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.
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:
- 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.
- 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:
- 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.
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.