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Gartner: Outsourcing costs more than in-house

Customer service operations sent overseas can cost almost a third more, according to a new study.

Outsourced customer service operations can cost almost a third more than those retained in-house, according to a new study by Gartner.

The research firm found that outsourced operations are 30 percent more expensive than the top quartile of in-house customer service operations.

Alexa Bona, research director at Gartner, said businesses often fail to take hidden costs, such as in-house backup support to the outsourced function, into account.

"The outsourced service is often more efficient, but then outsourcers need to make a profit too," she said.

Gartner also said 80 percent of organizations that outsource their customer management operations purely to cut costs will fail to do so, while 60 percent of those who outsource parts of the customer-facing process will have to deal with customer defections and hidden costs that outweigh any potential savings offered by outsourcing.

"If all you are trying to do is save money, you are not going to be successful," Bona said.

The worldwide market for customer service outsourcing is predicted to grow from $8.4 billion in 2004 to $12.2 billion in 2007, although the offshore element will still only account for five percent of that market by 2007.

Bona said organizations are still being very selective about which customer-facing functions they are prepared to send overseas.

"Most (offshore deals) are for level-one enquiries but not the full end-to-end customer service. People are sending bits of processes, but they have got wise as to what is and what is not suitable to be sent offshore," she said.

The Indian business process outsourcing, or BPO, start-ups--as opposed to the big established players like Infosys Technologies, Tata Consultancy Services and Wipro Technologies--are also set to undergo radical consolidation, with Gartner predicting 70 percent of the top 15 will be acquired, merge or disappear by the end of 2005.

"Many of those smaller companies are owned by VCs. They have grown really dramatically, and when you are growing at that rate, processes break down and it becomes harder to retain staff," she said.

Despite all this, companies can still achieve cost savings of 25 percent to 30 percent if they outsource successfully, Gartner said.

Andy McCue of reported from London.