Business Process Modeling Notation (BPMN) business process reengineering (BPR)
Definition

business process outsourcing (BPO)

What is business process outsourcing (BPO)?

Business process outsourcing (BPO) is a business practice in which an organization contracts with an external service provider to perform an essential business function or task.

An organization typically contracts with another business for such services after it has identified a process that, although necessary for its operations, is not part of its core value proposition. This step requires a good understanding of the processes within the organization and strong business process management.

Many organizations consider processes that are performed the same or similarly from company to company, such as payroll and accounting, good candidates for BPO.

Because these commodity processes do not generally differentiate one organization from another, enterprise executives often determine there is little value in having their own staff perform them. Companies calculate that outsourcing these processes to a provider that specializes in them could deliver better results.

BPO has its roots in the manufacturing industry. Manufacturers hired third-party vendors to handle parts of their supply chains after determining that the vendors could bring more skills, speed and cost efficiencies to those processes than an in-house team could deliver. Over time, organizations in other industries adopted the practice.

Today, the use of BPO has expanded, with for-profit businesses, nonprofits and even government agencies outsourcing a range of tasks to service providers located in the U. S., throughout North America and across the world.

BPO functions
Organizations often outsource an entire function to a single vendor whereas other companies outsource only specific processes within a functional area.

What is BPO used for?

Organizations engage in business process outsourcing for two main areas of work: back-office functions and front-office functions.

Back-office functions, sometimes called internal business functions, comprise support operations including accounting, information technology (IT) services, human resources (HR), quality assurance and payment processing.

Front-office functions are processes and business operations that serve or relate to existing and potential customers, such as customer relation services, marketing and sales.

Some organizations outsource an entire function, such as the HR department, to a single vendor. Other companies outsource only specific processes within a functional area, such as only payroll processing, while having their own team perform all other HR processes.

Commonly outsourced processes include the following:

  • payroll and accounting
  • administration
  • customer support
  • IT management and services
  • manufacturing
  • marketing
  • research
  • sales
  • shipping and logistics

Some companies also outsource strategic tasks, such as data mining and data analytics, both of which have become essential elements for maintaining a competitive advantage in a digital economy.

According to Deloitte's "2021 Global Shared Services and Outsourcing Survey Report," the most frequently outsourced functions are IT, finance and payroll.

How does BPO work?

Enterprise executives opt to outsource a business process for a variety of reasons. Those reasons vary based on the type, age and size of the organization as well as market forces and economic conditions.

Startup companies, for example, often need to outsource back-office and front-office functions because they do not have the in-house resources to perform them.

An established company may opt to outsource a task that it had been performing after determining that a third-party service provider could do the job better or cheaper. Management experts advise enterprise executives to identify functions that can be outsourced and then determine if shifting that task to an outsourcing provider makes sense.

If so, the organization must go through the process of not only identifying the best vendor for the work, but also shifting the work from in-house to the external provider. This requires a significant amount of change management, as the move to an outsourced provider generally affects staff, established processes and existing workflows.

The shift to an outsourced provider also affects the organization's finances -- not only in terms of shifting costs from the internal function to the outsourced providers, but often in terms of corporate taxes and reporting requirements.

The organization may also need to invest in new technology to enable the smooth flow of work to the outsourced provider. The extent and cost of that technology depend on the scope of the function being outsourced and the maturity of the technology infrastructure in place at both enterprises.

This process typically starts with enterprise leaders identifying specific functions or business processes to outsource as a way to save money, gain flexibility, improve performance and redirect resources to its core business capabilities.

Business leaders then consider whether one vendor should handle all the work being outsourced or whether contracting multiple providers for the various tasks would deliver the best value. For example, a company could decide to outsource most of its HR functions and then either contract for a single provider to perform all the outsourced processes or it could hire one for payroll and another for benefits administration.

Those considerations should lead to a list of requirements as well as a detailed scope of work for outsourcing. Organizations use those to shape a request for proposal to share with vendors that determine whether they can meet the requirements, at what price and with what value-adds.

Once an organization has selected the provider or providers it wants to hire, it must determine the type of contract. Such contracts generally fall into one of the following categories:

  • time and materials contracts, in which the business pays the provider for the time worked and the materials used; or
  • fixed-price contracts, which set an upfront price for the specified work.

Additionally, organizations must draft with their vendors the service-level agreement detailing the quality of the provided services and the metrics for determining success.

Depending on the needs and nature of the outsourced work, some organizations also negotiate with providers on whether to have the following:

  • specific workers on teams dedicated to their outsourced work;
  • workers located only onshore or, conversely, globally distributed; or
  • workers available 24/7 or only during set hours.

What are the benefits of BPO?

In its 2021 report, Deloitte found that organizations seek the following benefits from outsourcing:

  • 88% of the respondents cited standardization and efficiency of processes;
  • 84% cited cost savings;
  • 73% cited driving business value;
  • 61% cited digital agenda acceleration;
  • 59% cited developing capabilities; and
  • 36% cited overall business strategy and plans.

Benefits of BPO typically cited by proponents include the following:

  • Financial benefits. BPO providers can often perform a business process at lower costs or save the company money in other ways, such as in tax savings.
  • Improved flexibility. BPO contracts can offer the ability to modify how an outsourced business process is done, enabling companies to react more nimbly to changing market dynamics.
  • Increased competitive advantage. BPO enables an organization to focus more of its resources on operations that distinguish it in the marketplace.
  • Higher quality and better performance. Because business processes are their core business, BPO providers are well-positioned to complete the work with greater accuracy, efficiency and speed.
  • Access to innovations in the business process. BPO providers are more likely to know about advances in the process areas they specialize in. That means they are more likely to invest in new technologies, such as automation, that can improve the speed, cost and quality of the work.
  • Expanded coverage. Organizations that need 24/7 call center operations can often quickly gain that capability by contracting with a BPO company with around-the-clock capabilities and multiple geographic locations, enabling a follow-the-sun business model.

What are the risks of BPO?

BPO risks include the following:

  • Security breaches. The technology connection between the hiring company and the BPO provider creates another point of entry for bad actors, as organizations often need to share sensitive and regulated data with their service providers.
  • Regulatory compliance requirements. An organization's regulatory requirements extend even to outsourced work, so it must ensure that the vendors it hires align with the laws the organization must follow and that the vendors adhere to the rules that govern the organization's outsourced work.
  • Unanticipated or higher costs. Organizations can underestimate the amount of work that needs to be done, which can lead to higher costs than anticipated.
  • Relationship challenges. Organizations can face communication problems with their outsourced providers, or they might find that there are cultural barriers.
  • Overdependence on the external provider. An organization that outsources a function or service is tethered to the partner that performs the work. The organization must manage that relationship to ensure key objectives are met at the agreed-upon cost. If not, the organization may find it difficult to bring the operation back in-house or even move the contract to another outsourced provider.
  • Increased potential for disruption. An organization must monitor for issues that could interrupt or permanently end the relationship with an outsourced provider. These include financial or workplace problems at the outsourced provider, geopolitical instability, natural disasters or changes in economic circumstances. Organizations must consider such risks and devise strategies on how to cope, which, in turn, adds complexity to their business continuity and disaster recovery.

What are the different types of BPO?

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.

Research firm Gartner categorizes BPO as either horizontal offerings, meaning those functions that are used across multiple industries, or vertical-specific offerings, meaning those that are industry-specific.

KPO, LPO and RPO

Business process outsourcing is sometimes categorized by the types of services being provided; the following three categories are commonly cited:

  1. Knowledge process outsourcing (KPO) is when the outsourced service provider is hired not only for its capacity to perform a particular business process or function, but also to provide expertise around it.
  2. Legal process outsourcing (LPO) is a type of KPO that is specific to legal services; these range from drafting legal documents and performing legal research to offering advice.
  3. Research process outsourcing (RPO) -- another type of KPO -- refers to research and analysis functions; biotech companies, investment firms and marketing agencies are among the types of organizations that engage in RPO for services.

BPO examples

Clutch, a business-to-business research firm, surveyed 500 U.S. small-business owners and managers in 2021 and found that eight in 10 small businesses plan to outsource business functions. This breaks down as follows:

  • 27% plan to outsource IT services;
  • 23% plan to outsource finance and accounting work;
  • 21% plan to outsource legal work;
  • 20% plan to outsource digital marketing; and
  • 10% plan to outsource HR.

How to choose a BPO provider

Enterprise executives should select BPO providers that can support their business objectives, as well as help them be more agile, flexible and innovative and, ultimately, more competitive. As such, organizations should consider more than just the price of a BPO contract when choosing a provider. They must also consider how well the provider can deliver on those other points, evaluating each provider to determine whether it has the following:

  • an adequate understanding of the organization's business and industry;
  • the capacity to meet current requirements, as well as to scale to meet future needs;
  • an understanding and ability to meet compliance and regulatory requirements, as well as data privacy needs;
  • reporting metrics to demonstrate it is delivering on contractual standards; and
  • the geographical locations to meet business needs and regulatory requirements.

BPO market size

Research firms predict that the global business process outsourcing market will continue to grow

through the coming decade. Grand View Research, for example, valued the global BPO market at $245.9 billion in 2021 and estimated that it will experience a compound annual growth rate (CAGR) of 9.1% from 2022 to 2030 reaching $525.2 billion.

Analysis from Data Bridge Market Research's report "Global Business Process Outsourcing (BPO) Market, By Regions, 2022 to 2029" shows similar growth, predicting that the BPO market will experience a CAGR of 7.9% between 2022 and 2029, with the market reaching $422.6 billion in 2029. It cited business needs for agility and improved efficiency as primary factors driving that growth.

Future directions of the BPO industry

Executives continue to identify and reorder what they need and want from the vendors they contract with to handle their business processes.

Service provider CGS, which surveyed more than 200 business leaders and decision-makers about what they used to evaluate their BPO providers in 2021, found the following:

  • 6% put data privacy and compliance as their top priority;
  • 9% want their providers to be a knowledge partner with advanced technology capabilities;
  • 3% evaluate BPOs on their technology platform capabilities; and
  • 3% want BPOs with in-depth experience in the organization's own industry vertical.

BPO vendors, however, are contending with disruption as well, as the practice of business process outsourcing could be at least partially displaced in upcoming years by technology.

Robotic process automation (RPA) and artificial intelligence can handle some of the business processes now frequently outsourced, and these technologies can often perform those functions at lower costs and higher speeds.

Deloitte's "2021 Global Shared Services and Outsourcing Survey Report" found that successful providers are implementing both shared services and outsourcing models and that they are building continuous improvement and innovation into their talent programs. The survey also found that providers see RPA as a top enabler of their own transformation.

Organizations are deploying RPA at increasing rates in an effort to boost efficiency and accuracy. Learn how RPA is adding artificial intelligence to make it even more resilient and agile.

This was last updated in April 2022

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