by 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) is the practice of contracting a specific work process or processes to an external service provider. The services can include payroll, accounting, telemarketing, data recording, social media marketing, customer support, and more. BPO usually fills supplementary as opposed to core business functions, with services that could be either technical or nontechnical.
From fledgling startups to massive Fortune 500 companies, businesses of all sizes outsource processes, and the demand continues to grow, as new and innovative services are introduced and businesses seek advantages to get ahead of the competition. BPO can be an alternative to labor migration, allowing the labor force to remain in their home country while contributing their skills abroad.
BPO is often divided into two main types of services: back office and front office. Back-office services include internal business processes, such as billing or purchasing. Front-office services pertain to the contracting company’s customers, such as marketing and tech support. BPOs can combine these services so that they work together, not independently.
The BPO industry is divided into three categories, based on the location of the vendor. A business can achieve total process optimization by combining the three categories:
- Offshore vendors are located outside of the company’s own country. For example, a U.S. company may use an offshore BPO vendor in the Philippines.
- Nearshore vendors are located in countries that neighbor the contracting company’s country. For example, in the United States, a BPO in Mexico is considered a nearshore vendor.
- Onshore vendors operate within the same country as the contractor, although they may be located in a different city or state. For example, a company in Seattle, Washington, could use an onshore outsourcing vendor located in Seattle, Washington, or in Huntsville, Alabama.
Organizations contract with BPO vendors for two main areas:
- Back office operations: They include payment processing, information technology services, quality assurance, etc.
- Front office operations: They include marketing, sales, customer relations, and grievance redressal.
Reasons of BPO
Some people believe that businesses are only after the tax break associated with outsourcing jobs, or “shipping jobs overseas” as some political ads claim. According to PolitiFact, this is a flawed notion. PolitiFact concedes that there are tax breaks for a company when it relocates, whether out of country or to a different state, but there is no specific tax break or loophole in the U.S. tax code related to outsourcing.
What is relevant to this argument, however, is that the U.S. corporate income tax is one of the highest in the developed world (39.1 percent). Therefore, U.S. companies benefit from outsourcing operations to countries with a lower income tax because businesses pay the rate of their host country. In addition, businesses cite many other reasons to engage in outsourcing:
- To decrease costs: Outsourcing cuts down on costs for in-house labor, particularly for staffing and training, and for the work space to accommodate local employees. An outsourcing company physically located in a developing country leverages lower-cost labor markets. Finally, outsourcing enables businesses to use variable-cost models, like fee-for-service plans, instead of fixed-cost models that are required when retaining local employees.
- To concentrate on key functions: Outsourcing allows businesses to hone in on their main offerings instead of company functions that aren’t directly tied to their core processes. For example, when outsourcing, the company won’t have to monitor the payroll accountant’s performance. Rather, it can focus its energies on highlighting its business differentiators and maximizing overall growth. In turn, these actions can boost a company’s competitive advantage and enhance its interactions with the value chain. Ultimately, the company can enjoy improved customer satisfaction and increased profits.
- To achieve better results in noncore functions: Outsourcing companies specialize in what are considered noncore functions of other businesses, delivering world-class capabilities for its clients. In fact, an outsourcing company that invests in specialized processes and technologies can deliver cutting-edge breakthroughs to its clients. For example, a gaming design company may not want to pay for the latest payroll program on the market, but an outsourcing business that offers payroll services would likely make that investment to benefit its own performance, as well as that of its clients.
- To expand their global presence: Some outsourcing companies can serve customers in multiple languages, around the clock, thus relieving the local company of the responsibility. Outsourcing companies can leverage their presence in multiple countries and keep the local company’s redundant divisions to a minimum. For example, WNS Global has 37 “delivery centers” across the world and specializes in business process management.
- To enable flexibility: Companies that outsource their noncritical functions can act more quickly and more efficiently when managing the risks associated with introducing new products or services. They can also reassign their internal resources to more critical functions to help ensure better coverage and allocate responsibility.
- To improve speed and efficiency: Companies that outsource processes are opting to let specialists handle those tasks, thus saving time, improving accuracy, and increasing their capacity. For example, a BPO that specializes in records management can automatically index documents, making them available for retrieval and keeping a company in compliance with legal requirements. This replaces manual data entry and storage.
