The Lean & Mean Contact Center - Part 2

Part 2 – Reactive Cost Reduction Method

Most contact centers have experienced a budget cut.  Budget cuts can take different forms, including denial of a request for a budget increase or, a reduction of next year’s budget, or an outright reduction of the current budget.  Each option has an impact since, in most cases, they require the contact center to “do more with less.”

In periods of economic decline, there is a greater likelihood that a contact center will experience an actual budget cut that reduces the funds available from the previous year.  Unfortunately, the impact of arbitrary budget cuts is not always fully understood by management until its impact is actually experienced. 

There are two (2) approaches to cost reduction.  The first, known as the Reactive Cost Reduction Method, is described in this article.  The second, called the Proactive Cost Reduction Method, will be addressed in Part 3 of this series.

Reactive Cost Reduction Methods and Consequences

Put yourself in the place of senior management for a moment.  When revenues drop, it becomes necessary to cut expenses in a way that helps preserve profits, cash flow and the viability of the business.  When it becomes necessary to cut costs, a review of budget line items typically occurs as management searches for opportunities for trim costs.  Unfortunately, the contact center, which is both costly and labor-intensive, often finds itself in the crosshairs.

When a decision is made to cut contact center budgets, it often takes the form of a directive to cut budgets by “X%.”  In theory, management assumes that a 10% across-the-board staff reduction will result in a predictable, equivalent reduction in the overall budget.  Unfortunately, when other factors are considered, many cost-cutting measures do not achieve their intended result.

Arbitrary Staff Cuts

An arbitrary reduction in staff can have a devastating impact upon the contact center if it is done without considering other factors.  In most cases, the budget-motivated staff cut will rarely achieve its expected financial benefit.  One key reason why it fails is that it ignores the contact center cost hierarchy, which was described in last month’s issue.  Let’s take another look at it.

 

 Contact Center Cost Hierarchy

As the image illustrates, the primary force driving contact center costs is customer demand.  The number of transactions (and the time it takes to handle them) is a product of this demand.  It therefore must be used to determine the number of labor and technology resources required to respond.  These labor and technology resources in turn dictate the levels of management and support that are required.

Cutting staff to reduce contact center budgets without considering customer demand is a little like reducing the size of the fire department to cut costs during wildfire season.  An arbitrary staff cut ignores the relationship between customer demand and costs, and can result in a cascading series of problems that take a bad circumstance and make it worse.  The following illustration represents the typical result of an arbitrary staff cut when customer demand is not considered.

Impact of Arbitrary Staff Cuts

As the illustration suggests, a staff reduction can trigger a sequence of events that cause service quality to take a steep, downward spiral.  What may have appeared to be a logical decision intended to cut budgets can easily become a “perfect storm” that results in a contact center melt-down.

Financial and Performance Model

Setting aside the cascading list of problems that can result from an arbitrary staff cut; let's take a look at the financial and performance implications of this approach.  To do so, a model has been prepared that compares three (3) different scenarios. 

1. Scenario 1 calculates the approximate half-hour costs of a contact center that is properly staffed without a staff reduction.  This scenario serves as a baseline for this comparison.
2. Scenario 2 uses the same call volumes and costs as Scenario 1, but reduces staff by 5%.  Since a staff reduction will increase the average time a caller spends in queue, Scenario 2 assumes that 10% of callers will complain about the longer wait once they are answered, adding 30 additional seconds to those calls.  Average handle time of all calls increases from 240 seconds to 243 seconds as a result.
3. Scenario 3 assumes a 10% staff reduction using the same variables.  Since average wait times increase substantially in this scenario, 25% of callers are assumed to complain.  Average handle-time of calls in this case increases from 240 to 248 seconds.

Assumptions

The following assumptions describe the data used in the financial model for each of the three (3) scenarios. 

Staff Reduction Model Assumptions

Financial/Performance Model Results

Using the Erlang C staffing formula and the assumptions previously defined, the following cost comparison illustrates the impact of staff cuts of 5% and 10% in comparison to a properly staffed contact center for a 30 minute period.

The comparison of the three scenarios makes a powerful statement about the impact of an arbitrary staff reduction, which are summarized as follows:

Scenario 1:  The first scenario calculates the cost and performance results of a properly staffed contact center for 30 minute period. 

• Service level achieved is 84.2%, which is slightly higher than the actual Service Level target of 80% in 20 seconds.
• Average speed of answer is 11 seconds, which is very acceptable to callers under most circumstances.
• Using the variable “Abandon Threshold” of 180 seconds, which assumes that callers will abandon if queue times exceed this threshold, only one (1) caller abandons in this scenario.
• Agent occupancy rate, which measures the efficiency of the agent group and its pace of work, is a manageable 85.5%.   During this half-hour period, each agent handles an average of 6.4 calls with 41 seconds of idle time between calls.

Scenario 2:  With a 5% reduction in staff, deterioration in the overall performance can be seen as follows:

• Service level objective has dropped from 84.5% to 63.6%, an indicator that a higher number of callers are placed in queue.
• Average speed of answer has increased from 10 seconds to 35 seconds.  With fewer agents available to answer calls, callers must wait for longer periods before being answered.   As ASA rises, the cost of toll-free service increases from $28.53 for this period to $36.31 for this half-hour period.
• As ASA increases, we have assumed that 10% of callers complain, adding 30 seconds to the handle time of each complaint.  This results in a higher overall average handle time of 243 seconds.  While this addition is relatively minor, any increase in handle time results in demand for more staff.
• Agent occupancy rate has climbed to 91.1%.  In this half-hour scenario, each agent handles an average of 6.74 calls with 23.7 seconds of idle time between calls.  In cases where occupancy rate is consistently higher than 90%, agent morale can experience some deterioration.
• Considering network and labor costs, Scenario 2 results in an estimated savings of 3.2%, below the expected 5% savings expected.

Scenario 3:  With a 10% reduction in staff, a “worst-case” scenario begins to unfold.

• Service level objective now drops from 84.5% to 17.1%, resulting in far more callers being placed in queue for longer periods.
• Average speed of answer has increased from 11 seconds to 331 seconds (over 5 1/2 minutes), which is very unacceptable to most callers.  As a result of longer queue times, the total network cost per half-hour rises to $145.44 in comparison to $28.56 for a properly-staffed contact center.
• Since there are fewer agents available, the wait time increases resulting in a higher percentage of callers who complain.  In this case, we assume 25% of callers will complain about the longer queue times, resulting in an increase in overall average handle time from 240 seconds to 248 seconds.  Once again, longer handle times result in demand for additional staff.
• 54% of callers abandon.  Since a percentage of callers who abandon will try again, the total number of calls received is actually higher than the number of “first-time” callers.
• Agent occupancy rate climbs to 98.1%.  In this circumstance, agents are required to handle an average of 7.4 calls each, averaging only 4.8 seconds of idle time between calls.  In actual cases where insufficient idle time exists, agents respond by giving themselves “breather time,” placing callers on hold, increasing after-call work, and using other methods.
• Ironically, Scenario 3 turns out to be the most expensive option, costing 13.9% more than a properly-staffed contact center.

How Come There Aren’t Greater Savings?

Why don’t Scenarios 2 and 3 result in greater cost savings?  There’s a simple reason in this example.  Since all three (3) scenarios use toll-free service, average speed of answer, or the average time callers spend in queue, must be considered.  As average speed of answer rises, network costs increase since it doesn’t matter if a caller is speaking with an agent or waiting on hold.  When comparing Scenarios 1 and 3, half-hour network costs increase almost $117 as a direct result of increased ASA, eliminating all possible savings. 

Summary of the Reactive Cost Reduction Method

The arbitrary staff cut is only one reactive method of cost reduction.  Others, such as arbitrary outsourcing, can have a similar impact.  The important point to remember about any reactive cost reduction method is if it circumvents the contact center cost hierarchy, where customer demand drives resource requirements, it is not likely to achieve its intended results.  When resources are reduced in deference to customer demand, the expected cost savings are not often achieved.  In some cases, such as Scenario 3, costs can actually increase.  While one can debate the financial merits of reactive cost reduction measures, there is little dispute regarding the impact they can have upon customer and employee satisfaction. 

The final installment of this series, entitled “The Lean and Mean Contact Center, Proactive Cost Reduction Methods,” will describe the proactive approach to cost reduction in comparison to the Reactive Cost Reduction method.

The Lean & Mean Contact Center:

Part 1 of 3 - Understanding Contact Center Costs

The following article is an excerpt from Martin Prunty’s forthcoming book entitled “The Lean & Mean Contact Center: How to Trim Your Budget Without Starving Service Quality.” A veteran consultant with over 20 years experience in the contact center industry, Prunty has assembled an impressive “how to” book designed to give contact center managers a road map on how to reduce costs today without sacrificing the quality of service or making large investments in technology. Leveraging techniques he has learned over the past 2 decades, “The Lean & Mean Contact Center” is a one-of-a-kind book and a “must read” for contact center managers, supervisors and other professionals who are responsible for contact center budgets.

Part 1: Understanding Contact Center Costs

Contact center professionals understand the important role this customer channel plays in most businesses and organizations. Functioning as a primary conduit between an institution and its customers, the contact center is responsible for supporting mission-critical processes like managing new orders, answering customer questions, resolving problems, capturing information and more. When its capabilities are properly leveraged, the contact center is capable of delivering many benefits to an organization that include reducing customer turnover, generating revenue, reinforcing corporate branding and increasing customer loyalty. Enlightened organizations leverage its strengths to increase their competitive advantage.
Unlike many other business units, the contact center is capable of achieving enormous efficiencies that result from its ability to manage work queues, evenly distribute work and closely managing individual and group performance. From an employee productivity perspective, there are few examples outside of manufacturing that achieve similar results.

The contact center environment is very complex and must be managed effectively in order to minimize its costs. It is comparable in many ways to a piece of complicated machinery that relies upon a host of moving parts. When any one of those parts fail, overall performance is impacted and costs rise.

Ironically, the most expensive contact center operations are almost always those that are managed poorly. Whether an organization lacks management skills; or its organization places a low value on the contact center’s importance, the overall cost of operation is almost always higher than in organizations where it is managed efficiently.

Many factors contribute to contact center costs. As the following pie chart illustrates, a high percentage of a typical contact center budget (normally 65% - 75% of the total) is comprised of labor. Thus, any serious effort to reduce budgets must begin by focusing on ways to reduce labor costs. There are many ways to reduce labor costs in the contact center. Finding the right way is the challenge since many available options can have catastrophic results.

Typical Contact Center Budget

Contact Center Cost Hierarchy

There is a simple fact that is often overlooked by contact center professionals whose intent is to reduce or flatten overall budgets. Contact center costs are directly related to customer demand. In organizations with high customer demand, more resources are required to handle customer transactions. Where lower customer demand exists, fewer resources are required. Customer demand is the key driver of contact center costs.

If meeting customer demand is an organizational objective, then a specific hierarchy of cost elements, each with direct or indirect relationships to the other, must be established to meet that demand. The following diagram illustrates the contact center cost hierarchy and its relationship to customer demand.

Contact Center Cost Hierarchy

Cost Hierarchy Relationships

As the illustration shows, customer demand is the key driving force impacting all other costs. Customer demand creates transactions, which in turn require resources to meet that demand. Resources are the labor required to support live assistance, or can be the technology that supports self-service transactions. Labor resources represent the number of agents and supervisors required to manage the live transactions. Technology resources may include IVR systems or web-based transaction capabilities. In most cases, a combination of live and self-service resources will exist.

Both types of resources have a support requirement that is determined by the overall scale of the resources in place. The support component is normally comprised of management, workforce management, IT support, quality, training, etc. The size of the support component is generally determined by the size and scope of customer-facing resources.

Enveloping the resource and support components is an organization’s overall customer vision and strategy. Typically, it is this strategy that impacts the value placed on the contact center, the way in which services are delivered and rmines the budget that is established to support customer interactions.

To look at the hierarchy a little differently, there is a “demand side” and a “resource side.” The demand side is comprised of the overall work effort and the resource side is comprised of the resources and support required to meet that demand.

The following table lists the typical elements of each of the individual contact center cost components. To some degree, each of these elements contributes to the overall size of a contact center budget.

Live Agent Transactions

• Transaction volume
• Transaction type.
• Average handle-time.
• First call resolution rate
• Abandon rate
• Transaction cost

Labor Resources

• Average labor costs.
• Benefit costs
• Attrition rate
• Hiring costs
• Training costs
• Sourcing options

Technology

• ACD system
• IVR system
• System Integration
• Quality Management system
• Workforce Management system
• Agent desktop and applications
• Network

Self-Service Transactions

• Transaction volume
• Transaction Cost
• Completion rates Operations
• Organizational Structure
• Metrics
• Hours and days of operation.
• Workforce Management
• Agent to supervisor ratio.
• Network costs
• Processes

Management and Support

• Contact Center Management
• Human Resources
• Training
• Quality
• Workforce Management
• Process Improvement
• Tech Support

Technology Resources

• Integration costs
• Development costs
• Network costs
• Support costs

Facilities

• Office space
• Furniture
• Site locations

Contact Center Cost Formula

There are many ways to calculate the cost of operating a contact center. The most common methods calculate costs in “buckets” (e.g., labor, technology and network) and also take into account capital investment costs, depreciation and other factors. These methods are usually very precise and rely upon “generally-accepted accounting principles.” While these budgeting methods are necessary for managing balance sheets, budgets, annual reports, etc., they are not particularly useful as a blueprint for reducing costs, since they omit the key cost drivers like contact volumes, average handle time and others.

Without understanding the context of cost drivers, the temptation exists to make cuts to the resource side of the cost hierarchy without considering the result that is likely to occur. For example, management might determine that a 10% across-the-board staff reduction is necessary to adjust for a dip in sales. When resources are reduced before reducing customer demand, the results are catastrophic, impacting service level performance, customer experience and employee experience.

An alternative to a typical budget model is necessary to more effectively manage and reduce contact center costs. Rather than building costs from the “bottom up” like a typical budget, the alternative model uses customer demand as its key driver and calculates overall costs based upon what actual volume is. Such a model increases the required resources and costs as customer transactions increase, and decreases resource requirements and costs as volumes are reduced. A cost model that is driven by customer demand also enables management to predict the impact of demand reductions on costs and resources.

The alternative cost model is aligned with an important concept. The right way to reduce cost in a contact center is to focus on reducing the “demand side” of the cost hierarchy first. By reducing the demand side first, the resources and costs required to support that demand can also be reduced, but without a negative consequence. Reducing the demand side first allows the contact center to adjust its costs downward without impacting overall service quality, thus avoiding potential catastrophes. More importantly, by focusing on the “demand side” of the cost hierarchy, cost reductions will prove to be more significant and more sustainable.

Contact Center Cost Model Formula

If one embraces the assumption that customer demand drives transactions; and transactions in turn drive resources and other costs; then the contact center cost formula that follows is necessary to determine the approximate current and future costs. While this formula is not intended to replace traditional methods of calculating budgets, it is designed to provide a framework that can be used to determine “order of magnitude” costs and likely savings that result from efforts to reduce customer demand and/or increase efficiency.

Contact Center Cost Formula

Estimated Contact Center Operational Costs = ((((Annual Transaction Volume x Ave. Handle Time) / Ave. Occupancy Rate)/Average Shrinkage Factor) x Ave. Resource Cost) + (Overhead + Support Costs)

Following is a basic explanation of the formula and its cost variables.

1. (Annual Transaction Volume x Ave. Handle Time) calculates the total amount of time spent by contact center agents handling.

2. ((Transaction Volume x Ave. Handle time) / Ave. Occupancy Rate) adjusts the total work time to reflect idle time, or the time agents spend waiting for the next transaction. Average occupancy rate is calculated by sampling the typical average occupancy rate in the current contact center environment.

3. (((Transaction Volume x Ave. Handle Time)/Ave. Occupancy Rate)/Shrinkage Factor) calculates the total labor costs including factors that keep agents off the telephone, such as breaks, training, holidays, etc. Shrinkage factor is an important calculation used to determine staff requirements in contact centers using workforce management tools.

4. Average Resource Cost is the average hourly cost of agent labor, including benefits and the cost of supervisors.

5. Overhead costs accounts for office rent, furniture, technology and other costs associated with operating a contact center.

6. Support costs represent the costs of call center managers, trainers, workforce management team, quality team, tech support and others.

The cost formula defined is provided in its simplest form and can be easily modified for more complex environments. For example, many contact centers have a variety of different transactions, including live agent and self-service. In some cases, these transactions are handled by separate organizations and have different cost elements. To adjust for these factors, the formula can be applied to specific transactions or specific agent groups where transaction volumes, costs and occupancy rates are different.

The next installment entitled “The Lean and Mean Contact Center, Reactive vs. Proactive Change,” the impact of different cost reduction models and how they impact service quality will be explored.

Prescription for Disaster

Tax season was approaching quickly. As I do most years, I had postponed doing my taxes until the end of March, just in time to insure high stress and anxiety would occur.

In years past, one of the simplest tax deductions to calculate has been pharmaceutical costs, since these transactions could easily be downloaded via the Internet. Not this year, however.

Walgreens is my pharmacy and they have provided customers with the capability to download annual prescription histories at no cost for some time. The application works very well, but has one serious limitation. In a world of mail-order pharmacy programs, prescriptions that are ordered directlyby mail are not tracked by Walgreens. Therefore, Walgreen's prescription history is not complete unless you order all of your prescriptions directly from them.

On the other hand, if your insurance plan offers prescription benefits, your insurance company will have a complete list of pharmaceuticals, including both mail order and retail. In years past, I would simply go online to my insurance company to get a complete downloaded list for my taxes. Easy enough.

This year things changed. I logged on the same way I had in the past, only I was unable to find a way to download my records from the insurance website. After five minutes or more of searching, I finally decided to look in the "FAQ (Frequently-Asked Questions)". I might have done so earlier, but men typically don't like to ask for directions. I soon located the instructions for downloading my records. The instructions said "Simply navigate to and click the My Account" button located on the left navigation bar..."

I quickly went to the left navigation bar, eager to click on "My Account," only to find out that there was no "My Account" button as the FAQ section had described. After checking several times to make sure I had read the instructions correctly, I finally declared "I give up." It was time to send someone an email to get the right instructions.

After expending more effort than I would have expected, I found a way to send an email to customer service. I carefully explained what I was attempting to download, what steps I had already taken and requested instructions on how to download my records.

The next day, within the typical expected response time for email, I received a reply that essentially said "You can download your records online, or you can call our call center." As I read the response, I couldn't help but feel "They never read my note."

Undeterred, I decided to give this another try. In a reply to the email I had received, I requested them to re-read my previous email and went on to express my frustration with my prior attempts to find where I could download my records.

In response to my second email, I received a note explaining that I should contact the coordinator of the employee insurance plan that covered me since that company hadn't subscribed to the download service.

Scratching my head, I decided that maybe it was a good idea to call their customer service call center to find out what the problem was. After a reasonable wait time, I was answered by a very helpful representative who listened carefully to my story and my growing frustration. She didn't know the answer immediately, but placed me on hold for a period of about 5 minutes while she researched the problem. When she returned, she explained, "The reason you can't download your records is that the employer from whom you receive your insurance doesn't subscribe to the download option."

Surprised, and even shocked, I probed a little further. "Ma'am, I asked. "Are you telling me that you charge an employer more to be able to allow their employees to download prescription histories?" In response, she replied "Yes. It's an option we offer at additional cost."

I then asked, "So, if an employee wants to download her records, she is required to call you?" She replied, "Yes. But we don't actually download the records, we print them out and mail them to the customer."

"So, you have to talk with the customer, print out the records, then send them by mail to the customer instead of allowing them to download them directly?" I asked. "That's pretty much how it works." she responded.

"Okay," I responded while shaking my head. "Please send me my records and my spouse's."

"I hate to tell you this," she replied timidly. "but, because of privacy laws, I can't send your spouse's records without her permission. She'll have to call us directly."

Curiosity had just gotten the better of me, so I asked: "Ma'am, would you know whether or not the employer who provides this insurance is required to pay your company for all of the emails and telephone calls you receive for these type of requests?" She quickly replied, "Yes, I know. We don't charge companies for calls or emails, that's included in the service we offer."

We concluded our business and she agreed to send me the records. Later that day, I requested my spouse to make another call to request her records.

In retrospect, I couldn't help but ask myself, "What are these guys thinking?" How can it possibly make sense to charge an employer extra for a self-service option that offers both convenience and saves the them (the insurance company) money at the same time? Under what circumstances would anyone want to drive self-service transactions to a live agent?

To prove a point, I decided to create a basic cost comparison. For the sake of this example, I've used some relatively average transaction costs to compare live transactions to the cost of self-service. Remember that in my case, I was required to send 2 emails, place 2 telephone calls (mine and my spouse), and the insurance company had to print out and send 2 prescription histories.

Option 1: Self-Service

Download 2 prescription histories: $0.35 x 2 = $0.70

Total self-service cost: $0.70

Option 2: Live Assistance

(2) Email Transactions: $5.00 x 2 = $10.00
(2) Live telephone call: $6.00 x 2 = $12.00
(2) Print and mail records: $12.00 x 2 = $24.00

Total live assistance option: $46.00

As a consultant specializing in call centers, I am often times amazed, but never surprised, how often I find examples just like this one. Imagine the amount of money that can be saved, and the improvement in customer experience that can be achieved, by taking a look at your transactions and asking the question, "Does this make sense?"

Welcome to our new blog page.

I've been putting this off for a long time, even though I understand the importance of having a blog site. Welcome to the new Contact Center Professionals blog page and thanks for visiting.

Managing a contact center environment is challenging, even in the best of times. Of course, these aren't the best of times, which makes the challenges far greater.

This blog site will focus on contact center issues. For the foreseeable future, it will also focus on ideas and suggestions for getting through this global recession. Of course, I welcome any comments or suggestions that readers may have to offer.

Best regards,

Martin Prunty