Business Process Outsourcing (BPO)

What is Business Process Outsourcing (BPO)?

Business process outsourcing (BPO) is a type of outsourcing wherein a third-party service provider is employed to carry out one or more business functions in a company. The third party is responsible for carrying out all operations related to the business function.

BPO is also known as subcontracting or externalization. It was originally used in the manufacturing industry but is now used for numerous business processes.

What is BPO Used For?

Organizations contract with BPO vendors for two main areas:

1. Front office operations: They include marketing, sales, customer relations, and grievance redressal.

1. Back office operations: They include payment processing, information technology services, quality assurance, etc.

In many cases, organizations outsource one or more functions. For example, instead of outsourcing all HR functions, the company will outsource just the payroll processes.

When companies outsource operations via BPO, they often segregate work into front office (sales, customer relations) and back office (operations, IT, accounting). For a full primer, see our front office vs back office structure article.

Types of BPO

BPO companies can be divided into several types based on their location:

• Onshore outsourcing: When an organization hires a service provider that is located in the same country. It is also called domestic outsourcing.
• Nearshore outsourcing: When an organization hires a service provider in a neighboring country.
• Offshore outsourcing: When an organization hires a service provider in a different country. It is also called offshoring.

Making the BPO Decision

Transferring in-house work to a BPO company requires change management as it impacts employees, workflow practices, and business operations as a whole. The outsourcing decision-making process involves the following:

1. Company executives arrive at the decision to outsource a business process or a part of it.
2. They weigh the pros and cons of the decision and decide whether it makes strategic sense to the organization.
3. They identify the best BPO for the work and shift the work from in-house to the external services provider.

Benefits of BPO

1. Lower costs

One of the main reasons organizations outsource is cost reduction. Instead of buying IT equipment and hiring more employees to do different tasks, they can outsource the tasks to a service provider, reducing or even eliminating overhead costs.

2. Higher efficiency

BPO companies are experienced in different fields and perform at the highest level. They also adopt best practices and use the latest technology. It naturally results in higher efficiency and greater productivity.

3. Focus on core business functions

Many companies, usually start-ups, encounter a difficult time with ancillary business activities. Transferring non-core processes to a BPO company gives the organization more time to focus on its main business activities.

4. Global expansion

If an organization decides to enter an overseas market, some activities that require local market knowledge, national law expertise, or fluency in a foreign language can be assigned to a BPO company. It helps boost efficiency and facilitate quicker expansion.

Drawbacks of BPO

1. Security issues

There is the possibility of a security breach while working with a BPO company, as sensitive data needs to be shared and processed.

2. Overdependence on the BPO company

When work is outsourced to a BPO company for an extended period, an organization can become accustomed to their way of working and tend to become overly dependent on them. It leads to the organization paying higher-than-usual costs if demanded.

3. Communication problems

When working with an offshore BPO company, the language barrier can become a hindrance to efficiency. Outsourcing work, such as development or IT services, where many people are involved, can lead to mistakes due to miscommunication. It can be extremely costly sometimes.

4. Unforeseen or hidden costs

As work is not always straightforward, the organization may underestimate the quantity of work, which can lead to higher-than-expected costs. Working with a BPO company can lead to legal expenses in case of a dispute or disagreement. Delay in the delivery of work can also result in indirect costs.

Additional Resources

Thank you for reading CFI’s guide to Business Process Outsourcing (BPO). To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

• Outsourcing
• Business Operations
• Capitalized Cost
• Cost Structure
• See all Management & Strategy resources