What is Business Process Outsourcing | How Does BPO Work
Business process outsourcing (BPO) is the strategic deployment of a company's business processes to an outside organization, either in another country or in another part of the same country. The central goal of BPO is to lower costs and improve quality by taking advantage of regional cost differences.
This article will discuss what BPO entails, why it's beneficial for companies, and how it can be implemented within your own company.
While outsourcing has been a strategy employed by businesses for years, the term "business process outsourcing" was first coined in 1990 by John Chase of the General Electric Company. It is often called nearshore outsourcing when referring to companies that transfer business processes to a company in another country close to their own (making it feasible for employees in both countries to communicate with frequent visits). The reason why companies choose to outsource is the ability to hire experienced employees at a lower cost. For example, a technology company located in California might have the option of outsourcing its programming and technical support services to an offshore company. If they were to do so it would then make sense for them to transfer these job functions from California (where the cost of living is much higher) to the lower-cost country.
How does it Work?
An offshore outsourcing company will hire workers who are already located in the country where the project work is being performed. These employees might be either full-time or part-time. The client company then transfers these positions to the outsourcing company and has them perform their normal day-to-day duties under the direct supervision of a supervisor from the client's firm. What the client company has done in effect is to subcontract a certain amount of work and then transfer this work offshore to the outsourcing company.
Some firms send all or a portion of their work to be performed in the lower-cost country but then bring it back to the home base for completion. This is called "nearshoring." Nearshoring is attractive to the extent that some required interaction with higher management and/or other local staff members cannot be adequately done offshore because of language and other cultural differences.
The third option is to establish an R&D or other type of operation in a lower-cost country and have that facility perform all of the work. In recent years, many firms have sought to reduce their overall costs by implementing this strategy of offshoring.
What's Good About It For The Client?
Cost savings: The primary reason most small companies use off-shoring is that it reduces their costs. Several factors affect offshoring costs, including work/employee location and skill levels, quality of the outsourcer firm, work processes used by the outsourcer firm, nature of the client company (e.g., manufacturing or service), internal resources available to the client, and so on.
Cost savings can range from 30% to 50%. In one case study a U.S. company's CFO estimated that by contracting all of the call center operations to an offshore provider, which was 20% cheaper than a U.S. company doing it in-house, the savings over three years would be $1 million.
Personal relationships: The outsourcing relationship can be viewed as more personal in certain ways compared to a relationship with a service firm providing a product. Interactions between the firm and its offshore outsourcing provider are more immediate, frequent, and continuous. An outsourcer may be seen as more willing to accommodate requirements that deviate from the "standard" contract because the client-outsourcer relationship is built on trust. This personal element can lead to flexibility in solutions that may be seen as non-standard and may lead to the ability of a client firm's offshore partner to respond more quickly to ad hoc requests.
In addition, since capabilities reside within an outsourcing company rather than being provided by external vendors, outsourcers can bring their extended resources (e.g., other business units) in assisting the client. This can mean higher quality, faster turnaround, and better price performance.
Higher quality performance: It is inevitable for clients to compromise on quality and performance when they use vendors. Since outsourcers have more control over how quality is managed, they can be more responsive to client needs than vendors.
This improved performance also means that the outsourcing company has a better understanding of the client's business than do third-party vendors. The knowledge of the client's business enables the outsourcer to provide better advice to the client.
More flexible resource allocation: For many clients, it is difficult to scale their internal resources up or down based on market conditions. Outsourcing companies can more easily adjust resources when needed by simply hiring more staff or letting some go in response to changing market circumstances. The client company also can hire and make use of short-term projects, which is not possible for most internal IT staff.
The Challenges of BPO
The strategy of a BPO company contracting an outside company, typically in another country, to do some or all of its work. BPO can be difficult because it’s hard to predict how the outsourced company will perform and many challenges come with outsourcing. Some of these challenges include:
Cultural differences – Since the outsourced company is not located locally, there are cultural differences involved in outsourcing. The staff at the company contracting the outsourced work may have a difficult time communicating with a foreign-based company.
Language differences – Again, since the outsourced company is not locally based, there may be a language barrier that prevents effective communication.
Time zone differences – The outsourced company may be in a time zone that is very different from the contracting company, which can make scheduled meetings awkward.
Lack of trust – There is a lack of trust between the contracting company and the outsourced company. This makes it difficult to build trust, which is necessary for a successful outsourcing relationship.
Lack of personal relationships between management – Companies sometimes fail to develop a personal connection between their management, and the executives of the outsourced company. This can lead to a lack of communication.
Last Word
BPO is a business model that allows companies to outsource specific functions of the organization. This may include payroll, accounting, human resource management, and more. Outsourcing these tasks can help free up employees from having to manage them internally as well as save on costs for new hires or additional office space. For those looking into this type of strategy in their own company, it's important to work with a reputable firm that understands your needs and goals while also being able to provide you with an ROI analysis based on what they have done for other businesses like yours.
Contact us today if you're interested in learning more about outsourcing your day-to-day business operations so we can start exploring how it could benefit your company!
