Definition

business process outsourcing (BPO)

This definition is part of our Essential Guide: IT sourcing strategy guide for enterprise CIOs

Business process outsourcing, or BPO, is a business practice in which one organization hires another company to perform a task (i.e., process) that the hiring organization requires for its own business to successfully operate.

BPO has its roots in the manufacturing industry, with manufacturers hiring other companies to handle specific processes, such as parts of their supply chains, that were unrelated to the core competencies required to make their end products.

However, organizations in other industries adopted the practice through the years. 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.

According to the BPO Services Global Industry Almanac 2013-2022 released in May 2018, the overall BPO Services sector generated revenues of $144.9 billion in 2017.

What BPO is used for

Organizations engage in business process outsourcing for two main areas of work: back-office functions and front-office functions.


Learn why the Philippines increased as a
destination for BPO.

Organizations can outsource a range of back-office functions (also referred to as internal business functions) including accounting, IT services, human resources (HR), quality assurance (QA) and payment processing.

Similarly, they can outsource various front-office functions, such as customer relation services, marketing and sales.

Organizations can also outsource specific functions (i.e., payroll) in those areas in addition to outsourcing an entire functional area (i.e., human resources).

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 information technology-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:

  1. Knowledge process outsourcing, or KPO, in which 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.
  2. 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.
  3. 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:

  • 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, allowing them to better react to changing market dynamics.
  • Competitive advantage: BPO allows organizations to outsource those processes that aren't core to their businesses or missions, thereby allowing 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.

Risks of BPO

In addition to expecting anticipated benefits, organizations engaged in BPO also take on potential risks and drawbacks. Those potential problems include:

  • 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 did 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.

Future directions

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 service 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.

This was last updated in July 2018

Continue Reading About business process outsourcing (BPO)

Join the conversation

12 comments

Send me notifications when other members comment.

Please create a username to comment.

I agree. Outsourcing companies not only practices its profession but it also values the core of work ethic of every employees. This is needed to have a better connection between two companies. With good connection, it may double its productivity.
Cancel
Thanks for the info. Job well done.
Cancel
Glad to know that Business process outsourcing is continually growing here in the Philippines and such a big help to Philippine economy.
Cancel
Great article,hope you could also share some knowledge about SEO/SEM Outsourcing Marketing.I heard that by investing wisely on both SEO and SEM it could help in maximizing the ROI on its online marketing budget.
Cancel
That's good. Can you give a brief view by taking any example ,that what is outsourced and what is profited in such a case and how, to get a detailed view what actually they do in it?
Cancel
When outsourcing we all have two main questions: How do I find the right candidate and how do I manage the outsourcer afterwards. This article addresses both and was very helpful to me. I will leave the link.
Cancel
Business process outsourcing is totally useless it did not provide scope for improvement in career. I would always suggest not to join any BPO as they will not benefit to you in any manner.
Cancel
If done correctly, can both improve on efficiency and be very cost effective, freeing up valuable company resources to focus on other, more critical tasks. The key, however, as with other types of outsourcing, is to do your research beforehand, lay down clear expectations and deliverables with the vendor you select, and keep to what was agreed upon by the two parties.
Cancel
What tasks does your organization use business process outsourcing (BPO) for?
Cancel
Hi,
If anyone of you know the answer for this, kindly reply
Why software architecture essential for BPO management system?
Cancel
Thanks for sharing the details about outsourcing and BPO Services.
Cancel
Hello, I want to know whether to establish a BPO requires heavy Capital and Infrastructure?
Basically, by reading the above post i came to the conclusion that it is easy to establish a Back end BPO.
Cancel

-ADS BY GOOGLE

File Extensions and File Formats

Powered by:

SearchCompliance

SearchHealthIT

SearchCloudComputing

SearchMobileComputing

SearchDataCenter

Close