Theoretical Framework for CRM Outsourcing

INTRODUCTION

Customer service is emerging as a key differentiator among competitors as the explosive growth of e-commerce is changing the nature of competition among companies. This has changed the customer-related business requirements for all types of companies. With firms increasing their online operations, customers now have the ability to contact organizations through a variety of interactive and noninteractive means (such as e-mail, fax, call centers, FAQs, online chats, newsletters, snail mail, retail stores, and Web-based forums). This has led companies to consider customer relationship management (CRM) as an important part of their competitive strategy. As the focus is shifting to retention rather than acquisition of customers, companies are looking for ways to identify and engage their most profitable customers.
CRM is generally stated as a strategy that companies use to identify, manage, and improve relationships with their customers. Thompson (2001) defined CRM as a company’s activities related to developing and retaining customers through increased satisfaction and loyalty. eCRM is a term generally used when a company’s customer service operations are online. According to Cahners In-Stat Group (2001), worldwide revenues from CRM software application will increase from $9.4 billion in 2001 to approximately $30.6 billion in 2005.
CRM initiatives have high costs of implementation, typically $1 million, as well as high failure rates, estimated to be in the 55-75% range (Ericson, 2001). For large-scale CRM implementations at very large businesses, reported spending on CRM software, hardware, services, internal labor, and training have been as high as $30-90 million (Young, 2001).
For effective CRM, companies must generally adopt a customer-centric philosophy to achieve goals, such as increases in sales, customer loyalty, customer service and support, and better and effective distribution of products. CRM can produce additional profits for firms through cross selling, up selling, reduced product marginal costs, and lower customer acquisition costs (Winer, 2001). CRM applications must be designed to integrate all the customer communication points across various functional areas of a company. CRM products are generally classified into three categories (Karimi, Somers, & Gupta, 2001). These are as follows:
1. Operational: For improving sales, marketing, and customer service efficiency through marketing campaign management, service request management, and automation that integrate with existing processes and infrastructure.
2. Analytical: For collecting better customer data that contain customer buying histories and demographics data, mining this data to generate customer profiles and anticipate their needs, and thus formulating more effective customer-centric strategies.
3. Collaborative: For integrating communications across various channels to improve information sharing across the organization to build an integrated view of the customer, ensuring consistency of message to customer; for eCRM, one-to-one personalized Web marketing, customized product and services offerings for individual customers, etc.
Despite the rise in popularity of CRM outsourcing, there is little literature in information system (IS) outsourcing specific to CRM functions. This article presents an integrated framework of resource dependence, transaction cost economics, and social exchange theory. This framework is used to study CRM outsourcing partnerships and is an extension of the work of Grover, Cheon, and Teng (1996) and Lee and Kim (1999). This framework could be used to evaluate how these companies select a CRM vendor, how they adopt and integrate CRM technologies into their existing infrastructures, and what factors affect CRM outsourcing success.


OUTSOURCING OVERVIEW

Outsourcing is more a reflection of the strategic partnerships in the digital economy. While there are many definitions of IS outsourcing in the literature, there are three common components to these definitions, as stated in Yang and Huang (2000): “first an external provider takes over part or all of an organization IS functions; second, external provider should take the responsibility; and third, customers transfer IS functions to external provider as well as employee and part of computer facilities” (p. 227).
The nature and extent of IS outsourcing have evolved over the past few decades. IS functions of increasingly high asset specificity involving responsibilities for not just the technology but also for the business processes are being outsourced (Grover, Cheon, & Teng, 1994; Grover et al., 1996; Gurbaxani, 1996; Nam, Rajagopalan, Rao, & Chaudhury, 1996; Lee, Huynh, Chi-wai, & Pi, 2000). The reasons cited for widespread use of IT-enabled outsourcing by large U.S. companies are: slowing domestic economic growth, need to conserve costs, ability to focus on core capabilities and providing bottom-line benefits (Banking on Outsourcing, 2003).
Increasingly, the nature of the client-vendor relationship has shifted from just a contractual relationship to a tightly integrated partnership relationship for mutual benefit between the vendor and the outsourcing firm, as firms consider outsourcing a key strategic choice (Grover et al., 1996; Lee & Kim, 1999; Lee et al., 2000).
CRM implementations require far more coordination among functionally disparate organizational units, including IT and senior management involvement in IT planning, organization, control, and integration (Karimi et al., 2001). Because CRM initiatives are not confined to a particular function but rather cut across various functions of an organization, the process of CRM implementation through outsourcing becomes complicated. Because of the complex technologies involved in CRM, companies are choosing to outsource to vendors that specialize in CRM. IDC research shows that the worldwide CRM services market will increase from $19.4 billion in 2001 to $45.5 billion in 2006 (Morphy, 2002).
Outsourcing offers various strategic, technological, and economic advantages to a firm (Grover et al., 1996; Smith, Mitra, & Narsimhan, 1998; Lankford & Parsa, 1999; Ngwenyama & Bryson, 1999; King & Malhotra, 2000; Lee et al., 2000; Yang & Huang, 2000). These are as follows:
• Strategic benefits by allowing a firm to focus on its core competencies by outsourcing routine IT functions, being able to acquire state-of-the-art knowledge that the firm otherwise would not have the resources to acquire and improve IS service quality.
• Technological benefits through acquisition of complex technologies through an external vendor that otherwise would have high internal acquisition and coordination costs, high obsolescence risks, and longer time-to-market.
• Economic benefits through reduced costs and improved efficiencies in the long term by utilizing external vendors’ expertise and economies of scale, and through favorable allocation of fixed costs.
Cost reductions through outsourcing to external vendors result through two primary approaches. One approach is adversarial, involving bidding among competing vendors to drive down prices. The other approach is through collaboration between the vendor and firm to lower transactional costs (Canon & Homburg, 2001). Outsourcing strategies involve contracting with either a single vendor or multiple vendors, though developing a relationship with a single vendor is more cost effective and leads to better outsourcing performance over the long term (Ngwenyama & Bryson, 1999).
Notwithstanding the advantages, outsourcing IS functions may fail due to complexities involved in managing long-term relationships with its vendor, resulting in loss of control of organizational assets, loss of firms’ internal IS expertise and capacity to learn new skills and technologies, threat of opportunism from vendor, uncertainties and lack of decision models in choosing outsourcing vendor, and loss of morale and performance among firm’s employees (Rao, Nam, & Chaudhury, 1996; Ngwenyama & Bryson, 1999; King & Malhotra, 2000). High-asset-specific IS outsourcing may also result in competitive threat from the vendor, and in addition, a firm may lose out on future business opportunities if the skills and competencies being outsourced appreciate in value (King & Malhotra, 2000).


CRM OUTSOURCING FRAMEWORK

While there are a number of studies for evaluating outsourcing of IS functions (Grover et al., 1996; Lee & Kim, 1999; Maltz & Ellram, 1999; King & Malhotra, 2000; Kini, 2000; Lee et al., 2000; Yang & Huang, 2000), there is very little literature specific to the outsourcing of CRM functions. This framework contributes to the IS field by studying CRM outsourcing partnerships through an integrated framework of resource dependence, transaction cost economics, and social exchange theories.
Resource-dependency theory refers to outsourcing to external vendors to fill resource gaps within the firm for the purpose of providing the firm with strategic competitive advantage (Lee et al., 2000).
Transaction cost theory provides an economic viewpoint to outsourcing via a set of principles for analyzing buyer-supplier (outsourcer-vendor) transactions and determining the most efficient mode of structuring and managing them (Nam et al., 1996; Ngwenyama & Bryson, 1999; Lee et al., 2000). Yang and Huang (2000) considered five factors—management, strategy, technology, economics, and quality—when determining the outsourcing benefits to the firm.
Social exchange theory is used to explain the close partnership style of an outsourcing relationship between the firm and vendor by taking into account prior relationships, trust, and culture, and their effects on an ongoing outsourcing relationship (Lee & Kim, 1999; Lee et al., 2000; Yang & Huang, 2000). Trust is perceived as the firm’s belief that the vendor has in mind the best interests of the firm and will perform accordingly to achieve desired goals for the firm (Lee & Kim, 1999).

MEASURING CRM OUTSOURCING SUCCESS

The model (Figure 1) proposes to study the relationship between the level of CRM outsourcing and its success, how the CRM outsourcing success is influenced by the quality of service provided by the CRM vendor, and the partnership quality between the outsourcing company and the external vendor.
Generally, partnership relationship between vendor and firm is categorized as being of either transactional or partnership style. A transactional-style relationship is well specified in its contractual obligations. In contrast, the partnership-style relationships include sharing risk and benefit with a view to establish long-term commitment (Henderson, 1990; Lee & Kim, 1999; Lee et al., 2000).
The model also considers the effect of internal management issues and other organizational factors of the outsourcing company on the partnership quality and the success of CRM outsourcing. We consider prior outsourcing experience of an outsourcing firm, as this may affect outsourcing decisions (Nam et al., 1996; Lee & Kim, 1999; Lee et al., 2000).

MODEL CONSTRUCTS AND PROPOSITIONS

1. CRM outsourcing level: We adopt the classification of CRM products into three levels—operational, analytical, and collaborative (Karimi et al., 2001) and explore the relationship between level of CRM outsourcing and outsourcing success.
2. Quality of service provided by CRM vendor: The relationship between CRM outsourcing level and CRM outsourcing success will be stronger if service quality is higher. We adopt and adapt the two dimensions of the SERVQUAL instrument construct used in the Grover et al. (1996) study, tangibles and reliability, and add a new one, CRM technology, that pertains to product features, does one vendor provide better fit with the outsourcing company’s existing technology than others, etc.
3. Partnership: We treat partnership as an intermediate variable. To evaluate the company-CRM vendor partnership relation, we use four dimensions: communication, trust, cooperation, and satisfaction (Grover et al., 1996; Lee & Kim, 1999).

Figure 1. Research model to measure the success of CRM outsourcing

Research model to measure the success of CRM outsourcing
4. Organizational factors of outsourcing firm: These include internal management issues that influence partnership quality, which in turn, affects outsourcing success (Lee & Kim, 1999).
5. CRM outsourcing success: High partnership levels between the CRM outsourcing company and the CRM vendor will help achieve the organizational objectives and provide a competitive advantage. The dependent variable, success of CRM outsourcing, is measured by using the widely used concept of satisfaction due to benefits gained by the CRM outsourcing company from a business perspective (Grover et al., 1996; Chin & Lee, 2000; Lee et al., 2000).

SUMMARY

We present a theoretical model that examines the relationship between CRM outsourcing levels, organizational factors of the outsourcing firm, partnership quality, and the success of CRM outsourcing from a business perspective. The model considers how quality of service provided by a vendor influences CRM outsourcing success and seeks to answer questions like how companies select CRM vendors, how they adopt and integrate CRM technologies into their existing infrastructures, and what factors affect CRM outsourcing success.

KEY TERMS

Customer Relationship Management (CRM): This is a strategy that companies use to identify, manage, and improve relationships with their most profitable customers to create long-term value for the firm.
Data Mining: Process of using statistics, artificial intelligence, and sophisticated algorithmic techniques to discover useful hidden relationships or patterns in large amounts of data.
eCRM: This is a strategy that companies use to identify, manage, and improve relationships with their most profitable online customers to create long-term value for the firm when a company’s customer service operations are on the Internet, using e-mail, fax, Internet call centers, FAQs, online chats, and Web-based forums.
Information System Outsourcing: It is defined as transfer of an organization’s IS function(s) to an external provider who takes the responsibility for managing these functions on behalf of the organization.
Resource-Dependency Theory: This refers to outsourcing of a firm’s IT operations to external vendors to fill resource gaps within the firm for the purpose of providing the firm with strategic competitive advantage.
Social Exchange Theory: It is used to explain the close partnership style of outsourcing relationship between the firm and vendor by taking into account prior relationships, trust, and culture, and their affect on ongoing outsourcing relationships.
Transaction Cost Theory: It provides an economic viewpoint to outsourcing via a set of principles for analyzing buyer-supplier (outsourcer-vendor) transactions and determining the most efficient mode of structuring and managing them.

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