Production, Manufacturing and Logistics
Competition and market segmentation of the call center service supply chain

https://doi.org/10.1016/j.ejor.2015.06.027Get rights and content

Highlights

  • Study the competition and market segmentation of the call center service supply chain.

  • A single index is created to describe and segment the market for call centers.

  • Equilibrium market segments and competing prices are found for call centers.

  • Competition tactics are recommended to call centers both off-shore and on-shore.

  • Field studies suggest a match between theoretical results and empirical evidence.

Abstract

We construct a theoretical model to study the competition of call centers in the call center service supply chain. The market we study consists of multiple competing call centers and many clients searching for outsourcing partners to answer their customers’ phone calls. Through the perspective of operational efficiency, we create a single index that aggregates several contract parameters. The index can be used to segment the call center market as well as to estimate the contract prices at equilibrium. The results can help the call centers to locate and focus on their market niches. Clients can use the results to estimate the cost of their contracts and negotiate with the call centers for better deals. The results can also be used to explain the observed reshoring phenomenon in recent years from the perspective of operations management. In particular, our results suggest that call centers in low-wage locations have a competitive advantage on large contracts with very strict waiting time requirements. On the other hand, call centers in high-wage locations may still be attractive for contracts that have lower call volumes, shorter contract lengths, and/or less strict waiting time requirements. Finally, we present field studies from an international service provider with call centers in multiple locations. The results of the field studies suggest a strong match between our theoretical results and the empirical evidence.

Introduction

Telephone call center service is a labor-intensive operation and an important part of customer service for many organizations. In recent years, many organizations have outsourced their call center services to independently-operated call centers and thus have built a service supply chain with call centers as service providers and organizations needing the service as clients. Notably, the call center service supply chain represents a significant slice of the overall business process outsourcing market (Akan, Ata, & Lariviere, 2011). Convergys Corporation (a US-based outsourcer) reported revenues of approximately $1.5 billion in 2008 for its customer management group with a base of 25,000 customer service representatives (CSRs) worldwide (convergys.com 2009). BMW Technology, a call center service provider based in India, reported that it handled millions of calls and emails each month by employing thousands of employees (Nathan, 2010, the exact number is not reported to protect confidentiality).

The call center service market, which consists of multiple call centers and many clients, is very competitive. Cost is the major reason why clients outsource their call center service (Allon & Federgruen, 2007). Human resource cost, which includes the CSRs’ training cost and salary, is the call centers’ major operational cost concern. The cost for CSRs to handle phone calls comprises 60–80 percent of the operating budget, not to mention the additional training cost and other costs in human resource management (Aksin, Armony, & Mehrotra, 2007). Comparing the average salary of $6,000 in India with $46,000 in the United States, it is easy to see the significant labor cost differences in the global market and understand the reason why offshore outsourcing presents an attraction to many companies (Robinson & Ravi, 2004).

However, in recent years, the reshoring of previously offshored operations back to the U.S. has become a popular trend (Gray, Skowronski, & Esenduran, 2013). The phenomenon is applicable in the call center service supply chain. The Communications Workers of America (CWA) estimates that approximately 500,000 call center jobs disappeared from the United States during the period 2006–2010 (Huffington Post, 2012). However, with the large number of call center jobs that have been reshored recently, the percentage of call center jobs for high-tech firms that are currently offshored has dropped from 30 percent at one point to 12 percent in 2012 (Zeitline, 2012).

The offshoring and reshoring phenomena in the call center industry have drawn a lot of attention both publicly and politically. U.S. senator Charles Schumer even introduced a bill to charge companies 25 cents per call to transfer calls to foreign countries. He suggested that the tax would “provide a reason for companies that have already outsourced jobs to bring them back” (Nearshore Americas, 2010). Meanwhile, the CWA has lobbied for a bill that would eliminate federal grants or guaranteed loans for companies that outsource call center service overseas. Critics argue that government intervention hinders free-market economics and that the situation should be well-understood before any intervention.

The offshoring and reshoring phenomena have inevitably drawn attention from scholars as well. While low overseas labor rates are generally cited as the primary driver of offshoring, multiple factors have been suggested to explain the recent reshoring phenomenon. Those factors include poor customer service, negative home-country publicity, high turnover leading to poor productivity, technology requirements, and the desire for geographic risk mitigation while enabling access to diverse labor pools (Aksin et al., 2007, Heizer and Render, 2014, Nearshore Americas, 2010). Among these factors, poor service quality at the offshore facilities is often cited as the leading cause of reshoring, as supported by cases such as Dell Inc. and Lehman Brothers (Luce and Merchant, 2003, Ren and Zhou, 2008). However, investigation also shows that call centers in low-wage locations often hire highly educated employees. Their employees receive regular training, and the centers are managed both professionally and efficiently. In fact, these centers often provide very good customer service (Bosco, 2012, Holman et al., 2007). Clearly, service quality in general is not the only reason for the vast amount of reshoring. In fact, heretofore there have not been many scientifically-justified explanations of the call center reshoring phenomenon, and the necessary conditions for attracting call center jobs to high-wage countries have not been well-understood.

In this research, instead of trying to identify and justify all the possible factors that could explain the reshoring phenomenon, we seek to understand the market competition and market segmentation of the call center industry in general from a cost-analysis perspective. We introduce a stylized model to analyze the operational cost structure of call center service. Based on the cost structure analysis, we are able to segment a call center service market with multiple competing call centers whose relative competitive advantages make each of them able to serve contracts with particular requirements in the best possible way. We show that in a competitive market, the resulting market segmentation will provide both offshoring and reshoring opportunities. Our research does not favor either off-shoring or reshoring. We believe that clients should not blindly follow the tide, rather, they should conduct rational analyses in choosing their call center service providers. On the other hand, call center service providers both off-shore and on-shore should not fight aimlessly for service contracts either. They should understand their respective competitive advantage and market niche so that they can better allocate their resources to compete in the market. Additionally, our results recommend certain tactics, such as separating a large job into several smaller jobs, which managers can use to retain call center jobs in high-wage areas without the need to rely on government intervention.

Section snippets

Literature review

The involvement of global partners in business process services is a trend that has expanded from conventional manufacturing and purchasing activities (Cachon and Zhang, 2006, Chen et al., 2010) to service activities such as information technology enabled services (Narayanan et al., 2011, Rustagi et al., 2008) and offshore call centers (Hasija et al., 2008, Ren and Zhou, 2008).

In recent years, call center research has attracted much interest (see Aksin et al., 2007, Gans et al., 2003,

Model setup

We consider a market consisting of m competing call centers and many potential clients searching for outsourcing partners to serve their customers’ phone calls. The call centers differ in terms of the skill level, cultural/language background, and associated wage cost of their respective CSRs. Each client is characterized by phone call volume, desired service performance, and intended duration of the outsourcing contract. We define a market by its type of service, e.g., the market for credit

Competition and market segmentation between two call centers

To understand how multiple call centers compete within a particular BPO market, we start by analyzing the special case of two competing call centers. We apply the subscript index i to our notation from earlier sections to designate centers (i = {1, 2} in this section). To facilitate the direct comparison of call centers, it helps to express wages and service rates relative to how quickly employees improve from training. Specifically, for call center i we now introduce three new terms that are

Coexistence conditions for multiple call centers

If more than two call centers are competing in a BPO market, a center must have the lowest cost for some range of K in order to coexist. Therefore, the conditions from Theorem 2 can be checked initially to eliminate dominated centers. Lemma 1 formalizes this step as a straightforward extension of Theorem 2.

Lemma 1

For a call center market with the centers indexed from 1 to m such that i < j, γij, and θi>θj, each center may exist pairwise with the others ifγ1μ10<γ2μ20<<γmμm0.

However, satisfaction of

Case study: BMW Technology—An international BPO provider

In this section, we analyze real business data collected from a multinational business process service provider, BMW Technologies Ltd. BMW is headquartered in Chennai, India. Its call centers are located in multiple cities in several countries, including the United States. BMW's 6000 employees provide call center support (both voice and non-voice) to clients in technology, marketing, and financial services areas. We collected information via questionnaires and interviews with multiple company

Extensions

In this section we extend the base model and results in three directions. First, we incorporate call center seat capacity into our model. Second, a more realistic multi-piece learning curve is introduced to replace the two-piece learning curve. Third, we derive the equilibrium prices for the coexisting call centers for each market segment. The computed prices can be used by both clients and call centers to estimate the appropriate actual contract price.

Conclusions

This paper studies the competition of the call center supply chain from an operations management perspective. Based on the cost structure analysis, we are able to segment a call center service market with multiple competing call centers whose relative competitive advantages make each of them able to serve contracts with particular requirements in the best possible way. In other words, we find the market niches for call centers with different cost structures.

Our research results can be used by

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