Business Process Outsourcing (BPO)

What is Business Process Outsourcing (BPO)?

Business Process Outsourcing (BPO) is a concept in which firms outsource or subcontract their general business operations to a third-party service provider/vendor, which, in turn, owns, manages, and administers the assigned process.

The vendor then carries out the process under the defined/prescriptive performance metrics. The tasks assigned to outsourcing agencies, generally, are the ones that are, by nature, not defining or differentiating the firm's proposition.

With the emergence of outsourcing, these subcontracts were prevalent within manufacturing industries such as apparel, sports accessories, and furniture. Then, it moved to basic service-based processes like auditing, payroll accounting, and customer service.

Now, the types of services are evolving further, with firms hiring outsourcing agencies for even more advanced services such as software development, human resources, marketing and Sales, and IT.

These outsourcing agencies usually offer two categories of processes:

1. Horizontal Offerings: 
   This refers to processes standard in all industries. For example, it offers payment services, payroll accounting, recruitment, tax solutions, and Administration.
2. Vertical Offerings: 
   This refers to the processes specific to a particular industry. In this case, the outsourcing agency provides specialized services to a specific sector of financial services, healthcare, and marketing and infrastructure

What is BPO Used For?

Firms engage in business process outsourcing for two different sites of business operations: front office and back office.

1. Front Office

These business processes or operations are directly related to existing or prospective customers. These processes usually include subcontracting of: 

• Marketing
• Sales
• After-sales customer service 
• Grievance Redressal

2. Back Office

These business processes or operations are called in-house or internal business functions.

These processes do not usually directly impact prospective or current clients, but they are crucial in sustaining the firm's operations. These processes typically include subcontracting of:

• IT services
• Human Resources
• Quality check and assurance
• Accounting
• Research and analysis

Now, the method of outsourcing can be different for different firms, which is to say that some firms outsource the whole process, and some outsource partial operations.

For example, in human resources, some firms outsource the whole process but hire different outsourcing agencies for various divisions, such as payroll accounting to agency 1 and recruitment to agency 2.

Some firms hire an outsourcing agency for only a specific function, like recruitment.

Types of BPO

Outsourcing is fundamentally performed at different geographical locations.

This is because it is usually done due to either informational or technological asymmetry between regions/countries. For cost-efficiency, firms can get critical tasks done with the same quality and cheaper because of the low wage rate in other countries/regions.

It is also done while expanding the business into another geographical boundary as it helps save funds from upfront capital expenditure(e.g., production processes).

Hence, they can be divided into different types based on location:

1. Onshore Outsourcing: This occurs when a firm subcontracts a business process/operation to an outsourcing agency in the same country. It is usually done when the output (generally a tangible product) of the process is required in a comparatively closer range so that transportation is more accessible, with fewer political and legal barriers.
2. Offshore Outsourcing: It is known as offshoring when a firm subcontracts a business process/operation to an agency in a different country. 
3. Nearshore Outsourcing: This occurs when a firm subcontracts a business process/operation to an agency in a nearby country.

They can also be categorized based on the type of services/operations they offer: 

1. Knowledge Process Outsourcing (KPO): KPO outsourcing involves knowledge-intensive activities, primarily collecting and analyzing data and providing strategic solutions or consultations to clients.
2. Research Process Outsourcing (RPO): RPO is based on research-based processes primarily gathering and analyzing market trends and insights. RPOs are vastly popular among investment, marketing, pharmaceutical, etc.
3. Legal Process Outsourcing (LPO): LPOs offer legal services to their clients. This involves checking a company's legal compliance, drafting essential legal documents for clients, and keeping clients’ policies in line with applicable laws. 

Making the BPO Decision

A company choosing to outsource services will likely look into its decision's various technicalities and intricacies. However, opting for outsourcing against in-house operations can differ for different firms.

For example, some may outsource quite a few business operations in the context of startups due to the lack of resources. On the other hand, some may outsource just one or a few operations, as their scale is low, meaning it can be easily managed in-house.

Similarly, in the context of large companies, some may outsource operations unrelated to the firm's unique value proposition.

Alternatively, some large companies these days choose to outsource many operations. This allows them to put most of their efforts into innovation and advancement of their core business operations.

After deciding what operations are to be outsourced, the firms evaluate the various consequences and make strategies to avoid all the risks. Shifting to outsourcing from in-house operations leads to changes in finances, management, and employees.

After making the essential checks and balances, the firm can move on to selecting outsourcing agencies/agencies.

After selecting, they choose which operation to give to which firm/agency (if multiple tasks are being outsourced). The company looking for outsourcing vendors then calls out contracts in which they primarily look for three essential factors:

1. Unique services provided by the outsourcing vendors
2. Pricing suitability
3. General contract terms

Before entering into a contract, the client and outsourcing agency prepare a mutual performance metric that is the benchmark of work done in the desired and required manner.

Benefits of BPO

BPOs have provided several benefits to corporations operating in this highly-competitive global economy. To state a few significant ones:

1. It has decreased costs, making firms more efficient and specialized in the operations they take over. Hence, they do the functions outsourced by clients at a much lower price.
2. It has helped in the standardization of business operations, made possible by the efficiency and accuracy these outsourcing firms have. They design their processes in a way that stays uniform and automatic.
3. The firms (clients) drive more value after outsourcing their operations than operating in-house with limited knowledge and technological sophistication compared to outsourcing firms.
4. As stated above, outsourcing firms and clients mutually design the operation metrics, allowing clients to reform their metrics and actively respond to changes in the market. This maintains quality.
5. Outsourcing agencies have allowed companies to focus and put more resources into innovation and advancement of their core business operations.
6. Because of outsourcing, today, a firm in one continent can provide 24x7 customer services in another continent. Essentially, outsourcing has expanded the services provided by a company to every location possible.
7. As outsourcing is a BPO firm’s core service, these firms keep themselves technologically sophisticated and advanced, which further benefits their clients. 

For example, automation of customer service tasks through artificial intelligence and machine learning has allowed client companies to provide their customers better and quicker service and cost advantage.

Drawbacks of BPO

Outsourcing culture has some issues which need to be considered while planning to outsource an operation:

1. A security breach is one of the primary problems these days with outsourcing agencies. Data security breaches are especially painful as clients usually share the database of their customers, employees, and financials. 
   A data breach may happen either because of an insider in the BPO firm or some hacker or virus.
2. Regulatory compliance requirements not followed by the outsourcing agency can also lead to legal liability for the client firm. This can also create unnecessary expenditures and delay the operations of the client firm.
3. Overdependence on external service providers can become problematic in geopolitical instabilities, climate situations, or cultural differences. 
   For example, suppose a client outsources its numerous operations to a BPO firm and, suddenly, the geopolitical situation between the nations gets disturbed. In that case, the client may suffer financial and operational consequences.
4. Unforeseen or hidden costs may also occur for the client's company if it fails to evaluate the estimated cost. It may also become exceedingly challenging to restart the operation in-house.
5. Relationship issues can also occur for any reason. For example, let's say both parties are from different cultures; hence communication of expectations and contractual terms may not be delivered clearly. 
   Sometimes, this can lead to consequences like a legal dispute, causing unnecessary expenditures for the firm and a delay in operational output.
6. There is a possibility that, due to the inferior quality of a BPO firm, the client firm suffers a loss of customer base. 
   For example, a BPO firm hired by a firm for after-sale customer service provides delayed or poor resolutions to customers. This can lead to customers no longer doing business with the client firm.

Researched and authored by Dhanraj Johari | LinkedIn

Reviewed and edited by James Fazeli-Sinaki | LinkedIn

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