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Merchants’ Bank (MB) is a large regional bank operating in 634 locations in the Southeast United States. Until 2005, the bank operated a call center for customer inquiries out of a single location in Atlanta, Georgia. MB understood the importance of the call center for overall customer satisfaction and made sure that the center was managed effectively. However, in early 2004, it became clear that the cost of running the center was increasing very rapidly, along with the firm’s growth, and that some issues were arising about the quality of the service. To improve the quality and dramatically reduce the cost of the service, MB moved its call center to Bangalore, India, to be run by an experienced outsourcing firm, Naftel, which offers similar services to other banks like MB.
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The Naftel contract was for five years, and in late 2008 it was time to consider whether to renew the contract, change to another call center service provider (in India or elsewhere), or bring the call center back to Atlanta.
Some important factors to consider in the decision:
- At the time of the decision in late 2008, the value of the dollar had been increasing relative to most other currencies.
- The financial crisis of 2008 had been affecting the banking business, and the outlook for growth for MB at the time had not been as rosy as it had been for the last few years. Top management and economic advisors for the bank had basically no idea what to forecast for the coming five years.
- At the time of the decision, the employment rate in Atlanta had been falling to the point that there was a good supply of talented employees who could have been recruited into the call center if the center were relocated back to Atlanta.
- The bank had just completed a new headquarters building in Atlanta and had a good bit of space in the building that MB had yet to lease. The outlook for the Atlanta economy was such that MB did not expect to lease much of this space for at least three years. If the call center were returned to Atlanta, it would occupy a space that could be rented for $100,000 per year, assuming there was a company that wanted to lease the space.
- If renewed, the Naftel contract would cost $4,200,000 per year for the next five years.
- The cost of salaries to staff the call center in Atlanta was expected to be $2,300,000 per year, the equipment would be leased for $850,000 per year, telecommunication services were expected to cost $500,000 per year, administrative costs for the call center were expected to be $600,000 per year, and the call center’s share of corporate overhead was expected to be $400,000 per year.
Required
- At the time of the above facts, should MB have returned the call center to Atlanta or should it have renewed the contract with Naftel? Develop your answer for both a one-year and a five-year time horizon. Consider the strategic context of the decision as an integral part of your answer. (Hint: Using discounted cash flow is not required but would improve your answer; MB uses a discount rate of 6%.)
- What are the global issues that should have been considered in the decision?
- What ethical issues, if any, should have been considered in the decision?
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