Business process outsourcing (BPO) is a method of subcontracting various business-related operations to third-party vendors. Although BPO originally applied solely to manufacturing entities, such as soft drink manufacturers that outsourced large segments of their supply chains, BPO now applies to the outsourcing of services, as well.
BPO has its roots in the manufacturing industry, with manufacturers hiring other companies to handle specific processes, such as parts of their supply chains, that were unrelated to the core competencies required to make their end products. However, organizations in other industries adopted the practice over the years. Now, the use of BPO has expanded so much that organizations of all kinds — for-profit businesses, nonprofits, and even government offices and agencies — contract with BPO service providers in the United States, throughout North America and across the world to perform numerous processes. According to the BPO Services Global Industry Almanac 2013-2022 released in May 2018, the overall BPO Services sector generated revenues of $144.9 billion in 2017.
What is BPO used for?
Organizations engage in business process outsourcing for two main areas of work: back-office functions and front-office functions. Organizations can outsource a range of back-office functions (also referred to as internal business functions) including accounting, IT services, human resources (HR), quality assurance (QA) and payment processing. Similarly, they can outsource various front-office functions, such as customer relations services, marketing, and sales.
Organizations can also outsource specific functions (i.e., payroll) in those areas in addition to outsourcing an entire functional area (i.e., human resources).
Types of BPO
Because companies around the world provide BPO services to other organizations, BPO can be divided into different types based on the service provider’s location.
Offshore outsourcing, or just offshoring, occurs when an organization contracts for services provided with a company in a foreign country.
Onshore outsourcing, or domestic outsourcing, happens when an organization contracts for services provided by a company that operates in the same country as the hiring organization.
Nearshore outsourcing, when an organization contracts for services provided by companies based in neighboring countries.
Business process outsourcing is also sometimes referred to as information technology-enabled services, or ITES — a name that recognizes that IT infrastructure enables outsourcing to happen.
Business Process Outsourcing Benefits
The most popular and talked-about benefit for outsourcing is related to the significantly lower expenses.
Depending on where you’re sourcing, prices can be slightly lower (Think, San Francisco to Nashville), or significantly (development from San Francisco to India). Other than the lower salaries, there’s the added benefit of getting a “tax break.” While the government doesn’t straight-off give you a tax break, you get the option to defer paying income tax on profits made abroad.
Focus on Core Functions & Improved Support
If you’re an up-and-coming software startup, you really can’t be bothered with starting a huge customer support team from scratch. While doing it right is important, chances are, in-house isn’t the best place for that. If your founding team has a technical background, they won’t be as good in training a support team. So, by outsourcing to a company that specializes in support, you end up with better processes at the same price.
This, in turn, allows your team to focus on what’s important for the company – the core processes that make the company stand out.
If you decide to enter the French market, for example, you’d be having a very difficult time getting started. First of all, you can’t just import your American sales team because of the language barrier. So, you’d have to send someone from company management to start a regional department. This, in turn, leads to some other issues – even if the company official is fluent in the language, they’re unlikely to know how the market in that specific country works.
So, instead, it’s easier to find a local partner company with a native workforce. They’re already aware of how the market works, as well as having the knowledge of the language and culture on their side. And, of course, you can manage the 3rd party company as much as needed.