What is BPO (Business Process Outsourcing)?
Business Process Outsourcing (BPO) is a process of subcontracting different business-related operations to third-party specialists. In other words, Business Process Outsourcing (BPO) is a business practice in which an organization contracts with an external service provider to perform an essential business functions or tasks. Business Process Outsourcing (BPO) happens when an organization outsources entire business functions to be handled by another company. For example, companies can outsource their payroll services, Human Resources (HR) services, marketing activities, supply chain management functions and customer service services. In this article, we will discuss what business process outsourcing is, how it works, its different types, its benefits and disadvantages.
Many businesses, from small startups to large companies, opt to outsource their business processes, as new and innovative services are increasingly available in today's ever-changing, highly competitive business climate.
Broadly speaking, companies adopt BPO practices in the two main areas of back-office and front-office operations. Back office BPO refers to a company subcontracting its core business support operations such as accounting, payment processing, IT services, human resources services, regulatory compliance, and quality assurance services to outside professionals or third party companies who ensure the business runs smoothly.
By contrast, front office BPO tasks commonly include customer-related services such as tech support, sales, and marketing services.
How does BPO (Business Process Outsourcing) work?
Business process outsourcing begins when a company determines it can gain benefits from outsourcing business functions, such as marketing, accounting or supply chain management, to an external service provider. The company then begins studying different companies that specialize in performing the needed business function or operations. Often, the searching company will get in touch with more than one BPO company to determine the best fit for them to perform the operations.
Once a company has reached out to a considered BPO company, a conversation begins between them. Many BPO companies determine the needs of the client company, then tailor a solution to those unique needs. In this way, often, no BPO-client relationship is exactly the same. The BPO company will then draw up a contract, often called a master service agreement (MSA) or a service-level agreement (SLA) that gives a broad overview of the terms of the agreement between them.
Once the client receives these broad contracts from considered BPO companies, the decision-makers decide which BPO company offers them the best value and hires accordingly. A backup BPO company may also be fixed in case the primary BPO company is not able to deliver as per expectations of the client.
Once a BPO company is hired, more granular agreements may be drawn up to cover how each project will be handled by the BPO company. Such a granular contract is often called a statement of work (SOW). The relationship then continues based on the specifications in the MSA, SLA and/or SOW. In particular, the SOW may be revisited and revised when needed to ensure an optimal ongoing relationship between the client and BPO service provider.
What are the different types of BPO (Business Process Outsourcing)?
BPO is often divided into the following types based on the service provider's location:
- Offshore Outsourcing 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.
What are the advantages of BPO (Business Process Outsourcing)?
There are various potential advantages to hiring a BPO company. Among them are greater operational flexibility, cost savings, top talent and access to innovative technologies, access to quick and advanced reporting, a better ability to respond to change, reduced risk ultimately, a competitive advantage. Here is a closer look at each of these benefits.
- Greater Operational Flexibility - By outsourcing non core competency functions within your business, such as marketing and HR functions, your personnel are free to focus exclusively on core competencies within the organization. In turn, this gives them time to be innovative and adaptive in their work.
- Access to Innovative Technologies - To compete for clients against other BPO companies, most BPO companies specialize in one business function and invest in the latest and best technologies in that specialization. This often means companies that outsource to them gain access to the most innovative and best technologies in the industry, technologies they may not otherwise have the budget to implement internally or may not even know exist.
- Access To Top Talent - Many BPO companies hire talent with ample backgrounds and credentials in the area in which they specialize, such as payroll or HR. Hiring top talent meaning they can compete for clients against other BPO companies. It also means the organizations that hire them gain more access to the expertise within that top talent.
- Cost Savings - Many BPO companies exist or hire within countries with lower corporate income tax and acceptable incomes. As funds are saved by hiring from other countries, those savings are often passed along to businesses that outsource through them. In addition, many other costs can be saved by hiring a BPO company, including office rental costs, employee-used software fees and other overhead costs.
- Access to Advanced and Quick Reporting - Access to advanced technologies like artificial intelligence (AI), automations and machine learning (ML) via BPO companies permit businesses to gain access to more quick and advanced reporting, including cash flow and financial forecasting.
- Better Change Responses - By accessing top talent, innovative technologies, cost savings, greater internal flexibility and advanced reporting, companies are better able to adapt when their industries quickly or customer demands change. They may even be able to adapt before the changes hit to stay ahead of demand. For example, access to advanced reporting can help outsourcing companies forecast coming changes so they can adapt before they are forced to.
- Specialized Risk Management - Companies that outsource business functions can potentially reduce risks by putting those areas of their businesses in the hands of tried and true experts who know how to avoid relevant risks. For example, if a company outsources its information technology (IT) function, the hired IT experts may know ways to mitigate risks with greater attention to detail than the outsourcing company’s current employees.
- A Greater Competitive Advantage - With access to cost savings, innovative technologies, advanced and quick reporting, specialized expertise, opportunities and specialized risk management for greater operational flexibility, companies are strongly able to develop competitive edges against competitors that may not have such access.
What are the disadvantages of BPO (Business Process Outsourcing)?
Despite the numerous and impressive benefits to BPO, the disadvantages can be equally impressive if not managed correctly. Common disadvantages include public backlash, loss of control, communication breakdowns and hidden costs. Here is a closer look at these disadvantages.
- Public Backlash - Some outsourcing companies hire talent from across the globe (offshoring) or nearby countries (nearshoring). In doing so, public perception may negatively affect an outsourcing business as customers or community members perceive the business is sacrificing domestic jobs. In addition, customers sometimes perceive lower-quality services or products when those services or products are fulfilled via nondomestic talent.
- A Learning Curve - A hired BPO company must learn about the client company, its customers and what needs are to be fulfilled. This learning curve can create a disruption in the client company’s product or quality services, creating concerns among customers, shareholders or directors. For this reason, it is important to start slow with the outsourcing process and ask any BPO companies you’re considering hiring how they plan to mitigate this risk.
- Loss of Control - When functions are run internally, managers can be put in place to make sure quality control and consistency. When outsourced, companies no longer have control over this oversight. For this reason, it is crucial to hire a well-vetted BPO company that you can trust with your company’s reputation and goodwill. Interviewing past customers before hiring a BPO company can give you insights about the quality control process that’s generally offered by the BPO company.
- Communication Breakdowns - If not managed carefully, BPO can create a more siloed company. It is more difficult, for example, for internal engineers to talk to marketing talent if marketing is outsourced. That communication may not take place as fluidly, creating breakdowns in information flow that could hinder marketing’s ability to deliver what audiences need. If you outsource, a communication plan should be used to ensure the most fluid communication possible.
- Hidden Costs in Contractual Agreements - Before hiring a BPO company, outsourcing companies are needed to sign a very long contract with much fine print around possibilities that may occur. Some of that fine print will likely include expected actions to be performed (or not performed) or fees should certain circumstances arise. Those charges can add up quickly. It is vital to thoroughly look over contracts and with a legal understanding to avoid hidden costs that could create a problem later.
- Shared Reputational Risks - If a hired BPO company becomes entangled in a public relations nightmare, the reputation of the companies that hire them may suffer by association. For example, if a BPO company relies on grossly underpaid labor, its clients’ reputations may suffer due to the benefits they received via immorally outsourced labor. Before hiring a BPO company, vet its business practices thoroughly and include a commitment to moral practices in mutually signed contracts.
If you have understood BPO well then here are two more articles we would suggest you to go through, What is RPO? Complete guide about RPO and What is KPO? Complete guide about KPO.