https://www.techtarget.com/searchcio/definition/business-process-outsourcing
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. Organizations in many sectors have adopted the BPO model, including manufacturing, healthcare, energy, pharmaceuticals and e-commerce with the goal of reducing costs and increasing business efficiency, productivity, and profitability.
An organization typically outsources with another business to handle select processes that, although necessary for its operations, are not part of its core value proposition. At the same time, some companies outsource core or critical tasks if outsourcing is expected to provide efficiency or cost benefits that may not be available if the tasks are retained in-house.
To maximize the benefits of BPO, it's crucial to identify these processes before kickstarting the outsourcing engagement. 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, as good candidates for BPO.
BPO typically offers flexibility and cost efficiency to organizations that implement it. 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.
To truly understand the main ideas and benefits of BPO, it's important to differentiate between BPO vs. shared services.
Shared services refer to the practice of consolidating several back-office business functions, such as HR, IT and finance, into a dedicated business unit. The single unit delivers all these services to the organization, acting as a vendor. The goal of shared services is to leverage economies of scale in order to standardize processes, reduce costs and empower the individual units to focus on their core tasks.
Business process outsourcing refers to outsourcing certain business processes to an external, third-party service provider. It offers similar benefits as shared services. However, these benefits are larger. For instance, the client organization can save more by investing in BPO compared to shared services. This is because BPO eliminates the need to hire and train specialist personnel (if they're not already available). Also, organizations can access cutting-edge technologies at a lower cost with BPO to optimize their processes and boost business efficiency.
Organizations engage in business process outsourcing for two main areas of work: back- and front-office functions.
Back-office outsourcing refers to internal business functions, such as accounting, IT services, 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 payroll processing, while having their own team perform all other HR processes.
Commonly outsourced processes include the following:
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.
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 as they do not have the in-house resources to perform them.
An established company might 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.
Business process outsourcing 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 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 delivers 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 hire one for payroll and another for benefits administration.
To help with this decision, it's advised to follow these steps:
Those considerations should lead to a list of requirements and a detailed scope of work for outsourcing. Organizations use those to shape a request for proposal (RFP) to share with vendors that determine whether they can meet the requirements, at what price and with what value-adds. Comparing the offers of various vendors against the requirements can aid in selecting the right vendor (or vendors) for the outsourcing engagement.
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:
Additionally, organizations must, with their vendors, draft the service-level agreement (SLA) detailing the quality of the provided services and the metrics for evaluating vendor performance for determining a successful engagement.
Depending on the needs and nature of the outsourced work, some organizations also negotiate with providers on whether to have the following:
When both parties agree to its terms, the SLA is finalized. The client company then moves the workloads for the outsourced process to the vendor in a systematic and planned manner. The BPO strategy for enterprises should also clarify how the organization and vendor will communicate during the transition. Ideally, both parties should communicate frequently to minimize hiccups and ensure a smooth work handover.
Once the transition is complete, the vendor starts managing the outsourced processes. The best vendors use the latest technologies and assign skilled personnel to work on the client's tasks. On transferring processes and roles to the vendor, the client organization's in-house resources can be freed up and reassigned to other processes as needed. The firm can regularly evaluate the vendor's performance against the SLA and other terms outlined in the contract. These evaluations enable organizations to decide whether to renew or terminate the contract. Organizations might also choose to amend the contract (with the vendor's agreement).
To increase BPO value, it can be useful to set up an outsourcing governance framework. This framework should include the practices and processes the organization will use to manage its vendor relationships, minimize risk and maximize the value of the partnership.
In summary, here's how business process outsourcing works:
Benefits of BPO typically cited by proponents include the following:
BPO risks include the following:
BPO is often divided into the following types based on the service provider's location:
Another way to categorize BPO is as either horizontal BPO or vertical BPO. This approach, suggested by Gartner, differentiates BPO providers on the basis of their offerings: whether these offerings can be applied across industries or are industry-specific.
Horizontal BPO offerings are functions that are used across multiple industries, i.e., they have cross-industry applications. Examples include customer support, HR, finance, accounting and facilities management.
In contrast, vertical-specific offerings are industry-specific. To offer these services, the vendor must have specific knowledge about the industry. For example, a vendor that offers ATM outsourcing to banks must have deep knowledge about the banking sector, in addition to knowledge about installing, replenishing, security, compliance and general management of ATMs.
Similarly, a service provider that specializes in healthcare outsourcing processes like medical billing or patient data management must have domain-specific skills to manage these processes. They must also understand the various constraints and regulations that healthcare organizations operate in. The vendor might also be required to implement controls to comply with healthcare regulations concerned with patient privacy and data security (e.g., the Health Insurance Portability and Accountability Act).
Regardless of which BPO model they choose, organizations usually garner tangible benefits from it. In addition to cost savings and efficiency gains, outsourcing enables organizations to access skilled talent who can handle their workloads easily and consistently provide high-quality output.
Business process outsourcing is sometimes categorized by the types of services being provided; the following three categories are commonly cited:
RPO can also refer to recruitment process outsourcing, which outsources an organization's recruitment process, including sourcing, screening, interviewing and finalizing offers.
One example of an organization using BPO might be if it's struggling to maintain its HR department, say, due to labor shortages or an inability to keep up with rising salaries of HR specialists. In the first situation, skilled HR workers may be needed to keep this business function going. In the second scenario, the priority might be to lower the cost of the HR function.
In both scenarios, the organization can partner with a BPO provider that specializes in HR and offers HR services, including the following:
When these tasks are outsourced, it frees up the company's HR team to focus on more strategic initiatives related to employee engagement, learning and development, and experience management.
Another example is a business that hires a BPO provider for customer support services. A small business might not be able to dedicate the time or resources needed to set up and manage a contact center (particularly, a multichannel or omnichannel contact center). It can, instead, invest in a BPO provider that specializes in providing customer support services. The provider can handle tasks like order processing, customer support, appointment setting and helpdesk. Some providers offer multichannel support, which enables client organizations to elevate customer engagement while also reducing the costs of meeting their customers' demands.
A third example of BPO is IT outsourcing. Many companies outsource parts of their IT operations to BPO providers to reduce costs and improve IT outcomes. The IT tasks that are commonly outsourced include the following:
Enterprise executives should select BPO providers that can support their business objectives, as well as help them be more flexible, innovative and 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:
Organizations should conduct their own needs assessment to identify business processes that would benefit from outsourcing. They should then get in contact with different BPO providers to determine which one best suits their needs and which creates the best RFP. After it picks one and agrees to the terms of the RFP, the organization should begin the transition process of shifting agreed-upon processes.
The widely known benefits of BPO explain why the global BPO market is consistently growing. Research firms predict that the market will continue to grow through the coming decade.
For example, per Grand View Research, the size of the BPO market was approximately $302.62 billion in 2024. By 2030, the firm predicts that the size will grow to $525.23 billion, representing a CAGR of 9.8% from 2025 to 2030.
Research firm Statista also maintains a positive outlook toward the BPO market. It predicts that the market volume will grow steadily at a CAGR of 3.39% (2025-2030) to reach $491.15 billion by 2030. Statista also forecasts that the market will generate revenues of $415.73 billion worldwide in 2025. Most of this revenue ($159.75 billion) will come from the U.S. Also, BPO providers in India will continue to dominate the market over the coming decade, according to Statista.
The growth of the BPO market is driven by an increasing demand for outsourcing various business functions, like HR, customer services, data entry and other core competencies.
The BPO industry is seeing numerous trends that highlight the industry's positive outlook. Key trends include the following:
In general, the BPO industry continues to evolve, with more vendors emerging to offer specialized services or catering to specific sectors. Where previously only large companies opted to outsource some non-core processes, smaller businesses are also taking the BPO plunge, mainly to save money, tap into a global talent pool, and garner the benefits of cutting-edge technologies (without having to invest in those technologies).
Also, BPO is no longer restricted to non-core processes and activities. Many companies outsource some strategic activities as well, in areas like finance, HR, sales, marketing, infrastructure management, software development and cybersecurity. Typically, these firms lack in-house skills to manage these tasks and acknowledge that outsourcing may be the right strategy to improve operational efficiency and ensure higher-quality outcomes.
BPO vendors are contending with disruptions by taking advantage of the increased demand for their services. Many acknowledge that the practice of business process outsourcing could be at least partially displaced in upcoming years by technology. For example, RPA and AI can handle some frequently outsourced functions at lower costs and higher speeds, minimizing the need for organizations to invest in long-term BPO engagements.
On the plus side, technology could also improve the efficiency and quality of BPO offerings. For example, AI intelligence tools and machine learning models are facilitating smart automation and providing actionable insights that enable vendors to add new offerings to their service portfolio, improve existing offerings and offer greater value to clients. These advantages could convince more organizations that BPO is the optimal strategy to reduce costs and improve business efficiency.
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