The global business process outsourcing market is expected to grow by a massive $230.2 billion by 2027. A fast-growing industry, the BPO sector’s boom has continued even throughout the COVID-19 pandemic.
BPO providers (BPOs) owe their success to the large volumes of jobs they create and all the revenue they generate across multiple countries. While the outsourcing business model as a whole has to adapt to the growing tech innovations of business processes, it is still the preferred go-to for many companies looking for a competitive advantage.
What does BPO stand for?
BPO or Business Process Outsourcing is the practice of hiring a third-party service provider to perform non-core business functions for your company. Most companies choose to outsource certain business functions because a specialised agency is better equipped to perform them.
Also, it often provides cost savings to outsource certain business processes instead of paying for and retaining an in-house team to do it.
Depending on the nature of your business, you can choose to outsource a variety of different business processes including:
- Customer service
- Payroll
- Social media marketing
- Accounting & financial services
- HR
- IT services
- Shipping, procurement, and logistics
- Project management
- Sales
- Research
BPOs were originally used by the manufacturing industry which outsourced certain supply chain processes and workflows to third-party vendors owing to the efficiency and cost-effectiveness of the move. In time, industries across the board adopted the move to BPOs.
How does Business Process Outsourcing work?
At the onset, a company needs to identify the processes that it wants to outsource to an external agency. Next, they need to choose the best vendor and review the cost and logistical implications of moving the process from in-house to agency. Shifting to a BPO also impacts a company’s corporate taxes.
While choosing to move to a BPO, a company needs to consider investing in new tech (artificial intelligence, automation, etc.) that will enable a smooth transfer of work processes from in-house to agency and factor in this cost in the overall expenditure.
Remember, a BPO functions almost like an extension of your company so it must have the expertise to perform the business processes it is being hired for.
What is BPO used for?
Most companies hire BPOs for two main areas:
- Back-office operations
- Front-office operations
Back-office operations
This outsourcing service refers to shifting internal business processes to an external agency. This includes functions like information technology services, accounting and finance, human resources management, payment processing, quality assurance, and more.
Earlier, back-office outsourcing only included administrative functions. Present day BPOs provide various other services including research, digital marketing, ecommerce, content writing, and others.
Front-office operations
Front-office operations relate to processes that deal directly with customers. These include customer service, information technology-enabled services (ITES), sales, and more. Front-office operations have extended their scope to include business processes like social media management, market research, and virtual assistance.
Both back-office and front-office operations can be further categorised into:
- Legal Process Outsourcing (LPO)
- Research Process Outsourcing (RPO)
- Knowledge Process Outsourcing (KPO)
Legal Process Outsourcing (LPO) refers to sourcing an external agency to complete legal work. LPO includes a range of legal services including research and documentation, appointments, and transcription services.
Research Process Outsourcing (RPO) refers to outsourcing all research and development work. This includes all aspects of market research and analysis and preparing financial reports.
Knowledge Process Outsourcing (KPO) refers to outsourcing a company’s knowledge-based functions like finance, healthcare, and insurance.
Types of BPO
When choosing to outsource a business process, it’s important to review what type of outsourcing is right for your company. The three main strands of the outsourcing industry are:
- Nearshore
- Offshore
- Onshore
Nearshore outsourcing
Nearshore outsourcing refers to the practice of a company outsourcing near its own premises. One company outsources to a BPO in a nation next to or near its home country. For instance, a firm in the south of the USA may outsource to Mexico.
The geographical proximity allows frequent visits between the two centres. Nearshoring occupies the intermediate ground between onshore and offshore outsourcing.
Offshore outsourcing
Offshore outsourcing (or offshoring) refers to the practice of a company outsourcing to a far-off foreign country.
Benefits of offshore outsourcing include growing your market reach, and reduced costs due to the lower cost of living in offshored countries. However, offshore outsourcing also involves certain risks, particularly in relation to conflicts that may arise due to cultural barriers.
Onshore outsourcing
Onshore outsourcing refers to the practice of a company outsourcing within the same country, but often to a different state or district. One of the biggest advantages of onshore outsourcing is the easy access it provides to your BPO without having to travel for long. It also does away with time zone issues.
However, be aware that labour charges with onshore outsourcing can be the same as hiring your own in-house team.
What is the difference between BPO and BPA?
Business Process Automation or BPA is the method of automating standard business processes like accounting, preparing expense reports, and purchasing.
While business automation is different from outsourcing, there is an overlap between the two.
BPO involves outsourcing your business processes to an external agency, BPA involves automating your in-house business functions. In the case of BPA, you can choose to either implement the automation in-house or outsource it. This is also where the main overlap happens between BPO and BPA.
For some companies, in-house BPA solutions can be effective. However, in other cases, these solutions are often old and use out-of-date software. In these cases, your best bet to automate your business processes is to outsource your BPA to a third-party vendor.
Pros and cons of BPO
Like most business decisions, outsourcing also has its pros and cons. As a company looking to outsource a process (whether that be HR or answering phone calls), you need to review the cost implications of hiring a third-party vendor.
The expenditure must be adjusted by the value you get from outsourcing. For example, a company that outsources to an external debt collection agency might find increased productivity in the overall business.
On the other hand, a small startup may be wasting its resources on outsourcing functions that can be performed in-house. It’s more about considering cost efficiency than simple cost reduction.
Here are some of the main pros of BPO:
1. Enhanced company performance
BPOs are equipped with specialised skills to perform certain business functions better than their clients. Unlike standard companies, BPOs often have rosters of staff that are specifically trained for these business functions.
So, hiring a BPO guarantees quality assurance for a company.
Additionally, BPOs are equipped with better technology, state-of-the-art equipment, and better infrastructure. All of these factors contribute to improved performance, boosted metrics, and thereby better productivity for the business.
Another benefit of outsourcing is that most BPOs operate on a 24/7 work model. Companies can have access to their outsourced teams outside business hours and, in fact, at all hours of the day.
2. Financial savings
When a company decides to outsource some of its business processes to a BPO, it saves overhead costs of hiring and retaining in-house staff. Outsourcing does away with any expenses related to staff training as well.
Companies that outsource to an external service provider also avoid the hefty expenses of buying or renting heavy duty office equipment. Since the team is working at a different site, there is no need to provide a dedicated workspace for them.
This is particularly helpful for small businesses and startups with limited resources. Note that related costs for upgrading and maintaining equipment may be included in your agreement with the BPO company.
Companies who choose to do offshore outsourcing benefit from the low labour costs in some foreign countries. These companies end up paying lower employee salaries whilst maintaining quality of work and ensuring considerable financial savings.
3. Boosted flexibility
According to a 2020 Global Outsourcing Survey by Deloitte, 40% of companies use outsourcing to get more flexibility in their work processes. Companies that outsource non-core business functions can reallocate the saved time and resources to core functions like product leadership, building valuable customer relationships, customer experience, etc. This gives the client companies a competitive edge over other players in the industry.
4. Access to innovations
BPO service providers are equipped with the latest technologies, equipment, and infrastructure in their specialised business areas. With advanced tech and automation software, BPOs can provide high-quality work in less time.
Most companies, particularly small businesses, don’t usually invest in such expensive tech and so outsourcing allows them to enjoy the benefits of the latest tech, without having to buy it.
Now that we have discussed some of the pros of BPOs, let’s look at some of the cons:
1. Security risks
A security breach is one of the biggest challenges companies face when outsourcing to a BPO, as classified information has to be shared. The communication channel between a company and its BPO service provider creates an entry point for hackers.
According to Cybersecurity Ventures, the global cost of cybercrime is expected to grow to a staggering $10.3 trillion by 2025.
The BPO sector is among the most vulnerable to cyber threats as it deals with large volumes of data and information. While choosing a BPO service provider, you must conduct proper due diligence of the vendor’s data protection measures and their incident response plan in the event of a data breach.
It is near impossible to prevent all data breaches. However, being prepared with a contingency plan can help mitigate losses for your company and the vendor.
2. Additional costs
Before outsourcing to a BPO, you need to make sure to review all charges and fees so that you’re not taken by surprise by a hidden cost later down the line.
It can be difficult to go through the verbose jargon that most BPO contracts contain, meaning you can all too easily miss a catch about legal expenses or some other additional charges. Make sure to iron out credit agreements, if any, before signing the contract. Lesson: Do your due diligence!
Make sure you have your in-house counsel read through all the fine print before signing and ask all the relevant questions about terms and conditions and SLAs.
Additionally, companies often underestimate the actual quantity of work, which leads to higher unexpected costs. Any disputes or disagreements between the client company and the BPO can result in legal costs. Also, any work delays can also have an impact on overall costs.
3. Dependence on service provider/s
When companies engage in a long-term relationship with service providers, they tend to get accustomed to a certain way of working and quality. This can lead to over-dependence on the service provider. This is never advisable as it comes with a risk of BPOs demanding and getting away with higher fees.
4. Inter-organisational relationship barriers
Outsourcing can also lead to inter-organisational relationship barriers. This is mainly due to language and cultural barriers, especially if the company has partnered with an offshore service provider.
Customer support agents in BPOs that are located in a different country to your own may not have the communication skills or cultural references to provide the highest quality support, for instance. Choosing a nearshore or onshore BPO vendor is usually the better choice. However, you can get great support from a reliable BPO that has a solid global reputation.
Does my business need BPO?
Business process outsourcing done right allows your company to delegate non-core business processes and instead focus on the key functions that drive revenue.
Additionally, BPOs provide access to latest tech innovations, save time and money, and provide more flexibility.
However, before you sign a contract with an outsourcing vendor, you must review the fine print to spot any hidden charges so there are no nasty surprises later. It is also worthwhile to do your due diligence before hiring a service provider to make sure they have a good global standing and reputation.
Originally published Sep 20, 2021, updated Mar 14, 2024
