What is Business Process Outsourcing?

by The Editorial Team on October 31, 2014

In the end, Business Process Outsourcing or BPO is a business practice that is here to stay.

Investopedia defines Business Process Outsourcing, or BPO is “the contracting-out of specific business-related operations to a third party.” The types of business services that are usually subject to Business Process Outsourcing are “back office” services. (accounting, human resources, IT) and “front office” functions (marketing, customer service, sales).

Business Process Outsourcing was originally used by manufacturing companies but is now utilized by most large and some small businesses.

Business Process Outsourcing (BPO) that is done in a country other than the native country of that business is called “offshore outsourcing.”

BPO that is done in the native country or in a nearby country (e.g.: between the US and Canada) is called “nearshore outsourcing.”

Both outsourcing practices are thought to reduce costs and allow companies more flexibility.

A company that uses Business Process Outsourcing can have a better ability to concentrate on their core competencies. If they are able to outsource their non-core functions, more assets, time and energy can be used to concentrate on the real business functions of the company.

“In other words, a software start-up, unburdened by the time-consuming and resource-draining vagaries of human resources or payroll processing, can concentrate more energy on the task at hand“

Using a BPO company to answer customer questions and take orders not only reduces costs but also allows for faster growth. If capital is invested in development and growth, then it has greater maneuverability. If problems arise, the BPO contract can be terminated. This is certainly better (and less expensive) than laying-off a hundred or a thousand employees.

Any dollar that can be saved by a company by handing its non-essential tasks to the third party is a dollar earned – money that can be invested in research, development, or better equipment. BPO companies rely on economies of scale (and lower labor costs) to perform those business functions more cost-effectively.

IT functions can also be contracted out, along with just about any part of the business that does not require actual bodies and face time.

Of course, a business must carefully weigh the kinds of tasks or services they choose to send away from their realm of control. Customer lists can disappear, intellectual property can be stolen, and personal information can find its’ way into the wrong hands.

While most consumers probably think that most BPO companies are located in India, the Philippines actually has larger percentage of call- center outsourcing companies. Per Inquirer.net, at least 100 other countries around the are competing for a slice of the outsourcing pie.

On the downside, outsourcing may not always work for your company. It can be hard to convince a savvy young American consumer that your App is the best thing on the US market today when they are talking to someone in the “sales department” who do not speak proper English.

The problem not only goes to credibility but, these days, also to patriotism. Americans don’t want to see their jobs being shipped overseas.

Similarly, a consumer with a technical question does not want to wait to be transferred from person to person (or country to country) when they have a simple question.

“Consumers today are impatient, they want the answer yesterday, and they don’t a want to have to repeat themselves”

Bad customer service can, and often will result in the loss of a sale or customer loyalty.

And in this age of instant everything, how many bad tweets or Yelp reviews will your company be able to withstand?

It should not be assumed, however, that all BPO tasks are sent overseas. Insurance companies, for example, often outsource their insurance fraud investigation activities to outside companies.

Banks can assign their collections or bill-processing tasks to a large clearinghouse, and many companies use centralized payroll services.

Government agencies even contract with other governmental divisions to carry out non-core tasks (e.g.: the Governors’ Office contracts with the State Printing Department).

Prospective employers often use “onboarding” companies to do the preliminary background checks and reference checks on prospective new-hires.

It can represent enormous savings to a company – some web sources suggest savings as high as 60% on common business activities. The savings realized by relieving a company of the burden of non-core activities can be used to grow the company. However, the savings must be weighed against the risks that BPO represents: loss of control, loss of oversight, and potential loss of business and/or theft of intellectual property.