Business process outsourcing

Business process outsourcing (BPO) is a subset of outsourcing that involves the contracting of the operations and responsibilities of a specific business process to a third-party service provider. Originally, this was associated with manufacturing firms, such as Coca Cola that outsourced large segments of its supply chain.^[1]

BPO is typically categorized into back office outsourcing, which includes internal business functions such as human resources or finance and accounting, and front office outsourcing, which includes customer-related services such as contact centre services.^[2]

BPO that is contracted outside a company's country is called offshore outsourcing. BPO that is contracted to a company's neighbouring (or nearby) country is called nearshore outsourcing.

Often the business processes are information technology-based, and are referred to as ITES-BPO, where ITES stands for Information Technology Enabled Service.^[3] Knowledge process outsourcing (KPO) and legal process outsourcing (LPO) are some of the sub-segments of business process outsourcing industry.

Benefits and limitations

ITPL, Bengaluru, India, the hub of information technology companies

The main advantage of any BPO is the way in which it helps increase a company's flexibility. However, several sources have different ways in which they perceive organizational flexibility. In early 2000s BPO was all about cost efficiency, which allowed a certain level of flexibility at the time. Due to technological advances and changes in the industry (specifically the move to more service-based rather than product-based contracts), companies who choose to outsource their back-office increasingly look for time flexibility and direct quality control.^[4] Business process outsourcing enhances the flexibility of an organization in different ways:

Most services provided by BPO vendors are offered on a fee-for-service basis, using business models such as Remote In-Sourcing or similar software development and outsourcing models.^[5][6] This can help a company to become more flexible by transforming fixed into variable costs.^[7] A variable cost structure helps a company responding to changes in required capacity and does not require a company to invest in assets, thereby making the company more flexible.^[8]

Another way in which BPO contributes to a company’s flexibility is that a company is able to focus on its core competencies, without being burdened by the demands of bureaucratic restraints.^[9] Key employees are herewith released from performing non-core or administrative processes and can invest more time and energy in building the firm’s core businesses.^[10] The key lies in knowing which of the main value drivers to focus on – customer intimacy, product leadership, or operational excellence. Focusing more on one of these drivers may help a company create a competitive edge.^[11]

A third way in which BPO increases organizational flexibility is by increasing the speed of business processes. Supply chain management with the effective use of supply chain partners and business process outsourcing increases the speed of several business processes, such as the throughput in the case of a manufacturing company.^[12]

Finally, flexibility is seen as a stage in the organizational life cycle: A company can maintain growth goals while avoiding standard business bottlenecks.^[13] BPO therefore allows firms to retain their entrepreneurial speed and agility, which they would otherwise sacrifice in order to become efficient as they expanded. It avoids a premature internal transition from its informal entrepreneurial phase to a more bureaucratic mode of operation.^[14]

A company may be able to grow at a faster pace as it will be less constrained by large capital expenditures for people or equipment that may take years to amortize, may become outdated or turn out to be a poor match for the company over time.

Although the above-mentioned arguments favour the view that BPO increases the flexibility of organizations, management needs to be careful with the implementation of it as there are issues, which work against these advantages. Among problems, which arise in practice are: A failure to meet service levels, unclear contractual issues, changing requirements and unforeseen charges, and a dependence on the BPO which reduces flexibility. Consequently, these challenges need to be considered before a company decides to engage in business process outsourcing.^[15]

A further issue is that in many cases there is little that differentiates the BPO providers other than size. They often provide similar services, have similar geographic footprints, leverage similar technology stacks, and have similar Quality Improvement approaches.^[16]

Threats

Risk is the major drawback with business process outsourcing. Outsourcing of an information system, for example, can cause security risks both from a communication and from a privacy perspective. For example, security of North American or European company data is more difficult to maintain when accessed or controlled in the Indian sub-continent. From a knowledge perspective, a changing attitude in employees, underestimation of running costs and the major risk of losing independence, outsourcing leads to a different relationship between an organization and its contractor.^[17][18]

Risks and threats of outsourcing must therefore be managed, to achieve any benefits. In order to manage outsourcing in a structured way, maximising positive outcome, minimising risks and avoiding any threats, a business continuity management (BCM) model is set up. BCM consists of a set of steps, to successfully identify, manage and control the business processes that are, or can be outsourced.^[19]

Another framework, more focused on the identification process of potential outsourceable information systems, identified as AHP, is explained.^[20] L. Willcocks, M. Lacity and G. Fitzgerald identify several contracting problems companies face, ranging from unclear contract formatting, to a lack of understanding of technical IT processes.^[21]

Technological pressures

Industry analysts have identified robotic process automation (RPA) software as a potential threat to the industry^[22][23] and speculate as to the likely long term impact.^[24] In the short term, however, there is likely to be little impact as existing contracts run their course: it is only reasonable to expect demand for cost efficiency and innovation to result in transformative changes at the point of contract renewals. With the average length of a BPO contract being 5 years or more^[25] - and many contracts being longer - this hypothesis will take some time to play out.

On the other hand, an academic study^[26] by the London School of Economics was at pains to counter the so-called "myth" that RPA will bring back many jobs from offshore. One possible argument behind such an assertion is that new technology provides new opportunities for increased quality, reliability, scalability and cost control, thus enabling BPO providers to increasingly compete on an outcomes based model rather than competing on cost alone. With the core offering potentially changing from a "lift and shift" approach based on fixed costs to a more qualitative, service based and outcomes-based model, there is perhaps a new opportunity to grow the BPO industry with a new offering.

Industry size

India has revenues of US$10.9 billion from offshore BPO and $30 billion from IT and total BPO (expected in FY 2008). India thus has some 5-6% share of the total BPO Industry, but a commanding 63% share of the offshore component. This 63% is a drop from the 70% offshore share that India enjoyed last year: despite the industry growing 38% in India last year, other locations like Philippines, and South Africa have emerged to take a share of the market. By the year 2016, the BPO Industry in the Philippines will employ 1.2 million workers with $25 billion in revenues.^[27] The South African call centre industry has grown by approximately 8% per year since 2003 and it directly employs about 54,000 people, contributing 0.92% to South Africa's gross domestic product (GDP).^[28] China is also trying to grow from a very small base in this industry. However, while the BPO industry is expected to continue to grow in India, its market share of the offshore piece is expected to decline. Important centres in India are Coimbatore, Bangalore, Gurgaon, Chennai, Kolkata, Mumbai, Pune, and New Delhi.

The Association of Southeast Asian Nations (ASEAN) countries, along with the People's Republic of China and India—known collectively as ACI countries—are likely to see services like BPO figure strongly in their economies over the medium term. Services trade among ACI countries has been growing at a very rapid rate over recent years, despite starting from a relatively low baseline. Although data are scarce and must be interpreted with caution, an analysis of applied services sector policies in the region suggests there is much policymakers can do to intensify this process, and increase the pace at which the transformation to a service economy is taking place.^[29]

Eastern Europe is also an emerging BPO destination. McKinsey & Company reported that in 2010, 33,000 jobs were moved to Eastern European countries. While the overall size of the industry and the number of developers in Eastern Europe is lower than India, the knowledge of European languages like French, Spanish, German, and Italian by many Eastern Europeans, as well as the overall high quality of education in these locations, allows the BPO industry in this region to continue to grow. For example, the region has an estimated 17.2 million people with a tertiary education, compared to 13.6 million in India, making it an attractive choice for BPO, especially if more specialised projects are to be outsourced.

See also

• Outsourcing
• Offshoring
• Nearshoring
• Homeshoring
• Globalization
• Contact centre (business)
• List of call centre companies
• Call center industry in Bangladesh
• Call center industry in the Philippines
• Banking BPO services
• Recruitment
• Recruitment process outsourcing
• Software testing outsourcing
• BPO security
• Business process outsourcing in India
• Business process outsourcing in the Philippines
• Website management outsourcing
• Captive service
• Offshoring Research Network
• Legal outsourcing
• Outsourced document processing
• Virtual assistance

References