BPO -Business Process Outsourcing: Complete Guide

“It is not the strongest among the species that survive, nor is it the most intelligent, it’s those that are most adaptive to change.”

– Charles Darwin

Business process outsourcing, aka BPO, is a 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.

What is BPO? (Business Process Outsourcing)

Business Process Outsourcing (BPO), is subcontracting a set of functions or processes by one firm to another or to a group of individuals. The latter organization is often in different physical locations or countries altogether.

Outsourcing is being pursued as an active business strategy in the current economic scenario, since it enables a firm to focus on core-competency areas. It also frees the firm from resource and labor intensive functions, which are now performed by trained personnel at much lower costs.

The process or activities that are being outsourced could range from customer service and telemarketing to IT management, software development, market research and even financial portfolio management.

BPO is not about relinquishing control but about trusting a business partner to continue in pursuit of excellence at comparatively low cost product or service.

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. Organizations are increasingly sourcing their business processes through external service providers, a practice known as Business Process Outsourcing (BPO).

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.

Rationale for Global Outsourcing:

Why do everything yourself, when someone else can do it at low cost?

The global market today is highly competitive and continuously changing. A company must, thus, focus on improving productivity and at the same time, cut down costs. This is the basic premise of outsourcing. Outsourcing works because what is non-core for one organization, is core for another.

In brief, business process outsourcing can be seen as a process in which a company delegates some of its in-house operations or processes to a third party. Thus, it is a transaction through which one company acquires services from another, while maintaining ownership and ultimate responsibility for the processes.

The company then informs its provider what it wants, and how it wants the work to be performed. The main motive for business process outsourcing is to allow the company to invest more time, money and human resources into core activities and building strategies, which fuel company growth.

Why is BPO gaining ground

 1. Factor cost advantage.

2. Superior competency.

3. Utilization improvement.

4. Economy of sale.

5. Business risk mitigation.

6. Availability of a highly qualified skilled pool of labour.

Firms dealing with insurance, banking, pharmaceuticals, telecom, automotive parts and airline companies were the ones who were first to adopt Business Process Outsourcing. Of the verticals listed above, insurance and banking are able to generate the bulk of savings, due to the large proportion of their processes that they can outsource, e.g., claims processing, loans processing and client servicing through call centers.

Kinds of processes

Companies mainly have three types of processes

a. Core processes (which give strategic advantage)

b. Critical, Non-core processes (which are important but are not competitive differentiators)

c. Non-core, Non-critical processes (which are needed to make the environment work)

It is suggested to outsource core processes; and it is recommended to invest in them. But many do recommend outsourcing critical, non-core processes to providers who specialize in those processes because they will invest in them and aim to make them world-class. And most advisors recommend outsourcing all non-core, non-critical processes. But outsourcing does not mean handing over an entire process.

Generally, it means turning over to a BPO provider the “how” aspects of a process, the systems, infrastructure, administration, execution, and some of the design of non-core processes. But retain the “what” aspects of the process, the governance, policy setting, decision-making, and strategy of these processes. The intent is to outsource the work while retaining the direction- setting part.

Top Benefits of Outsourcing

(i) Focusing of Attention:

Outsourcing focuses the firm’s attention and resources on select activities for better efficiency and effectiveness. It provides an opportunity to the organisation to concentrate on areas in which it has core competency and contracting out the rest to the outsourcing partners.

(ii) Quest for Excellence:

The firms excel in the activities that they can do the best (because of core competency or strength) by virtue of limited focus and by contracting out the remaining activities to expert and specialized service providers.

(iii) Cost Reduction:

It not only provides benefits of expert and specialized service of outsourcing partners, but also reduces cost. This happens due to economies of large-scale, which accrue to outsourcing partners as they deliver the same service to a number of organisations. Cost saving helps business enterprises to gain competitiveness. For example, India is a preferred destination for outsourcing due to availability of cheap manpower.

(iv) Growth through Alliance:

Alliances with outsourcing partners enable businesses to develop and expand because money saved by outsourcing can be used to expand manufacturing capability and explore new markets.It also facilitates inter-organizational knowledge sharing and collaborative learning.

(v) Boost to Economic Development:

Outsourcing promotes entrepreneurship, employment and exports in the countries from where outsourcing is done (known as host countries). For example, in India, in the IT sector, there has been such a tremendous growth of entrepreneurship, employment and exports that today we are the undisputed leaders as far as global outsourcing in software development and IT-enabled services are concerned.

(vi) Diversion of Problem Area:

The organization may go for outsourcing simply for the reason that it is prepared to pay a bit more to divert itself from the problem area and hand over the problem to somebody else.

(vii) Human Resource Management:

Traditional activities relating to human resource management such as recruitment, training, supervision, development and annual appraisal etc. can be minimized through outsourcing. Outsourcing of desired personnel for desired activities for the required duration will improve the corporate profitability and efficiency.

(viii) Technological Change:

Outsourcing helps improve the existing technology to achieve the objectives for better quality products at minimum cost. Access to latest technological or process sophistication becomes easy and assured in outsourcing. Outsourcing provides a firm to avail the opportunity of using world class external sources.

(ix) Flexibility:

Outsourcing will bring in flexibility in scope of services, volumes of output pricing, geographical extension etc. and the company makes least capital investment.

(x) Higher Stock Market Price:

Since stock market analysts measure the revenue per employee, the reduced headcount due to outsourcing results in increased per employee revenue and it will lead to an increase in stock price.

(xi) Shared Risk:

With the changing environment the risk in investment is high. Outsourcing is more dynamic to accept change to produce maximum returns on investment. In other words, there are no compulsion in investment in the own back dated production to receive underrated return for the investors.

Top 3 Features of Outsourcing

(i) Outsourcing Involves Contracting Out:

It involves contracting out an activity to an outside specialised agency which undertakes complete responsibility to handle it using its own manpower.

For example, many companies have started outsourcing sanitation and housekeeping functions, which were earlier performed by their in-house staff.

(ii) Generally Non-Core Business Activities are Outsourced:

Outsourcing is done for non-core activities, such as housekeeping or security in case of school.

For example, a school may tie-up with some computer training institute to impart computer education to its students.

(iii) Processes may be Outsourced to a Captive Unit or a Third Party:

A number of processes such as recruitment, selection, training etc., may also be outsourced to third party service providers.

Types of Outsourcing

Type 1. Transactional: High value in focusing internal information system group on value added applications development and integration.

Hire more information system people or contractors.

(i) Outsourcing all or portions of the new applications.

(ii) Outsource legacy applications maintenance.

Type 2. Best of breed:

(i) In the past, there have been many “Mega-deal” or “Soup-to-nuts” sourcing contracts.

(ii) Best-of-breed outsourcing contracts with the consortium of providers.

Type 3. Offshore:

A firm based in the USA can choose to outsource its non-core activities to a group based in America or it can give this work to another group in an offshore location, be it India or China. Offshore outsourcing leads to huge cost reductions, with most firms claiming a savings of between forty to fifty percent. But cost is not the only reason.

Type 4. Shred Services:

This involves creating an “in sourcing” unit that:

(i) Operates as a separate business unit.

(ii) Charges for services at full cost.

(iii) Competes and works with other ESPs.

Type 5. Business Process:

(i) Outsourcing an entire business process that is typically non-core.

(ii) This sounds new but in actual fact has been common for years e.g. payroll processing.

(iii) Have been relabeled and also moved more towards core process e.g. Billing, Procurement etc.

Type 6. E-Business:

(i) This is basically the same as business outsourcing, but is carried out electronically.

(ii) Outsourcing internet/interact/extranet i.e. web related matter as opposed to other forms of outsourcing.

The major differences between e-business outsourcing and traditional IT outsourcing is that there is no need to buy machines from the client, no personnel has to be moved, and no software licenses have to be transferred.

Services that can be Outsourced

A wide variety of routine activities and services can be outsourced.

Some of these services are given below:

(i) Financial Services:

Outsourcing service providers may be hired for maintaining books of accounts, for issue of securities, for raising debts and other financial activities. When a company needs to raise finance by way of issue of shares and debentures, several formalities have to be performed. These formalities are cumbersome and require specialised knowledge and skills. Similarly, when a company wants to take over another company or when two companies want to merge together, expert values are required. Merchant banks, issuing houses and investment banks provide financial services to business enterprises.

(ii) Advertising Services:

Advertising service is generally outsourced. Business firms hire advertising agencies to design and carry out advertising campaigns for them. These agencies design the advertising copy, arrange space and time for advertising and produce advertisements. They are experts in advertising and outsourcing advertising services to them provides benefits of specialization to business firms.

(iii) Courier Services:

Courier Service is essentially postal service provided by private firms. Couriers carry letters and parcels at low charges and deliver them more quickly and safely than post offices. Business firms hire couriers to send letters, documents and samples of products from one place to another. Couriers offer desk-to-desk service under which the articles to be dispatched are picked up from the sender’s place and delivered to the receiver’s place. A larger number of courier service firms have come up in big cities and towns. They are doing brisk business.

(iv) Customer Support Services:

Producers and sellers of durable house-hold products such as washing machines, air conditioners, television sets, etc. are required to provide after sale services to their customers. Prompt, courteous and effective after sale service is essential for survival and growth of business in this competitive world. Large companies may have their own customer support service departments. Alternatively, they may outsource customer support services to outside agencies. These agencies are experts and can ensure complete customer satisfaction and theory enhances the goodwill of client companies.

(v) Human Resource Services:

Several services concerning employees are nowadays outsourced. Recruitment and selection, orientation and training, payroll administration, employee welfare services (e.g. transport and food for the staff) are examples of such services.

Key Factors in Successfully Outsourcing a Business Process

1. Thoroughly analyze your process so you know your costs, and can determine the cost savings of outsourcing over a specific time period.

2. Define roles and responsibilities in the outsourcing partnership, so there are no surprises, and so that the expectations of both parties are clear.

3. Have measurable performance objectives – the speed of transactions, the time period to close the books, etc. and establish performance incentives, both rewards and penalties, for meeting those objectives.

4. Develop a detailed transition plan to ensure a smooth hand off. Outsourcing is a major undertaking that benefits from careful advanced planning.

5. Establish a clear dispute-resolution process to handle issues as they arise. This makes for smoother operations and doesn’t make every issue a contractual or legal problem.

6. Monitor results for continuous improvement. Arrange long term contracts on a yearly renewal basis, so there is an annual review of an outsourcer’s performance.

Concerns over Outsourcing:

(i) Confidentiality – Outsourcing involves sharing a lot of vital information and knowledge with others. This involves risk of passing such information to the competitors by such persons. Outsourcing may lose the information security which may lead the competitors to a front-foot.

(ii) Sweat-Shopping – Business firms which outsource their work, seek to get maximum benefit from the low cost manpower of host countries. Moreover, the work outsourced requires ‘doing skills’ instead of ‘thinking’ skills, which does not build competency and capability of the outsourcing partner.

(iii) Ethical Concerns – When the companies outsource their work to developing countries where child labor and women are employed due to weak laws, it may lead to unethical behaviour. Similarly, it is unethical if the work is outsourced to countries where there exists wage discrimination on the basis of sex of the workers.

(iv) Resentment in the Home Countries – Outsourcing directly shifts the employment opportunities to other countries. It may cause resentment among people of the home countries, especially when the home country is suffering from the problem of unemployment.
(v)  Staff Issues : Outsourcing may lead to low employee morale and reduce performance of other staff.

Future of BPO Industry

The future of BPO is similar to that of many industries in that automation will be key. Many experts point to RPA as the main avenue through which BPO will change. For example, data entry work and image recognition can be automated easily. However, experts report that certain functions, like handwritten data and telemarketing, will resist automation.

All industries, including BPO, will likely leverage emerging technologies, such as cloud services, social media, and machine learning, to reduce costs and accelerate growth. One business model, the productized service, combines software and an outsourced staff member. An example of productized services is a package that bundles cutting-edge accounting software and accounting services, with both services billed to the contracting company monthly. Startups in particular are becoming more dependent on this type of service, so there is mutual dependence with BPOs.

The trend of providing and supporting improvements in social media management tools is expected to continue. Investments in cloud computing will also persist, as it becomes a more mature platform. In addition, BPOs will invest in diversifying their workforce. As BPOs get more competitive and are forced to lower their prices, they will move to lower-cost alternatives such as software automation and AI. With the threat of losing workers to AI and automation, governments and business leaders are educating them so they can meet the newer demand for highly skilled positions.

With businesses expecting BPOs to fill their gaps or even becoming dependent on them, BPOs are required to be more transparent so that they may build and maintain trust. In the 2016 U.S. presidential election, BPO providers were concerned that they would lose their ability to work for U.S. companies if the new administration changed policies on trade, tax laws, and visas. However, experts do not believe that changing political tides will negatively affect BPO or KPO. Because KPO in particular requires higher-level skill sets or higher education, experts believe that individual country politics will be less apt to disrupt the businesses.