Offshoring Reduces Airline's Customer Service Costs by 55 Percent
Overview: Facing steep operating losses and longstanding structural problems in the airline industry, a major U.S. carrier turned to Inductis' Outsourcing & Global Resource Optimization (OutGRO) to cut costs by more than $22 million annually, or some 55 percent, with additional savings to come.
OutGRO is a proven approach to migrating business functions offshore in order to reduce costs, improve operational performance, and optimize resources globally. The comprehensive OutGRO framework provides opportunity sizing and scope analysis, country and labor market analysis, risk analysis and mitigation, vendor identification and negotiation, and implementation and post-migration support.
The Situation
A major U.S. airline, along with the entire U.S. industry, faced longstanding issues of unfavorable cost structure, overcapacity, and regulation. The airline's problems were compounded by the economic downturn that began in 2001 and the events of September 11, 2001. In response, the company undertook an aggressive cost-reduction program, shrinking capacity, cutting commissions paid to travel agents by 40 percent year over year, and reducing its workforce by almost 20 percent. As a result, costs were trimmed by $1 billion in 2002 compared to 2000. Other initiatives now underway are expected to lower non-fuel unit costs by an additional 15 percent, or $2.5 billion to $3 billion, by the end of 2005. For the airline's Reservation Sales business unit, which employs 6,000 people in 20 call centers throughout the U.S. and overseas, offshore outsourcing has become one of the centerpieces of its contribution to the company's overall cost-reduction plan.
Launching the Project
The airline launched its offshoring project with clear objectives: ensure the successful migration of selected business functions, expand the scope of the project where feasible to increase migrations and cost savings, create an operations infrastructure, both offshore and domestically, to support future expansion. Additionally, risks to the company and customer impact had to be minimized.
Lacking experience with outsourcing in either the U.S or offshore, the airline engaged Inductis to help execute and implement the initial phase of offshore migrations, a role that would grow to include planning and coordination of a second phase of the initiative. Working in joint teams with the client, Inductis conducted feasibility studies, enlisted the involvement of all stakeholders to define the scope of the migration, and developed a compelling business case, which set a savings target of $13 million annually for the initial phase of the project.
Selecting Optimal Offshore Locations and Vendors
To the process of vendor selection, Inductis brought its offshoring experience and global presence to help the airline navigate an unsettled geopolitical situation, including India/Pakistan turmoil and U.S. State Department travel advisories for the Philippines. After careful country and market analysis, the team ensured diversity in vendor locations, both within and across countries, which minimized the risk and enabled the airline to implement the migrations on schedule despite the concerns.
Inductis is unaffiliated with any vendor, and recommended a multiple-vendor approach which allowed the airline to negotiate aggressively on pricing and ensured that no single vendor would be in a position to take the airline's business for granted. And Inductis' ability to leverage a knowledge base regarding vendors, contacts, RFPs, SLAs, and contracts provided rapid execution and the ability to capture savings sooner.
By the end of 2003, six functions - frequent flyer service, baggage loss, reservations, email inquiries, promotions and special offers, and telephone and email complaints - will complete their migration to two vendors spread over three offshore sites with an additional vendor to be selected as the company migrates more functions in the future.
Selecting Optimal Offshore Locations and Vendors
The scope of the project increased as Inductis was asked to help migrate additional work, to assist in the reorganization of call centers domestically, which will generate additional savings, and to prepare for even more migrations with a second round of vendor selection.
Exceeding Expectations
As a result of the enlarged scope of the project, cost savings are expected to run at a rate of $22 million annually for a 55 percent savings against the cost base - up from an initially projected savings of $13 million or 40 percent. Improvements in domestic call centers will save another 10 percent. Additional annual savings of $5-6 million are expected as the company continues to optimize its business processes globally. And because the offshore locations draw from a well-educated, skilled labor pool, quality metrics exceed those recorded in the airline's internal domestic centers.
The airline is also ideally positioned to capture sustainable economic and strategic advantage well into the future by engaging additional business units, leveraging proven savings and processes, and continuing to drive systematic improvements at home and abroad. And as other airlines migrate functions offshore, the airline will benefit from its leadership position through commission arrangements which Inductis has already included in its contracts with leading vendors.
