What is business process outsourcing (BPO)?

BPO entails contracting an external service provider to fulfill a business function or process. BPO is sometimes referred to as information technology-enabled services (ITES) because in the modern world, outsourced processes are often reliant on IT.

BPO was first used in the manufacturing industry, where firms gained efficiencies by outsourcing business tasks for supply chain management. Today, BPO services are used in healthcare, asset management, energy, pharmaceuticals, ecommerce, and other industries as companies use new and innovative ways to improve customer experience and gain competitive advantages.

Generally, companies outsource non-core business functions—tasks that, while essential to the business, are not part of its core value proposition—that are similar across companies and industries. These include back-office functions (internal business functions) like accounting, IT services, sourcing, procurement, quality assurance and human resources management. Front-office (customer-facing) roles like sales, marketing or customer support are included as well. These roles are also using newer technologies such as chatbots.

Traditionally, companies have outsourced functions mainly to cut costs, save time and improve performance. These benefits remain the primary drivers of the BPO market, but the trend toward digital transformation has more firms looking beyond cost-saving strategies. There is now an increased focus on access to technology and expertise that are not available in-house.

The proliferation of new technologies like Robotic Process Automation (RPA) and artificial intelligence (AI) has impacted BPO processes. These advancements have ushered in unparalleled levels of efficiency, accuracy and scalability, making BPO a competitive advantage for many organizations.

RPA automates repetitive and rule-based tasks traditionally performed by humans. By deploying software bots programmed to replicate human actions, RPA simplifies processes, enabling human workers to focus on more complex tasks. This streamlining of workflows reduces errors and accelerates process execution.

Integrated analytics, which connect data insights solutions to everyday workflows and applications, are enhancing business intelligence. Machine learning (ML), a subset of AI, is dedicated to using data and algorithms to mimic human learning processes. This continuous refinement of accuracy over time represents a significant leap forward in data processing and analytics. ML can extract valuable insights from vast amounts of structured and unstructured data, leading to better decision making.

Predictive analytics, another branch of AI, employs mathematical and statistical models to identify data patterns and generate predictions. Integrated analytics offer deeper visibility into operations and aid in identifying emerging trends. This empowers organizations to make informed, data-driven decisions to stay ahead.

With technology playing such a pivotal role in business success, organizations are looking for BPO partners with expertise in AI, automation and emerging technologies. These partners can bridge the technology gap and help organizations remain competitive within their industries.

Identifying the appropriate functions for BPO requires strong business process management and a complete understanding of organizational processes. Typically, the outsourcing of a function or process will involve the following steps:

Business process outsourcing offers valuable benefits for organizations and allows for greater focus on highly skilled and specialized roles essential to core objectives. These benefits include:

• Access to innovations. As specialists in the services they provide, BPO vendors often invest in the latest technology solutions available to maintain an advantage over competition and offer the greatest value for clients. This allows companies to access cutting-edge technology, like AI, advanced analytics or automation solutions that handle more complex processes, while minimizing costs.

• Efficient global presence. Outsourcing providers can deliver around the clock service to customers in multiple languages, eliminating the need for an organization to staff a local office. In addition, for organizations looking to expand, a partnership with a BPO vendor in the region can grant a better understanding of local markets and help streamline the expansion process.

• Improved efficiency and standardization. BPO providers are often specialists in non-core business operations, like payment processing, call centers or accounting. Thus, they can handle these operations with greater efficiency and expertise than if the services were handled in-house.

• Increased focus on core business competencies. By outsourcing non-core competencies, organizations free up resources. These can be redirected toward business differentiators that drive value and give the company a competitive advantage.

• Reduced cost. While overhead costs are unavoidable, by outsourcing various functions to third-party vendors, organizations can reduce in-house labor costs related to staffing and training. They can also take advantage of fee-for-service plans that are more cost effective than retaining full-time employees. Through offshore outsourcing, organizations can use lower-cost labor markets and tax advantages to improve the bottom line.

Business process outsourcing can be classified according to the location of the hired outsourcing company and the type of service rendered.

• Near-shore outsourcing. Here, the contracted vendor operates in a neighboring country, like a firm in the United States of America outsourcing to Mexico.
  
  
• Offshore outsourcing. This is when an organization contracts a provider in another non-neighboring country. For example, a German firm hiring a vendor in the Philippines.
  
  
• Onshore outsourcing. Also referred to as domestic or local outsourcing, this is when both the organization and the service provider operate in the same country.

• Knowledge process outsourcing (KPO). This is the outsourcing of core, information-related business activities to a third party, or to a different group within the same organization with expertise in that particular area. Examples of KPO services include research and development (R&D), data and technical analysis, and consulting services.
  
  
• Legal process outsourcing (LPO). LPO is a subset of KPO involving the outsourcing of higher-level legal work. Examples include the drafting and revision of legal agreements and patent applications, legal research and client advising.
  
  
• Research process outsourcing (RPO). Another subset of KPO, this is the outsourcing of research and analysis functions. Organizations that commonly engage in RPO include biotech and investment companies.

Choosing a BPO industry service provider to meet an organization’s outsourcing needs requires thorough planning. The goal is to choose an affordable vendor with the right mix of expertise and experience. The following are general steps to follow when evaluating and choosing a BPO provider:

• Define the requirements. All relevant stakeholders should be involved from the outset in choosing a vendor. Each department should outline requirements and expectations as they relate to the functions to be outsourced. The key objectives and foreseeable risks of outsourcing these functions should also be counted.

• Publish a request for proposal (RFP). An RFP is a document that describes a job and invites bids from qualified vendors. The expectations for the role and the contract terms are often stated in an RFP.

• Select a vendor. Evaluate the proposals. Assess the strengths and weaknesses of the shortlisted vendors and compare against stated requirements and objectives, weighing any value-adds offered by vendors.

• Negotiate the contract. Once a vendor has been selected, begin to finalize the contract. Because the contract terms have already been detailed in the RFP, most of the terms should already be agreed upon. Make sure that the service parameters and delivery timelines are clearly understood by all stakeholders.

• Transfer the workload and regularly evaluate performance. Follow the pre-established plan for the transition of services to the vendor. Communicate regularly with relevant in-house teams as well as with the external service provider to maintain efficient business operations and foster a collaborative relationship. Monitor and evaluate vendor performance against the key performance indicators (KPIs) outlined in the SLA, and use these evaluations to determine whether a contract should be renewed.

Though it offers many benefits, BPO exposes an organization to some risks as well. Outsourcing your organization’s business processes to an external service provider raises questions about work quality, data security and work culture compatibility, especially when the provider is located in a different part of the world. BPO can introduce the following risks:

• Communication barriers. Language barriers can restrict business activities in offshore outsourcing, leading to poor communication and delays in service delivery.
  
  
• Increased potential for disruption. When outsourcing to other countries, issues like political instability and natural disasters in a provider’s country of operation can interrupt an organization’s business activities.
  
  
• Over-reliance on external service providers. Working with one BPO vendor for a long period of time can lead to an over-reliance on that vendor. The vendor becomes more or less a part of the organization and, if necessary, replacing them is not always easy. A vendor might take advantage of this knowledge to use the situation.
  
  
• Regulatory compliance issues. Despite being third parties, BPO companies still must comply with the client organization’s regulatory requirements. An organization risks sanction from relevant authorities when there is regulatory non-compliance. Different workplace cultures and norms might increase the chances of falling out of compliance, especially when compliance is outsourced to other countries.
  
  
• Security issues. Business process outsourcing often requires the sharing of sensitive information with vendors, which increases security risk. Most communication and information sharing is done over the internet, which is a viable entry point for bad actors. Also, despite best efforts to align security standards, it can be more difficult to ensure that a third-party vendor is adhering to data privacy protocols and security measures than it is with an in-house team. Different countries have different security requirements and data privacy policies, which can pose a threat to data security for organizations that outsource to other countries.
  
  
• Unforeseen costs. Organizations do not always accurately estimate the cost of an outsourced service. Some unforeseen and indirect costs can be incurred due to, for example, currency fluctuations, hardware or software upgrades, and delayed delivery. It’s important to consider these hidden costs when evaluating the financial implications of outsourcing.