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Business process outsourcing, or BPO, is a business practice in which one organization hires another company to perform a process task that the hiring organization requires for its own business to operate successfully.
BPO has its roots in the manufacturing industry, with manufacturers hiring other companies to handle specific processes, such as the parts of their supply chains unrelated to the core competencies required to make their end products.
Over time, organizations in other industries adopted the practice. Now, the use of BPO has expanded so much that organizations of all kinds -- for-profit businesses, nonprofits, and even government offices and agencies -- contract with BPO service providers in the United States, throughout North America and across the world to perform numerous processes.
What BPO is used for
Organizations engage in business process outsourcing for two main areas of work: back-office functions and front-office functions.
Back-office functions -- also referred to as internal business functions -- include accounting, information technology (IT) services, human resources (HR), quality assurance (QA) and payment processing. Front-office functions include customer relation services, marketing and sales.
In addition to outsourcing an entire functional area, i.e., HR, organizations outsource specific functions in those areas -- for example, payroll.
Over the decades, the business process outsourcing industry has expanded to offer an extremely wide range of functions and services to organizations.
The breadth of functions that can be outsourced today spans from conventional back-office tasks, such as accounting, data processing and payroll processing, to digital services, such as social media marketing, and to customer support roles, such as call center operations.
Although organizations generally outsource noncore functions, they do indeed still outsource critical tasks, such as customer service, financial services and IT operations. Organizations also outsource strategic tasks, such as data mining and data analytics, both of which have emerged as essential elements for digital transformation and for competitive advantage in a digital economy.
How does BPO work?
Organizational executives arrive at the decision to outsource a business process through a variety of avenues. Startup companies, for example, often need to outsource back-office and front-office functions because they do not have the resources to build the staff and supporting functions to preform them in-house. On the other hand, an established company may opt to outsource a task that it had been performing all along after an analysis determined that an outsourced provider could do the job better and at a lower cost.
Management experts advise enterprise executives to identify functions that can be outsourced and then evaluate that function against the pros and cons of outsourcing to determine if shifting that task to an outsourced provider makes strategic sense for the organization.
If so, the organization then must go through the process of not only identifying the best vendor for the work, but also shifting the work itself from in-house to the external provider.
This requires a significant amount of change management, as the move to an outsourced provider generally impacts staff, established processes and existing workflows.
The shift also impacts the organization's finances -- not only in terms of shifting costs from the internal function to the outsourced providers, but often also in terms of taxes and reporting requirements.
The organization may also have to invest in a technology solution to enable the smooth flow of work from the organization itself to the outsource provider, with the extent and cost of that technology solution dependent on the scope of the function being outsourced and the maturity of the technology infrastructure in place at both enterprises.
Security and regulatory concerns
Additionally, the organization must address any security and regulatory concerns, requirements and restrictions. For example, some regulations require local storage of certain types of data, which could prevent the use of an offshore provider in some circumstances.
As such, organizations seeking to outsource generally need to involve IT, security, legal and financial executives in the transaction in addition to the business unit leader of the function being outsourced and the procurement office. Moreover, these executives need to be involved in periodic reviews of the outsourced function to determine whether regulatory and financial changes, as well as changing organizational strategies, render the need for changes in the outsourcing arrangements.
Scope of work
As an organization moves a function to a new outsourced provider, it must identify the scope of the work shifting from in-house staff to the external partner. Executives should identify the workflows and processes impacted by this shift and adjust, if necessary, those workflows and processes to accommodate the outsourcing of the work.
Executives should also identify the key objectives for outsourcing a function -- whether it's cost savings, increased quality, quicker turnaround or some other objective -- and then use that criteria to determine which provider would be best suited to handle the work. Those objectives should also serve as the basis for contractual obligations that can be used to help assess the performance of the outsourced provider and success of the function once it is actually outsourced.
Types of BPO
Because companies around the world provide BPO services to other organizations, BPO can be divided into different types based on the service provider's location:
- Offshore outsourcing, or just offshoring, occurs when an organization contracts for services provided with a company in a foreign country.
- Onshore outsourcing, or domestic outsourcing, happens when an organization contracts for services provided by a company that operates in the same country as the hiring organization.
- Nearshore outsourcing is when an organization contracts for services provided by companies based in neighboring countries.
Business process outsourcing is also sometimes referred to as IT-enabled services, or ITES -- a name that recognizes that IT infrastructure enables outsourcing to happen.
KPO, LPO and RPO
Business process outsourcing is also sometimes categorized by the types of services being provided. The three prevalent categories are the following:
- Knowledge process outsourcing, or KPO, is when the outsource service provider is hired not only for its capacity to perform a particular business process or function, but also to provide expertise around it.
- Legal process outsourcing, or LPO, is a type of KPO that -- as the name states -- is specific to legal services, ranging from drafting legal documents and performing legal research to offering advice.
- Research process outsourcing, or RPO -- another type of KPO -- refers to research and analysis functions; biotech companies, investment firms and marketing agencies are among the types of organizations that would engage in RPO for services.
Benefits of BPO
Organizations engage in business process outsourcing because they expect to benefit from the arrangement.
The benefits typically cited by proponents of BPO include the following:
- Financial benefits: Organizations often find that an outsourced provider can perform a business process at lower costs, or they often find that, by contracting with an outsourced provider, they can save money as a result of the relationship in other ways, such as in tax savings.
- Flexibility: BPO contracts can allow organizations greater flexibility to adjust how it completes the outsourced business process, enabling them to better react to changing market dynamics.
- Competitive advantage: BPO enables organizations to outsource those processes that aren't core to their businesses or missions, thereby enabling organizations to focus more of its resources on the operations that distinguish them in the marketplace.
- Higher quality and better performance: Because the core business of BPO providers is performing the specific processes they're hired to do, they are, in theory, able to focus on providing those processes at the highest levels, often with greater accuracy, efficiency and speed.
- Quicker access to innovations in the process: BPO providers are also more likely and better positioned to know about advances and innovations happening in the area they specialize in, and they are more likely to invest in new developments in process automation that can improve the speed, cost and/or quality of the work -- benefits that flow back to the organizations that contract with the provider.
- Expanded coverage: Outsourced providers can expand the hours or geographical reach of an enterprise in a cost-effective manner. For example, an organization that wants to have 24/7 call center operations may be able to more quickly and more efficiently provide that capability by contracting with a partner which has existing around-the-clock capabilities, perhaps even in multiple geographic locations to enable a follow-the-sun business model.
Risks of BPO
In addition to expecting anticipated benefits, organizations engaged in BPO also take on potential risks and drawbacks. Those potential problems include the following:
- Security breaches: Organizations must create technology connections between themselves and their service providers, thereby creating another potential point that could be exploited by bad actors; moreover, organizations often need to share sensitive and/or regulated data with their service providers -- another potential security risk.
- Unanticipated/higher costs: Organizations can underestimate the price they'll be charged for the work that they're outsourcing, either because they underestimate the amount of the work or they do not calculate or anticipate the full costs of their contracts with their providers.
- Relationship challenges: Organizations can face communication problems with their outsourced providers, or they might find that there are cultural barriers to having a strong business partnership, problems that could hinder hiring organizations from seeing the full benefits of their BPO contracts.
- Overdependence on the external provider: An organization that outsources a function or service becomes tethered to the particular partner it has chosen to perform the work. The organization then must manage that relationship to ensure that key objectives are continuously met at the agreed-upon cost. If not, the organization may find it difficult to bring the operation back in-house or even move it to another outsourced provider.
- Increased potential for disruption: An organization also must monitor for issues that could interrupt or permanently end the relationship with an outsourced provider. They include financial or workplace problems at the outsourced provider, geopolitical instability, natural disasters or changes in economic circumstances. Organizations thus need to consider such potentials and devise strategies on how to cope, adding layers of complexity to their business continuity and disaster recovery (BC/DR) plans.
The practice of business process outsourcing could be at least partially displaced in upcoming years by technology.
Robotic process automation (RPA) and artificial intelligence (AI) can handle some of the business processes now frequently outsourced, and these technologies can often perform those functions at lower costs and higher speeds.
However, not all processes are easily automated; moreover, a BPO provider may be in a better position to utilize those technologies to automate its service offerings than organizations are, thereby helping the BPO provider retain its appeal to organizations looking for the best way to handle business functions.
BPO market size
According to the BPO Services Global Industry Almanac 2013-2022, released in May 2018 and the most recent almanac available, the overall BPO services sector generated revenues of $144.9 billion in 2017. That represents a compound annual growth rate (CAGR) of 3.3% between 2013 and 2017. The market is expected to reach $140.3 billion by 2022.
According to the report, the BPO services counted include the customer relationship management (CRM) function, KPO, finance and accounting, HR, procurement and vertical-specific processes.
The report further noted that the United States was by far the largest global market for BPO, larger than the European market, as well as the market for the entire Asia-Pacific region.
According to industry research from IBISWorld, the BPO services market size in the United States in 2019 was $130.9 billion, up 2% for the year. That tracks with the overall BPO market growth in recent years, with IBISWorld calculating 2.1% annualized market size growth in the United States since 2014. IBISWorld put the number of BPO businesses in the U.S. market at 160,723, with industry employment topping 1 million.
Controversies around BPO
Although many business leaders see the practice of outsourcing services and functions as a critical component of organizational success in a competitive digital economy that operates 24/7, the practice has also become controversial over the years.
Some labor leaders, politicians and workers have criticized business process outsourcing, saying it encourages organizations to shift good jobs from their home countries, such as the United States, to low-wage countries that have less stringent labor laws and environmental protections. Such criticisms in the past have fueled public outrage against outsourcing. In 2015, for example, Disney made news for laying off technology workers who first had to train their foreign-based replacements.
In fact, outsourcing has become a political point for Democrats and Republicans as both parties focus on the need to sustain good jobs in the United States. In 2019, Congress considered legislation aimed at the practice, with a Democrat-backed proposal that would require companies to disclose the location of their employees.