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Business Process Outsourcing (BPO)

Type of outsourcing wherein a third-party service provider is employed to carry out one or more business functions in a company

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.

 

Business Process Outsourcing (BPO)

 

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

 

Summary

  • 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.
  • Organizations contract with BPO vendors for back office and front office operations.
  • BPO offers several benefits, such as lower costs, global expansion, and higher efficiency, while some of the drawbacks include security issues, hidden costs, and overdependence.

 

What is BPO Used For?

Organizations contract with BPO vendors for two main areas:

  1. Back office operations: They include payment processing, information technology services, quality assurance, etc.
  2. Front office operations: They include marketing, sales, customer relations, and grievance redressal.

 

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.

Over the years, the BPO industry’s expanded considerably and offers a wide range of services and functions to organizations.

 

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 in boosting efficiency and 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 a long period, an organization can become accustomed to the way they work and tend to get overdependent on them. It leads to the organization paying higher than the usual costs if demanded.

 

3. Communication problems

When working with an offshore BPO company, the language barrier may turn out to be a hindrance to efficiency. Outsourcing work such as development or IT services, where a lot of 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 hard and fast, the organization may underestimate the quantity of work, and it can lead to costs that are higher than expected. Working with a BPO company can lead to legal expenses in case of a dispute or disagreement. Delay in delivery of work can also result in indirect costs.

 

Related Readings

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Outsourcing
  • Business Operations
  • Capitalized Cost
  • Cost Structure

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