Outsourcing and ethics Hollenberry, Inc., is a successful mail-order catalog business with customers worldwide. The company’s headquarters is in a small town some distance from any major metropolitan area. Sales have grown steadily over the years, and the call center facilities are currently inadequate for the sales volume. Management is deciding whether to outsource the call center operations to a company specializing in such operations. If the call center is outsourced, most of the current employees would lose their jobs because they do not wish to relocate to the new call center location, close to a major metropolitan area. Many of the employees have been with Hollenberry for more than 20 years. Regardless of where the call center is located, customers will call a toll-free phone number. If the call center is outsourced, however, more multilingual operators would be available. Hollenberry has identified the following costs of operating the call center in-house:
Labor ………………………………$650,000
Building rent………………………… 60,000
Phone charges……………………….. 35,000
Other overhead costs………………… 42,000
If the call center is outsourced, the related office equipment would be sold to the new call center operations for $20,000. The equipment was originally purchased at a cost of $100,000. The building will no longer be rented, and call center employees will have the opportunity to transfer to the outside call center, in which case their salaries will be paid by the outside call center. The other overhead costs are associated with maintaining the building and office equipment for the current call center.
If Hollenberry outsources the call center and the same number and pattern of calls occur next year, Hollenberry will pay the new call center firm $700,000 for the year.
Required
(a) What costs are relevant to the decision to outsource the call center?
(b) What qualitative factors are important in this decision?
(c) What should Hollenberry do? Provide reasons for your recommendation.
The Correct Answer and Explanation is:
Certainly! Let’s walk through the analysis of this outsourcing decision by Hollenberry, Inc. in detail, considering both quantitative (financial) and qualitative (ethical and strategic) aspects.
(a) Relevant Costs to the Decision
Relevant costs are future costs that differ between alternatives. In the decision to outsource versus continue in-house operation, we consider only those costs that will change depending on the decision.
In-House Call Center Operation Costs (Relevant):
- Labor: \$650,000 (would be eliminated if outsourced)
- Building Rent: \$60,000 (would be eliminated if outsourced)
- Phone Charges: \$35,000 (would continue regardless)
- Other Overhead: \$42,000 (associated with building and equipment maintenance, eliminated if outsourced)
Total cost to operate in-house:
\$650,000 + \$60,000 + \$35,000 + \$42,000 = \$787,000
Outsourcing Costs (Relevant):
- Fee to the outsourced firm: \$700,000
- Proceeds from selling equipment: \$20,000 (one-time gain)
Note: Original purchase cost of equipment (\$100,000) is a sunk cost and not relevant.
Difference in Costs:
- In-house operation cost = \$787,000
- Outsourcing cost = \$700,000
- Equipment sale gain = \$20,000
Net cost of outsourcing:
\$700,000 – \$20,000 = \$680,000
Thus, Hollenberry would save \$107,000 by outsourcing:
\$787,000 – \$680,000 = \$107,000
Relevant Cost Summary:
| Cost Item | In-House | Outsourced |
|---|---|---|
| Labor | \$650,000 | \$0 |
| Building Rent | \$60,000 | \$0 |
| Phone Charges | \$35,000 | \$35,000 |
| Other Overhead | \$42,000 | \$0 |
| Outsourcing Fee | \$0 | \$700,000 |
| Equipment Sale (gain) | \$0 | -\$20,000 |
| Total Cost | \$787,000 | \$715,000 |
Thus, the relevant costs are those that differ:
- In-house costs: labor, building rent, and overhead (\$752,000)
- Outsourcing: the \$700,000 fee and \$20,000 gain from selling equipment.
(b) Qualitative Factors
While the cost savings appear attractive, qualitative factors are critically important and must be evaluated before making a final decision.
1. Employee Impact
- Many current employees would lose their jobs or need to relocate.
- Many have been with the company for over 20 years, showing loyalty and institutional knowledge.
- Loss of jobs can severely affect employee morale, especially in a small town with limited employment opportunities.
- Ethical responsibility to long-term employees should not be overlooked.
2. Community Impact
- Hollenberry is located in a small town. Eliminating these jobs could damage the local economy.
- Hollenberry may face reputational harm in the community for abandoning its workforce.
3. Customer Service Quality
- Outsourcing may bring more multilingual operators, potentially improving international customer service.
- However, outsourced call centers may have less familiarity with Hollenberry’s products or culture, possibly affecting service quality.
- Transitioning operations might cause disruptions or delays that impact customer satisfaction.
4. Employee Loyalty and Corporate Culture
- Outsourcing may erode company loyalty and the culture built over decades.
- Remaining employees may feel insecure, leading to reduced productivity.
5. Control and Flexibility
- Outsourcing relinquishes some control over customer interactions.
- Internal call centers allow for direct management oversight and quicker adjustments to policy or service standards.
6. Long-Term Strategic Considerations
- Short-term savings might be outweighed by long-term risks.
- Outsourcing is hard to reverse once infrastructure and personnel are gone.
- Future cost increases from the outsourcing partner could limit flexibility.
(c) Recommendation: What Should Hollenberry Do?
Recommendation: Do NOT outsource the call center at this time.
While outsourcing would yield \$107,000 in savings, this decision involves far more than just money. Here’s the rationale:
1. Ethical Responsibility to Employees
- Hollenberry has a long-standing relationship with its employees.
- Firing loyal staff to save money may be viewed as unethical, especially when the savings are not massive relative to total revenue.
- Loyalty and morale are intangible assets — losing them can create long-term damage.
2. Reputation and Corporate Image
- Customers value socially responsible companies.
- Outsourcing might damage Hollenberry’s brand reputation, especially if service quality declines or if the layoff story becomes public.
- Supporting the local economy enhances the company’s image and goodwill.
3. Customer Service Quality
- Current employees understand Hollenberry’s products and customer needs intimately.
- Outsourcing may introduce communication barriers, lack of empathy, or service gaps that hurt customer satisfaction and retention.
4. Control and Adaptability
- With an internal team, management retains direct oversight and can immediately implement changes.
- Outsourced firms may follow scripts rigidly, with less concern for customer satisfaction.
5. Alternative Solutions
If the call center is inadequate, consider renovating, expanding, or hybrid models, such as:
- Investing in remote work infrastructure to allow current employees to work from home.
- Hiring locally to scale capacity while maintaining community ties.
- Adding bilingual support gradually via part-time or contract employees.
These options would preserve employee jobs, improve service, and enhance scalability without completely outsourcing.
Final Thoughts
Outsourcing decisions must strike a balance between financial efficiency and corporate ethics. In Hollenberry’s case, the marginal cost savings are not compelling enough to justify the negative human and ethical impact.
Instead of choosing outsourcing purely for financial reasons, Hollenberry should adopt a people-first approach, reinforce community roots, and find innovative ways to improve efficiency and capacity without abandoning its long-term employees.
Summary Table:
| Consideration | In-House | Outsourcing |
|---|---|---|
| Cost | Higher (\$787K) | Lower (\$680K net) |
| Employee Retention | Preserved | Most jobs lost |
| Customer Familiarity | High | Possibly reduced |
| Language Capability | Limited | More multilingual staff |
| Community Impact | Positive | Negative (job loss) |
| Reputation Risk | Low | High |
| Long-Term Flexibility | High | Reduced |
| Ethical Consideration | Responsible | Controversial |
