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Business Process Outsourcing (BPO) Definition: What is BPO?

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Business Process Outsourcing (BPO) is growing in popularity as a smart technique for contracting specific business processes to high-quality, third-party service providers, at affordable rates. 

Generally, the purpose of BPO is to improve an organization’s profitability and efficiency by delegating non-core processes to a third party with niche experience in that field.

BPO can offer organizations a wide variety of benefits, including access to skills and expertise, cost savings, improved customer satisfaction, and increased responsiveness. 

This form of outsourcing allows organizations to reduce payroll costs by hiring employees in lower-cost locations while simultaneously enabling companies to focus on their core competencies. 

Areas of outsourcing can include:

  • Customer support
  • Data processing
  • IT services
  • Back-office administration

In this article, we will look at the benefits of business process outsourcing, discuss the best practices for selecting an external provider, and examine what sort of issues can arise during the implementation of an outsourcing contract.

Let’s get started!

What is Business Process Outsourcing?

Since the mid-1990s, BPO has grown into an industry with its own global body representing companies across all sectors and geographies. BPO today accounts for 7.3% of the world’s GDP and is growing at three times the rate of traditional manufacturing work.

BPO has been identified as a key driver in the development of the global services economy. Outsourced Shared Services (OSS) has grown into a multibillion-dollar enterprise on a global scale. 

The total cost of OSS operations and services is expected to be US$901.2 billion next year — almost a two-fold increase over prior years.

By outsourcing business processes like customer service and back-office support, companies can take advantage of increased agility, lower labor costs, and access to specialized expertise without making an entire workforce redundant.

Why Do Businesses Outsource Processes?

Companies that outsource non-core processes to free up time and resources for high-value business activities will realize increased margins and greater returns on investment

The benefits of outsourcing BPO often include:

1. Cost savings: By transferring infrastructural and administrative activity, such as human resources, customer service, or accounting, companies can cut costs while allowing BPO vendors to shoulder some or all of the workforce expenses with their economies of scale. 

Organizations may also realize significant savings through reallocating personnel working in traditionally expensive locations to customer-facing roles.

2. Access to specialized knowledge and skills: This is one of the most common reasons companies turn to BPO vendors — it enables them to draw upon professionals who possess unique expertise that isn’t readily available in-house.

With outsourced accounting services, for example, your company may tap into a pool of CPAs that includes former Big Four auditors or industry experts with years of experience performing SEC filings.

3. Improved service quality: Sourcing providers that offer services across a broad spectrum of industries can often do so at a reduced cost, as they benefit from increased buying power and economies of scale. 

In addition to providing access to superior expertise, this allows companies to outsource functions like customer or technical support without sacrificing the level of service customers have come to expect.

4. Access to global talent pools: Most BPO or call center workers are located in developing countries with large numbers living and working abroad. By tapping into these labor pools, organizations can hire skilled professionals who might not have been available domestically (including recent graduates)all while lowering the impact on their own workforce.

5. Operational flexibility: Business process outsourcing provides organizations with the operational flexibility to deliver services at the time and place that best serves their customers. This can help companies expand into new markets without having to build costly infrastructure or invest in additional staff.

Business Process Outsourcing Best Practices

Before deciding whether BPO is right for your organization, here are some important best practices to keep in mind:

1. Ensure you have the appropriate internal structure. Ideally, your company should identify specific BPO opportunities where knowledge transfer will be required. Hence, employees should understand how outsourced processes work before they’re essentially replaced by foreign workers. 

This also gives you a chance to test drive and streamline certain functionalities before handing them off entirely.

2. Make sure there’s adequate technology support. This includes back-end integration with existing company systems. You’ll also want to make sure that your chosen BPO provider can seamlessly integrate with your IT infrastructure. 

3. Conduct a cost-benefit analysis. It’s essential to consider both the potential upside of an outsourced business process as well as some of the challenges. This way,you can have reasonable expectations of what the costs will be and how it may affect your existing workforce.

4. Weigh the risks of offshore outsourcing vs. near-shore outsourcing. There are trade-offs when using either model, but there are some factors to consider when deciding which is right for your organization.

Types of Outsourcing

Though business process outsourcing can take place anywhere across the globe, two main models exist: offshore and onshore.

Offshore Outsourcing

Offshore outsourcing refers to contracting services from a BPO provider in another country; usually one with a lower cost of living and proximity to major markets than your own. India and the Philippines, for example, are the most established offshore outsourcing destinations.

When leveraging an offshore model, you can benefit from quality talent at a more affordable price point, but it comes at the risk of increased communication challenges. 

Additionally, organizations should consider possible time zone differences and cultural nuances that could inhibit business, such as how Westerners typically prefer face-to-face meetings versus Indians who may be more comfortable with email or phone communications.

Onshore Outsourcing

On the other hand, onshore outsourcing can provide more consistency by working with a provider that’s in the same time zone. Still, it may involve higher costs than traditional offshore models. 

There are likely to be fewer language and cultural barriers, making it easier for your organization to communicate effectively. However, as with any outsourcing arrangement, organizations should still anticipate challenges associated with integrating providers into existing IT infrastructures.

There are certainly benefits to leveraging both business processes depending on your specific needs. However, you’ll want to think through all the variables before deciding which is suitable for your company.

BPO Companies: Risks vs. Rewards

While BPOs offer numerous opportunities for organizations of all sizes to boost their capabilities while lowering costs, they’re not without risk. Here are some risks you should consider when making your decisions:

Risks Associated with Offshore Outsourcing

When leveraging an offshore outsourcing model, organizations must weigh the benefits against potential challenges, including:

  • Time zone differences: Consider how both parties will handle time zone differences. For example, Westerners can find it difficult to communicate effectively with employees in India when there is nearly a half-day time difference.
  • Understanding of processes: There needs to be a mutual understanding between your company and their business process management team to ensure that the outsourced processes are being implemented accurately.
  • Communication barriers: Language and cultural barriers can hinder businesses by creating communication issues that can’t be resolved easily. For example, lapses in communication may result in workers having inadequate technical training for implementing processes or feeling disconnected from decision-making.

Risks Associated with Onshore Outsourcing

Another risk to consider when deciding between onshore and offshore outsourcing is that your organization may incur higher costs than traditional offshore models. Additionally, you should also anticipate challenges associated with integrating providers into the existing IT infrastructure. 

Final Thoughts: BPO

When weighing the risks and rewards of business process outsourcing, it’s important to consider your future needs. Is it cost that primarily drives your business decisions? Perhaps speed is what your company requires. Whatever your needs, make sure to figure them out first before you do anything else.

If you’re unsure about how BPO might impact your company, you may consult with industry experts for guidance. 

And before making any decisions, make sure you understand all the time frames, risks, and costs associated with each option. 

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