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Activity Based Management Helps You Understand and Reduce What's Driving your Call Center Costs

Kenneth Kipers, Ph.D. and John Antos

Is your management complaining about spiraling call center costs?
Are you facing challenges of trying to hire and keep skilled call center personnel?
Would you like some better techniques for justifying call center equipment to your senior management?
Would you like to know what drives number of calls and how to reduce number of unnecessary calls?

An effective way to reduce cost/improve productivity in call centers is to start by asking a few questions.

Do you know the time and cost of "each type" of call you handle?
Do you know which products and services are driving your call volume?
Do you know which types of customers are driving you call volume?
Do you know which other call centers are driving your call volume?
Do you need techniques that will control call center costs by product, by customer, and by internal call center?

These and similar questions haunt call center managers on a daily basis.

Labor is the single largest component of a call center budget. Extensive effort is spent improving the productivity of the customer service representatives and reducing costs often with marginal improvement. In one call center when the phones back up, the supervisor used the equivalence "of grabbing a whip and stalking the halls to get the calls back in line". His concept was that people are flexible and can increase their output. This is true for a short time but at a high cost to human capital. Often little effort is spent researching the causes of increased call volume.

Most call center managers are completely occupied with the details of managing their call center or team. This leaves little time to embrace the processes of

cost reduction
process improvement
product improvement
output costing

Tim (a team leader for a twenty-customer service representative team) spoke about his team's productivity. "During October, our call center was on the phones 79% of the time. We pride ourselves in the number of calls we take each day." The remainder of their time is taken up with mail and other miscellaneous tasks. Not much wasted effort in this team, at least by the traditional management tools. Traditional management tools were developed before there were call centers. Many of the improvements possible for call centers are invisible with these tools. Traditional management techniques focus on call center productivity and not on what causes increased call volume.

Cost Reduction

Let's examine each of the four concepts mentioned above (cost reduction, process improvement, product improvement, and output costing) to determine the merits of each. Most of us have been through cost reduction campaigns in various forms, "cut four people out of your call center" or "reduce the amount of off phone time". In one call center Kevin has been directed three times in the last year to cut a total of 20% from his call center with no reduction in call volume. These efforts are little more than a knee jerk response to bring expenses in line with an arbitrary budget. Head count reduction must be accompanied by call volume reductions. Just reducing people without finding ways to reduce call volume may not give the organization the results they desire. Cost reduction without the insight gained from the remaining three concepts often creates more problems than it solves. With reduced staff to handle the same call volume, quality often suffers. To reduce call center cost, the organization needs to focus on finding the reasons for so many calls. Then the call center must determine ways to maintain quality while reducing the causes of calls.

Process Improvement

How the call is handled is a topic of much discussion in all call centers. Most call centers do a good job of initial training, but their ongoing formal and informal training could be improved. When a call is received, a process is set in motion that may or may not give the customer service representative flexibility in completing the call. The procedures or tasks that are followed are all part of the process of handling the call. Process improvement examines each task for relevancy, speed, resources needed, skill needed, and other factors. In Tim's team, a series of tasks that were found to be redundant consumed 20% of his team's time. With some work, he was able to eliminate most of the redundant tasks. This resulted in his team's improved ability to handle more calls with fewer customer service representatives and under less pressure. Less pressure on customer service representatives is a real plus in this high turnover industry.

Cross-Functional Feedback

In most organizations those functions that drive call volume are often outside the control of the call center manager. Providing feedback to those functions should improve the outputs of those functions, resulting in reduced call volume. In one case, a software company developed a great program to improve the links between different operating programs. In their rush to market, the manual was a little short on many of the critical details. Most people needed to call technical services to get the software working correctly. This defect in the software manual resulted in additional work for the call center. Call volume increased significantly as did average call time. The size of the call center was increased by about 30% to carry the increased call volume due to the poorly worded software manual. This is an example of a product defect driving the costs in the call center. Correcting and improving the manual would have increased costs in product development but lowered costs in the call center, and lowered total costs to the company. Effective management takes the time to examine the links between product costs (e.g. software, disks, and manual) and after-market costs. Frequently after-market costs are hidden in overhead. Often after-market costs are much larger than most senior managers realize. It is critical to understand and manage this total value stream.

Output Costing

Managing without insightful, actionable information is ludicrous. Traditional financial reports detail the cost of resources or inputs to a call center. They give little information on the cost of the call center's outputs. Traditional methods of tracing a call center's resources to outputs are sketchy at best. Output costs are critical for good management decisions. Good cost information should reveal problems to tackle and opportunities to exploit. Most call center managers "only" know total call center cost divided by total call volume. This conventional cost information is like the sea that covers dangerous shoals; there is little inkling of what lies out of sight, such as unprofitable products, practices, waste, or unprofitable customers.

We have used Activity-Based Costing (ABC) and Activity-Based Management (ABM) to measure the cost and performance of activities and costs in a number of call centers. ABC assigns costs to activities based on how activities use resources. ABC then assigns those activities to the outputs of the center. By applying ABC/ABM, it is possible to determine the relationship between resources, activities, and outputs; thereby more accurately tracing costs through the call center.

Using ABC to determine the cost of different types of phone calls, we were able to pinpoint several areas for cost improvement. We found that there were anywhere between 8 and 25 major types of calls in most call centers. Representative data is contained in the following table. Before we begin an ABC project, management is well aware of the total cost of the call center and the average cost per call. By collecting and slicing the information by the type of call, it is possible to find opportunities for cost reduction, process improvement, and service improvement.

Call-Center Call Costs

Type of call

Number of calls
Total cost

of calls
Cost

per call

1. Cancellation
1,017,990

$910,290

$0.89

2. Policy explanation
387,913

666,984

1.73

3. Payment inquiries
358,763

541.659

1.51

4. Wrong number-transfer call
204,047

160,802

.79

5. Policy changes
122,204

217,253

1.78

6. Duplicate policy
87,449

148,736

1.70

7. Benefit change/Inquiry
75,116

135,733

1.81

8. Solicitation inquiries
59,420

102,956

1.73

9. Policy options information
36,997

129,290

3.49

10. Change authorization
30,271

118,072

3.90

11. Reinstatements/Reactivation
15,696

76,799

4.89

12. Miscellaneous
241,044

351,136

1.46

Total
2,636,909

$3,559,709

$1.35

For example, a cost reduction program might proceed with the observation that there are types of calls whose cost per call is very high. "Reinstatements/Reactivation" calls are very high. They cost an average of $4.89 per call (item 11 in the table). This is over three times the cost of an average call (3 X $1.35 = $4.05). What are some ways to reduce the cost of these calls? A quick look at the total dollars ($76,799) of "Reinstatement/Reactivation" calls reveals that although these calls have a high unit cost, the return on investment for improving these types of calls may be minimal. The total cost of this type of call ($76,799) is about 2% of the total cost of the call center ($76,799 divided by $3,559,709 is 2.2%).

For an example of a value added process improvement, look at "payment inquiries" (see item 3 in the table). Automating the response to payment inquiries would reduce the number of calls reaching the customer service representatives. This would dramatically reduce the number of calls in this category. Automation would reduce the number of calls handled by the customer service representatives, thereby improving the process and reducing costs. Reducing the number of calls handled by the customer service representatives (CSR) is often more effective in reducing costs than cutting the talk time per call.

A final example to illustrate the concept of service improvement takes a look at the category of "policy explanation" (see item 2 in the table). What changes in the policy-manual, sales presentation or communication with the customer could be made to either reduce the number of "policy explanation" calls or the length of these calls? Either approach would reduce the cost of this significant category ($666,984).

Conclusion

In order to create value for an organization, a call center must understand the cost and length of each type of call to the center. A call center must understand which products/services, customers, and internal departments are driving their call volume. They must communicate their findings to the appropriate people so that call volume can be reduced. They must focus on process improvement by understanding which types of calls create the greatest cost in their call center. Finally, they must continue their efforts to improve productivity in the call center while focusing on reducing call volume. Activity Based Costing (ABC) and Activity Based Management (ABM) are critical to effectively managing a call center today. "The ABC/ABM process was like turning on the lights. It allowed us to see our operations for the first time from a cost basis. We were then able to extract considerable savings without the trauma of letting people go," says Kevin.

For additional information see:

Activity Based Management for Services", John Antos and Jim Brimson, John Wiley, 1994.

Driving Value Using Activity Based Budgeting", John Antos and Jim Brimson, John Wiley, 1999.

Contact John Antos or Ken Kipers at 972.980.7407 assistyou@valuecreationgroup.com

Call Centers Find Out How Activity Based Management Will Help You Achieve Your Call Center Goals By Focusing on Those Costs That Increase Your Costs

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Phone: 972.980.7407 email: assistyou@valuecreationgroup.com
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