Business Process Outsourcing

BPO

➢ Definition: Business process outsourcing (BPO) is the act of outsourcing business

operations to a third-party vendor or service provider.
➢ Function: A third-party service provider carries out one or more business functions, taking
responsibility for all operations related to that function.
➢ Also Known As: BPO is also referred to as subcontracting or externalization. Originally
used in manufacturing, it is now applied across various business processes
➢ Global Expansion: BPO supports business growth, particularly in global expansion, by
utilizing providers with local industry experience and language proficiency.

Outsourcing

• Definition: Outsourcing involves hiring external parties to perform services or create

goods that are traditionally done in-house.
• Cost-Cutting Measure: It is typically undertaken as a cost-cutting measure and affects
various job functions, including customer support, manufacturing, and back-office tasks.
• International Benefits: Outsourcing internationally allows companies to leverage
differences in labor and production costs, potentially increasing profitability and
competitiveness.
• Impact on Employment: Many corporations have outsourced entire functions, such as
customer service, to lower-cost providers.

Disadvantages of Outsourcing

• Communication Difficulties: Challenges in communication may arise between the

outsourcing company and the provider.
• Security Threats: Sensitive data may be at risk due to the outsourcing relationship.
• Legal Responsibilities: Additional legal duties may emerge, complicating the outsourcing
arrangement.
• Labor Force Disruption: Outsourcing can disrupt the domestic labor force, as seen in the
U.S. manufacturing industry, leading to a shift toward higher-skilled jobs like robotics and
precision machining.

Commonly outsourced processes are:

1. Payroll and Accounting: Managing employee wages, taxes, and financial records.
Outsourcing ensures compliance with tax laws and reduces errors in financial management.
2. Administration: Routine tasks like scheduling, data entry, and office management.
Outsourcing these functions allows companies to focus on core business activities.
 3. Customer Support: Handling customer inquiries, complaints, and assistance. Often
outsourced to call centers to improve response times and service availability.
4. IT Management and Services: Maintenance of IT infrastructure, software, and networks.
Outsourcing ensures access to expert IT support and advanced technology without large
in-house teams.
5. Manufacturing: Producing goods or components. Companies outsource manufacturing to
reduce production costs and increase efficiency, often using specialized facilities.
6. Marketing: Developing strategies to promote products or services. Outsourcing helps
businesses access creative expertise and manage marketing campaigns efficiently.
7. Research: Conducting market research, product development, and competitive analysis.
Outsourcing research provides specialized knowledge and saves time.
8. Sales: Managing sales operations, lead generation, and client acquisition. Outsourcing
sales can improve efficiency and expand market reach through skilled sales teams.
9. Shipping and Logistics: Managing the storage, transportation, and delivery of goods.
Outsourcing logistics streamlines supply chains and ensures timely deliveries.

Current trends involved in BPO include:

1. Cloud-Based BPO Offerings – Offers cloud-based services that save on costs when
compared to traditional models. This model also offers benefits such as added flexibility,
real-time data and reporting.
2. Hybrid Working Models – Provides traditionally outsourced business processes, such as
call centers, are now able to work remotely.
3. Nearshoring Operations – Technology such as video conferencing, AI-enabled tools
(Artificial Intelligence) and robotic process automation (RPA) os bringing down costs,
enabling vendors that nearshore business processes to become more cost-effective.

RPA an AI can handle some of the business processes now frequently outsourced, and these
technologies can often perform those functions at lower costs and higher speeds

Most Common BPO Services and Functions

1. Customer Service: Provides support to clients through various communication channels,
addressing inquiries and issues to enhance satisfaction.
2. Accounting: Manages financial records and reporting to ensure compliance and accurate
oversight of a company’s finances.
3. Payroll: Handles employee payments and tax withholdings to ensure timely and accurate
salary disbursement.
4. Human Resource Management: Oversees recruitment, employee training, and
compliance with labor laws to improve workforce efficiency

BPO Importance to Business Entity

BPO (Business Process Outsourcing) is important to a business entity because it helps:
 ➢ Reduce Operational Costs: By outsourcing non-core activities, businesses can reduce
labor, infrastructure, and technology costs.
➢ Focus on Core Competencies: Outsourcing allows companies to focus more on their
primary business functions, such as product development and customer experience, while
BPO providers handle secondary tasks.
➢ Access to Expertise: BPO providers bring specialized knowledge and advanced
technologies to improve quality and efficiency in areas such as customer service,
accounting, or IT support.
➢ Scalability and Flexibility: BPO enables businesses to scale operations up or down based
on market needs without the need for significant investments in internal resources.
Example: A retail company outsourcing its customer support to a BPO provider can focus
more on improving its product line and marketing strategies, while the BPO efficiently
manages customer inquiries.

Benefits of BPO

• Financial Benefits: BPO providers often perform processes at lower costs or save money
through tax savings.
• Improved Flexibility: BPO contracts allow for modifications in outsourced processes to
respond to market changes.
• Increased Competitive Advantage: BPO enables organizations to focus resources on
distinguishing operations.
• Higher Quality and Better Performance: BPO providers complete work with greater
accuracy, efficiency, and speed due to specialization.
• Access to Innovations in the Business Process: BPO providers invest in new technologies,
like automation, to improve speed, cost, and quality.
• Expanded Coverage: Organizations can gain 24/7 operations through BPO companies with
round-the-clock capabilities across multiple locations.

BPO Risks

• Security Breaches: The connection between the hiring company and BPO provider creates
points of entry for bad actors due to the sharing of sensitive data.
• Regulatory Compliance Requirements: Organizations must ensure that their vendors align
with necessary regulatory laws and adhere to rules governing outsourced work.
• Unanticipated or Higher Costs: Underestimating the workload can lead to higher-than-
expected expenses.
• Relationship Challenges: Communication problems and cultural barriers can arise between
organizations and their outsourced providers.
• Overdependence on the External Provider: Organizations become reliant on outsourced
partners, making it challenging to bring operations back in-house or switch providers.
 • Increased Potential for Disruption: Issues like financial problems, geopolitical instability,
natural disasters, or economic changes can disrupt relationships with providers,
complicating business continuity and disaster recovery plans.
• Public Backlash: Negative public perception may arise if organizations are seen as
sacrificing domestic jobs for cost savings.

Categories of BPO
➢ Front Office BPO: This involves outsourcing services that interact directly with
customers. These services include customer support, sales, marketing, and technical
assistance.
Example: A telecommunications company hiring a call center to manage its customer
service.
➢ Back Office BPO: This category involves outsourcing internal business operations that
don’t involve direct customer interaction. It covers areas like payroll, accounting, data
entry, and human resources.
Example: A business outsourcing its financial and HR processes to a BPO firm.

Also categorized as:

➢ Horizontal Offerings – functions that are used across multiple industries.

➢ Vertical-specific Offerings – functions that are industry-specific.

Types of Contracts Entered with a BPO

➢ Time and Materials Contract: In this type of contract, the client pays based on the amount
of time and materials the BPO provider uses for the project.
Example: A client paying an IT support provider for the number of hours spent fixing a
system issue.
➢ Fixed-Price Contract: The client and BPO provider agree on a set price for the service,
regardless of the actual time or resources used.
Example: A business agreeing to a fixed price for payroll processing over the year.
➢ Gain-Sharing Contract: The BPO provider is rewarded based on the results they deliver.
If the business performs better, the provider shares in the benefits.
➢ Example: A marketing BPO firm earning a bonus for helping a company achieve a specific
sales target.
➢ Service-Level Agreement (SLA): This contract defines the performance expectations and
service standards that the BPO provider must meet. Penalties or rewards are tied to
performance metrics.
Example: An agreement requiring a call center to answer 90% of customer calls within 30
seconds.

Types of BPO
 ➢ Offshore BPO: Outsourcing to a provider in a foreign country, typically to take advantage
of lower costs.
Example: A U.S. company outsourcing its customer service to the Philippines.
➢ Onshore BPO: Outsourcing within the same country where the business operates.
Example: A U.S. company outsourcing its IT services to a U.S.-based BPO provider.
➢ Nearshore BPO: Outsourcing to a neighboring country, often to maintain closer proximity
while still benefiting from cost advantages.
Example: A Canadian company outsourcing its software development to a BPO provider
in Mexico.
➢ Knowledge Process Outsourcing (KPO): Outsourcing tasks that require advanced
expertise, such as legal research, financial analysis, or market research.
Example: A company outsourcing financial data analysis to a specialized KPO firm.

Types of Outsourcing

➢ Professional Outsourcing: Hiring external professionals for tasks requiring specific

expertise, such as legal services, consulting, or accounting.
Example: A small business outsourcing legal services to an external law firm.
➢ IT Outsourcing: Contracting external providers to handle technology-related services,
such as software development, IT infrastructure, or technical support.
Example: A company outsourcing its website development to an IT firm.
➢ Process-Specific Outsourcing: Outsourcing specific processes like payroll, supply chain
management, or customer service.
Example: A company outsourcing its customer support to a call center.
➢ Manufacturing Outsourcing: Hiring external manufacturers to produce goods rather than
manufacturing in-house.
Example: A clothing brand outsourcing production to a factory in another country.
➢ Project Outsourcing: Delegating specific, often short-term projects to an external
company.
Example: A business outsourcing the development of a new mobile app to an external
developer.