The outsourcing of customer service to offshore providers has gotten a lot of bad press in the U.S., with reports citing language problems and the exporting of jobs. But, despite the potential for such reports to alienate consumers, this offshoring continues to grow, driven mainly by the lower labor costs overseas.

Are companies that send customer service abroad making a mistake? It’s hard to answer that question without knowing offshoring’s actual impact on customer satisfaction.

Our research indicates the effect in most cases is significantly negative—but similar to the effect of outsourcing customer service domestically. That suggests companies shouldn’t necessarily forgo the savings they can reap from offshoring. But if they’re going to do it, they’d better do it right.

Negative Numbers

We analyzed the offshoring and outsourcing activities of 150 North American companies and business units from 1998 to 2006. As a group, those that outsourced customer service saw a drop in their score on the American Consumer Satisfaction Index, or ACSI, a measure created by the National Quality Research Center at the University of Michigan. The declines were roughly the same whether companies outsourced customer service domestically or overseas.

ACSI scores tend to move in the same direction as companies’ share prices. Based on the historical data showing that connection, the average ACSI decline we found at companies outsourcing customer service is associated with a drop of roughly 1% to 5% in a company’s market capitalization, depending on what industry the company is in.

That’s a steep price to pay. But there are ways to make outsourced customer service more palatable to customers or to mitigate its negative effects, and in some respects that may be easier to do with offshoring. And there are offshoring alternatives that can save a company money without damaging its relationship with its customers.

An important step companies can take to improve the quality of outsourced customer service is to ensure that the provider has all the information necessary to help the customer and full authority to do so. Sometimes, because a company wants to protect information about its customers, the customer-service provider isn’t given complete customer histories and profiles. Or the provider’s authority to resolve complaints is limited; for instance, the provider may not be permitted to grant credits to customers. Companies need to weigh their concerns about information security and financial control against the damage that such arrangements can do to customer satisfaction.

Tapping Technology

Companies can also make customer service