Dell Inc. and Inefficient Outsourcing

Dell Inc. (Dell) is a global IT company based in Round Rock, Texas. They specialize in developing, selling and supporting computers and other related products and services. From its early beginnings, Dell operated as a pioneer in the "configure to order" approach in manufacturing and delivering individual PC's to customer specification. In minimizing the delay between purchase and delivery, Dell adopted a general policy of manufacturing its products close to its customers. This allowed Dell to implement a Just in Time (JIT) manufacturing approach to reduce inventory costs. Because they manufacture and sell their products directly to the customer the aspect of service is essential to their business model and overall operational efficiency. In fact Michael Garrison, country manager for Dell International Services, said, "What differentiates us is that the call centers are an integral part of our business model. We don't view it as a back office operation. We don't think that "this is a call center" we think about them as a crucial element of Dell's operations." Many PC companies talk about the importance of customer support, but historically Dell has been a market leader having a reputation for providing superior service. Because they cut out the middleman Dell has a closer relationship (and obligation) to its customers, thus taking all the praise from happy buyers and all the blame from unhappy buyers. Unfortunately the latter was the case when Dell decided to outsource segments of their customer service support to India in 2001. The negative impact this had on Dell's customers and Dell's overall brand equity was significant. The objective of this paper is to analyze from an operational point of view what Dell did wrong in outsourcing their services to India and what they could have done differently to ensure a smoother implementation.

In the late 1990's, organizations in India started providing outsourcing services in various business processes such as data processing, billing, and customer support. This came to be known as Business Process Outsourcing (BPO). Dell, like many other companies during the tech boom, was growing very fast and needed additional capacity. To address their capacity issues Dell expanded its operations to India by opening a customer call center in Bangalore in 2001. The main functions of the call center were to provide technical support to the customers, make outbound sales calls and provide back office support in accounting functions. As Dell's operations grew the company also expanded its business to other Indian cities including Hyderbad and Mohali.

The prime reason Dell choose India for expanding its customer service operations was to reduce its overall customer support costs. In general, labor accounted for 60%-70% of operating expenses in the US and European call centers . In India, on the other hand, workers could be hired much more cheaply than their American or European counterparts. The infrastructure expenses were also comparatively lower. As a result, Dell was able to distribute their operating expenses more evenly across labor, systems, utilities, real estate etc. and use those cost savings to invest in R&D activities. So at first glace, it looked like outsourcing was a win/win situation for Dell. However senior management failed to recognize the negative impact outsourcing could have on their customers buying experience and overall satisfaction. The backlash of outsourcing these operations was felt almost immediately as Dell's US customer base started complaining about the quality of support they were receiving from India call centers. Dell received poor ratings in the American Customer Satisfaction Index (ACSI) survey conducted by the University of Michigan . A number of customers said they were dissatisfied with the quality of service provided by the company. The bottom line was that Dell failed to complement its significant growth in sales with good customer services and by doing so neglected the most important component of their business model (the customer). Senior management needed to do a more in-depth analysis of its policies and processes if Dell was going to perform better.

As Dell's revenues grew rapidly in the mid 2000's so did the operations of the call centers both in terms of size and number of functions and processes. This was unexpected growth for the company and Dell's inability to do proper aggregate planning led to operational inefficiencies. A good aggregate plan must attempt to match the demand for a service and its supply by ascertaining the required quantities and timings. Dell failed to forecast aggregate demand properly. Some of the aggregate planning inputs that Dell ignored were resources (workforce) demand forecast, policies (dealing with back orders) and costs (hiring/firing workforce). Dell took more of a reactive aggregate planning strategy but because of poor forecasting on the part of senior management they were unable to alter capacity to match demand. Dell could have used a number of techniques in their aggregate planning model to better manage capacity and quality issues. For example, management could have determined demand for each period or they could have identified policies that were more pertinent to customer satisfaction. They could have also been more creative in developing alternative plans and costs. An advantage of aggregate planning in the services area is labor flexibility and being able to adjust capacity to match increasing or decreasing demand. However, Dell was unable to take advantage of labor flexibility because of talent shortages.

A problem Dell did not consider before outsourcing was the rapid expansion of operations into India by other multinational companies. This migration led to an extremely competitive market when it came to hiring talented workers. The shrinking "talent supply" quickly became a concern for Dell because they did not have the capacity to keep up with rapidly increasing call volumes. In particular they were lacking experience at the middle management level to oversee operations. Dell's call centers were very large not 100 to 200 but often 1,500 people or more. Talent is the largest detriment