What is business process outsourcing (BPO)?
Business process outsourcing (BPO) is a business practice in which an organization contracts with an external service provider to perform an essential business task.
Typically, an organization first identifies a process that is necessary for its operations yet is not part of its core value proposition in the market; this step requires a good understanding of the processes within the organization and strong business process management.
Processes that are performed the same or similarly from company to company, such as payroll or accounting, are candidates for BPO.
Because these commodity processes don't generally differentiate one organization from another, enterprise executives often determine there's little value in having their own staff perform them. Indeed, companies calculate that outsourcing these processes to a company specializing in these processes could deliver better results.
BPO has its roots in the manufacturing industry. Manufacturers hired third-party vendors to handle parts of their supply chains after determining that the vendors could bring more skills, speed and cost efficiencies to that process than an in-house team could deliver. Over time, organizations in other industries adopted the practice.
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Now, the use of BPO has expanded so much that organizations of all kinds -- for-profit businesses, nonprofits and even government agencies -- contract with BPO service providers in the United States, throughout North America and across the world to perform numerous processes.
What is BPO used for?
Organizations engage in business process outsourcing for two main areas of work: back-office functions and front-office functions.
Front-office functions include customer relation services, marketing and sales.
BPO contracts can involve outsourcing an entire functional area, such as the HR department, to a single vendor. Organizations also often outsource specific processes within a functional area. For example, an organization may outsource its payroll process but perform all other HR processes itself.
Commonly outsourced processes include the following:
- customer services and call centers
- IT management and services
- shipping and logistics
A survey from Clutch, a business-to-business research firm, found that small businesses most commonly outsourced their more technical tasks, with 37% outsourcing accounting, 37% outsourcing IT services and 34% outsourcing digital marketing.
For large and small businesses, the range of functions and services offered by the business process outsourcing industry has expanded greatly in recent decades.
The breadth of BPO functions spans from the conventional back- and front-office functions listed above to digital services, such as social media marketing.
In addition to these commodity functions, some companies also outsource strategic tasks, such as data mining and data analytics, both of which have emerged as essential elements for maintaining a competitive advantage in a digital economy.
How does BPO work?
Enterprise executives opt to outsource a business process for a variety of reasons.
Those reasons vary based on the type of organization, the age and size of the organization, market forces and economic conditions.
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 a third-party service 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 determine if shifting that task to an outsourcing provider makes sense.
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 affects staff, established processes and existing workflows.
The shift to an outsourced provider 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 corporate taxes and reporting requirements.
The organization might also have to invest in new technology to enable the smooth flow of work from the organization itself to the outsource provider, with the extent and cost of that technology product dependent on the scope of the function being outsourced and the maturity of the technology infrastructure in place at both enterprises.
What are the benefits of BPO?
In its "2020 Global Outsourcing Survey," Deloitte found that companies use BPO to meet the following objectives:
- cost savings, cited by 70% of enterprise leaders surveyed;
- flexibility, cited by 40%;
- speed to market, 20%;
- access to tools and processes, 15%; and
- agility, 15%.
Benefits of BPO typically cited by proponents include the following:
- Financial benefits. BPO providers can often perform a business process at lower costs or save the company money in other ways, such as in tax savings.
- Improved flexibility. BPO contracts can offer the ability to modify how an outsourced business process is done, enabling companies to react more nimbly to changing market dynamics.
- Increased competitive advantage. BPO enables an organization to focus more of its resources on operations that distinguish it in the marketplace.
- Higher quality and better performance. Because business processes are their core business, BPO providers are well positioned to complete the work with greater accuracy, efficiency and speed.
- Access to innovations in the business process. BPO providers are more likely to know about advances happening in the process areas they specialize in. That means they're more likely to invest in new technologies, such as automation, that can improve the speed, cost and/or quality of the work.
- Expanded coverage. Organizations that need 24/7 call center operations can often quickly gain that capability by contracting with a BPO provider with around-the-clock capabilities and multiple geographic locations, enabling a follow-the-sun business model.
What are the risks of BPO?
Organizations also take on potential risks when outsourcing business processes.
BPO risks include the following:
- Security breaches. The technology connection between the hiring company and the BPO provider creates another point of entry for 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 outsourced work, either because they miscalculated the amount of the work being performed or the full costs spelled out in their BPO contracts.
- Relationship challenges. Organizations can face communication problems with their outsourced providers, or they might find that there are cultural barriers -- problems that can dilute the benefits of BPO.
- Overdependence on the external provider. An organization that outsources a function or service is tethered to the partner that performs the work. The organization then must manage that relationship to ensure that key objectives are rigorously met at the agreed-upon cost. If not, the organization may find it difficult to bring the operation back in-house or even move the contract 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 risks and devise strategies on how to cope, which, in turn, adds complexity to their business continuity and disaster recovery
Deloitte found in its "2020 Global Outsourcing Survey" that enterprise leaders are focusing more on the potential risks of BPO and on the importance of risk management. Deloitte noted that "third-party ecosystems are more complex than ever, which has implications for regulatory compliance, security, risk, and data protection requirements" and noted that "the role of supplier management is more critical than ever; however, this function is still underpowered in many organizations."
Security and regulatory concerns
It is important to examine any security and regulatory concerns, requirements and restrictions in BPO contracts. For example, companies that are subject to regulations requiring local storage of certain types of data could be prevented from using an offshore provider in some circumstances.
Consequently, organizations seeking to outsource 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 cost savings, increased quality, quicker turnaround or some other objective -- and then use that criteria to determine which provider is 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.
What are the different types of BPO?
BPO is often 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 sometimes categorized by the types of services being provided; three categories commonly cited 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; these range 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.
How to choose a BPO provider
Enterprise executives should select BPO providers who can support their business objectives, as well as help them be more agile, more flexible, faster, more innovative and, ultimately, more competitive.
According to executive advisors and management consultants, organizations should consider more than just the price of a BPO contract when choosing a provider. They must also consider how well the provider can deliver on those other points, evaluating each provider to determine whether it has the following:
- an adequate understanding of the organization's business and industry;
- the capacity to meet current requirements, as well as scale to meet future needs;
- an understanding and ability to meet compliance and regulatory requirements, as well as data privacy needs;
- reporting metrics to demonstrate it's delivering on contractual standards; and
- the geographical locations to meet business needs and/or regulatory requirements.
BPO market size
Analysts predicted that the global business process outsourcing market will continue to grow.
Grand View Research, for example, predicted the BPO market will reach $435.9 billion by 2028, expanding at a compound annual growth rate of 8.5%. Researchers attributed that projected growth to ongoing demand from businesses for ways to lower their costs, although they also said that pressure on organizations to improve efficiency, customer service, innovation and flexibility is also driving the growth.
Grand View Research put the BPO market at $232.3 billion in 2020.
Future directions of the BPO industry
Executives continue to identify and reorder what they need and want from the vendors they contract with to handle their business processes.
Consider findings from service provider CGS, which surveyed more than 200 business leaders and decision-makers about what they'll use to evaluate their BPO providers in 2021. CGS found the following:
- 48.6% put data privacy and compliance as their top priority.
- 41.9% want their providers to be a knowledge partner with advanced technology capabilities.
- 34.3% evaluate BPOs on their technology platform capabilities.
- 33.3% want BPOs with deep experience in the organization's own industry vertical.
Such findings fit with other reports showing that organizations see outsourcing decisions as an important part of their strategic planning. One such survey from Clutch found that 80% of small businesses planned to outsource in 2021 to save money, save time and/or access experts. Enterprise executives also said they planned to outsource functions as a way to support organizational growth.
BPO vendors, however, are contending with disruption as well.
The practice of business process outsourcing could be at least partially displaced in upcoming years by technology.
Robotic process automation and artificial intelligence 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 process automation technologies than organizations are, thereby helping the BPO provider retain its appeal to organizations looking for the best way to handle business functions.
Controversies around BPO
Although many business leaders see the practice of outsourcing services and functions as critical to success in a competitive, 24/7 digital economy, outsourcing 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 hot button issue 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.