Business Process Outsourcing

What Is Business Process Outsourcing (BPO)?

The term outsourcing Opens in new window refers to the general business practice through which firms cut costs by transferring a portion or an entire organizational function to an external agency located either domestically or abroad rather than performing it internally.

Business process outsourcing (BPO) is defined simply as the movement of business processes from inside the organization to external service providers in attempt to achieve increased productivity, cost effectiveness and system efficiency. BPO is simply the movement of business processes to the highest-skill/lowest-cost provider, in other words.

The external agencies are called vendors. They are experts in their jobs and in addition they have domain knowledge of the customer’s industry. The customer receives a service that performs a distinct business function that fits into the customer’s overall business operations.

With the global telecommunications infrastructure now well-established and consistently reliable, BPO initiatives often include shifting work to international providers.

Five BPO international hot spots have emerged around the globe, although firms from many other countries are specializing in various business processes and exporting services:

BPO Hot Spots Expertises
India. Engineering and Technical
China. Manufacturing and Technical
Mexico. Manufacturing
United States. Analysis and Creative
United States. Analysis and Creative
Philippines. Administrative

Each of these countries has complex economies that span the range of business activity, but from a BPO perspective they have comparative advantages in the specific functions cited.

BPOs are basically supply chains of domain expertises. Literatures on BPOs attempts to discuss how these supply chains of expertises are managed, what their business models are, what the regulatory and legal limitations are, and how the contractual and service level agreement responsibilities and obligations are carried out.

BPO is typically categorized into back office outsourcing—which includes internal business functions such as human resources or finance and accounting and front office outsourcing—which includes customer-related services such as contact center services. BPO that is contracted outside a company’s country is called offshore outsourcing Opens in new window.

Business executives and owners adopt BPO as a means of eliminating business processes that are not part of the core competence of their organizations. Back-office functions such as payroll and benefits administration, customer service, call center, and technical support are just a few of the processes that organizations of all sizes have been able to outsource to others who specialize in those areas. Removing back-office functions from their internal operations enables organizations to reduce payroll and other overhead costs.

In an era when executives have been admonished from a wide range of business commentators and analyst to focus on core competence, BPO offers them an opportunity to finally achieve that goal in a dramatic new way.

Like appliance manufacturing firms that moved its production from the Midwest to Mexican maquiladoras or apparel manufacturers that moved production to the Far East, businesses of all types and sizes are now shifting back-office jobs to international locations such as China, India, and the Philistines where the labor is inexpensive and highly skilled.

BPO: A Socio-Technical Innovation

Fundamentally, BPO is a socio-technical business innovation that provides a rich new source of competitive advantage. By socio-technical we mean that BPO requires skillful management, and organizational culture. If left solely in the hands of nontechnical managers, a BPO initiative is likely to fail for unrealistic expectations about the potential and limitations of the enabling technologies.

BPO is one of those interdisciplinary workplace innovations that require a diverse set of skills in order to be successful. The initiation and implementation of a BPO project in an organization requires focused attention on several human factors, both within the organization initiating the project and within the outsourcing vendor.

These human/social factors cannot be ignored and must be handled correctly in order for the project to succeed. Human factors include the following:

  • Developing various teams to manage the BPO initiative throughout its life cycle
  • Reassuring staff of their role in the company
  • Training people on the new way of doing business
  • Dealing with job loss and/or reassignment
  • Keeping morale high throughout the change process
  • Encouraging people to participate in decision making
  • Understanding cultural differences between the organization and BPO partner

The initiation and implementation of a BPO project also require attention to technology issues. Among these are the following:

  • Compatibility of systems between the BPO buyer and vendor
  • Data and system security
  • Backup and recovery procedures in the case of system failure
  • Data interface challenges and strategies
  • Software and database compatibility challenges
  • Data and knowledge management

Next we look at goals of BPO.

Goals of Business Processs Outsourcing

The goals of BPO may be tactical, such as to reduce or control costs or free up capital funds, or strategic, such as to gain access to a specific technology. Outsourcing is an effective cost-saving strategy when applied properly. The Case Study describes how GE Capital and Microsoft have utilized outsourcing for value-added services at low costs.

There are many reasons that a firm will use BPO. The cost savings that result from moving back-office processes to low-wage environments is the most oft-cited one. However, firms can also use BPO to transfer service functions to best-in-class performers to gain competitive advantage.

A firm that outsources customer service functions to a firm that specializes in and provides world-class support in that area will perform at a higher level in that function than its competitors.

Case Study: Two Giants Take the Offshore BPO Lead
GE Capital’s International Services unit, which provides everything from risk calculation to IT services and actuarial analysis for GE worldwide, has grown from 634 employees t 17,000 in under five years. More than half of those workers are in India, and they are not being used for mindless data entry—in India every employee has a college degree, and more than 1,200 have Master’s degrees in Business Administration (MBAs).

Microsoft has about 200 employees developing software in Bangalore, where it opened its first non-U.S.-based product development center. In July 2003, the company announced it will be shifting more currently U.S.-based jobs to India as it seeks to lower technical support and development costs. Over the years, Microsoft have increased its staff in India, as the country continues to turn out tens of thousands of English-speaking engineers each year.
Sources: Adapted from Reed Stevenson and Anshuman Daga, “Microsoft Shifting Development, Support to India,” Reuters News Service (July 2, 2003); and Nelson D. Schwartz, “Down and Out in White Collar America,” Fortune (June 23, 2003), p. 82.

Moving to a best-in-class provider may actually increase costs in the short run in the interest of developing competitive advantage. Under this rationale, BPO is a strategic investment that is designed to upgrade service levels at a cost, with the intent of increasing revenues through enhanced competitiveness.

BPO is based on the fundamental proposition that organizations should focus on what they do best and outsource everything else. If your company markets and sells sporting goods, it should spend substantially all of its time doing that and as little time as possible managing its accounting, customer service, and employee benefits plans.

There are only so many things that any company can do well. Whether their core focus is on price, cost, quality, or innovation, a firm can leverage BPO to dedicate resources more intensely on what it does best. Of course, initially firms chose BPO for cost savings.

Today, they recognize that an outsourcing partner whose sole business is to service a specific business process can develop unique and highly competitive domain knowledge. Harnessing this knowledge has become an important source of competitive advantage for the BPO buyer.

related literatures:
  1. M.S. Rangaraju, S. Hanuman Kennedy, Management Challenges and Opportunities in the next decade, (p. 60) Introduction to BPOs, edited by Nagaraj Shenoy.
  2. Rick L. Click, Thomas N. Duening, Business Process Outsourcing: The Competitive Advantage, (p.3-9) What Is So Revolutionary about BPO?
  3. Vinod V. Sople. Business Process Outsourcing: A Supply Chain of Expertises, (p. 20) Need for Outsourcing.