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What is Business Process Outsourcing? – Definition, Benefits, & Examples

Key Takeaways

1. Business Process Outsourcing (BPO) is when companies hire 3rd parties to handle non-core but essential business operations.

2. The benefits of BPO are numerous and the disadvantages few; with widespread adoption in recent years, the question becomes: can you afford not to outsource?

3. Further, experts believe the trend will only increase in the coming years with the potential market increase for the industry estimated at US$75.9bn

4. Choosing which type of BPO is right for you is only winning half the battle; choosing the right BPO partner is essential for success.

Business Process Outsourcing (BPO) began in the manufacturing industry to improve supply chain management. It has since expanded to other sectors because of the efficiency and potential cost savings it allows.

BPO is a relationship between two organizations in which one performs certain functions, like human resources and payroll, on behalf of the other. The services provided are commonly a combination of technology, expert guidance, and administrative help.

In this article we examine the definition of Business Process Outsourcing and consider the pros and cons of BPO for your business. 

What is the definition of Business Process Outsourcing (BPO)?

Business process outsourcing (BPO) is the process of contracting a third-party service provider to handle your business operations.

BPO is different from a call center. Call centers are usually large-scale operations that provide sales and customer support services. Business process outsourcing (BPO) service may be more suitable for small businesses.

Now almost every company includes outsourcing in its business model. The BPO services market in the United States alone is valued at $132.9 billion.

Organizations that opt for BPO identify operations and business processes that are not a core competency of their product or service but essential nonetheless, and subcontract them out to a third party. For example, a health care company may want to expand its human resources but can’t afford to hire more personnel for that department. It may choose to work with a BPO provider specializing in HR so it can focus on what it does best – taking care of patients – without having to worry about payroll, unfamiliar recruitment markets, or benefits administration (for example, global health insurance).

Outsourcing processes, such as data entry and payroll, are often viewed as attractive management alternatives for their cost savings. Still, larger-scale business operations are now expanding the BPO landscape to more senior positions. Some experts believe this adoption shift primarily comes down to the need for agility, connectivity, and cost-containment.

Video: What’s the Difference Between a BPO and a call center?

Different types of BPOs

Back-Office BPO

Back-Office functions are frequently outsourced. These deal with internal business functions of the company. These functions can take the form of administrative tasks like order processing, payment processing, and quality assurance. They may include:

  • Human resources
  • Accounting
  • Research
  • Information technology

Front-Office BPO

Among the Front-office functions frequently outsourced are processes that would require your BPO staff to interact with clients and consumers directly. These services include:

  • Customer service
  • Marketing
  • Sales
  • Tech support

Offshore BPO

These Business Process Outsourcing companies are in a different country from yours. For example, a company in the US is outsourcing their work to a BPO company in the Philippines, or a US tech giant outsources customer support to India.

Nearshore

These BPO companies are in a neighboring country. For example, a soft drinks company in the United States outsources its bottling operations to a Mexican BPO company.

Onshore

These BPO companies are located within the same country. However, they could be situated in another region. For example, a company based in California could outsource its work to a BPO company based in Texas.

Often, domestic sourcing or onshoring is a viable solution for companies that need software development support but want to keep the work closer to home, and not send it overseas.

What are the benefits of Business Process Outsourcing?

Many business have enjoyed the benefits of BPO, which results in their ability to:

  • Reduce costs: A BPO enables the company to avoid hiring more staff, and to maintain the physical overhead of office space and equipment.
  • Improve efficiency: BPO providers are experts in the services they provide, which means they’re often able to complete tasks faster and with greater accuracy than the client business.
  • Focus on core business functions: a BPO empowers the company to maintain a strategic focus on its core competencies and competitive advantages. Outsourcing can help the organization respond and lead within their market without being bogged down in supporting processes.
  • Become more flexible: Businesses can quickly reallocate resources in response to market changes or unexpected disruptions. Because businesses of all sizes, even smaller local businesses, now operate in a global environment, agility is a top priority. With competition as close as a few web clicks away, firms must be responsive to the changing needs and expectations of their customers and prospects. When they quickly locate and engage a variety of service providers, companies can respond to changing market needs easier.
  • Expand geographically: Outsourcing providers with national and international compliance capabilities can help employers branch out into new geographic regions.
  • Stay competitive: When competitors are outsourcing, your company must do so too.

What are the disadvantages of Business Processing Outsourcing?

While the benefits are clear, there are also some perceived disadvantages to BPO:

  • Potential data breach. Some companies believe that their proprietary information is too valuable to entrust into the hands of others, for they fear a data breach. Similarly passing on personal information to a BPO company runs the risk of breaching data protection laws.
  • Control. Some companies want to maintain tight control of functions such as Accounting and Human Resources and prefer to keep those departments in-house rather than outsource them
  • Communication. Where BPO is based offshore, and there are multiple languages involved, there is always a risk of miscommunication. 

These perceived ‘cons’ of BPO can be largely mitigated through (a), choosing the right BPO provider and (b), ensuring that contracts and data processing agreements are in place to protect data. 

What are the best Business Process Outsourcing solutions?

Customer Support is one of the most popular BPO solutions that companies employ. Whether Customer Support involves handling airline or hotel reservations or ordering goods for an online retailer, many companies find that using a BPO is a cost-effective way to service their customers. Instead of hiring and training new in-house customer support executives, many firms prefer to outsource to professionals.

IT is often handled via a BPO. Information Technology Enabled Services (ITES) is a type of BPO that handles IT solutions over the internet. ITES usually involves these types of IT services:

  • Technical Support
  • Service Desk Analyst
  • Production Support Analyst
  • KPO — In Knowledge Process Outsourcing, service providers are hired to provide advanced expertise around a particular business process.
  • KPO services providers handle highly skilled jobs like:
  • Accounting and financial analysis
  • Legal processes
  • Web design
  • Content creation

What is the future of Business Process Outsourcing?

In business process outsourcing or BPO, subcontractors perform essential business operations instead of using internal staff. While many businesses have used external service providers, including freelancers, independent contractors, and large-scale third-party enterprises, at some point, the use of BPO has continued to expand.

Forbes.com recently reported on the future of BPO. It quoted a report by global market research firm Technavio notes that “beneficial aspects of BPO services are driving the business process outsourcing market growth …” at an expected “…CAGR [compound annual growth rate] of over 7%” between 2020 and 2024. The report summary further notes that “the business process outsourcing market size has the potential to grow by US$76.90 billion during 2020–2024” and that its market growth momentum could accelerate.

Horizons’ role as BPO

If your company would like to outsource functions such as HR, payroll, or recruitment, you should hire Horizons, whose BPO can benefit businesses of all sizes.

Managing global payroll across international borders and multiple languages is challenging for expanding businesses. Through laws and regulations, each country has its individual approach to payroll, mandatory deductions, and tax withholding.

Horizons manages payroll for companies in more than 150 countries and regions. Our all-in-one payroll and HR solutions allow you to streamline your international payroll, ensuring on-time accuracy and full compliance with local laws.

To centralize and coordinate your global payroll cycle — in any country — consider Horizons’ international payroll solutions. Contact us today for a free consultation.

Frequently Asked Questions (FAQ)

Companies use several main types of business process outsourcing, which include:

  1. Front-Office BPO is used for customer-centric functions like human resources and marketing.
  2. Back-Office BPO applies to internal business functions like accounting and IT.
  3. Offshore BPO refers to when a company assigns its business processes to a firm located overseas.
  4. Nearshore BPO refers to when a firm outsources to a neighboring country.
  5. Onshore/Domestic BPO refers to when a company outsources to an organization in the same country as the client, in another city or state.

In a BPO arrangement, subcontractors perform essential business operations outside the client company: e.g., a firm in Texas handles IT for a Washington,DC firm; or an airline based in Dallas outsources customer support and reservations to a firm in India.  Companies enjoy the cost savings of hiring fewer salaried staff and not having to pay for office overhead when they use a BPO.

A BPO is often an expert in its services, leaving the client – such as a hospital – free to focus on its core mission, caring for patients.

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