Business Process Outsourcing
What is BPO as a concept? Business Process Outsourcing: definition, examples
A subset of the catch-all term outsourcing, Business Process Outsourcing (BPO) involves contracting a third-party to handle non-essential business activities. When BPO companies recruited internationally, the contract referred as offshore outsourcing. Contracting BPO companies within the same country where the client located, the contact seen as onshore outsourcing. Nearshore outsourcing relates to the situation where BPO conducted within the same region, but in a different country.
BPO services have classified either front-end or back-end.
The industry also organizes them. For example, the BPO can look different for a retail business versus a healthcare oriented business. BPO services run the gamut from customer service to HR, accounting and more. Some of the most common processes that companies choose to outsource are information-technology based.
Industry-wide, BPO offerings consist of two primary categories :
- Horizontal offerings whereby the services leveraged across industries - for example, accounting. Horizontal BPO services typically provide traditional back-office services.
- Vertical-Specific offerings require specific industry knowledge. In the latter case, the provider needs to be highly specialized. These industry specific BPOs a growing quickly and handle such specialized process as claims and mortgage processing.
Examples of BPO services:
As the trend towards BPO continues to develop, almost every business outsources some aspect of their business process. The BPO industry has been responsible for providing cost-effective services to many businesses. The range of business domains to which the BPO industry can be of service includes:
Business Process Outsourcing History
The Main Elements of the Business Process: Management, Core, Operational, Supporting, etc
Running a successful business means maximizing efficiency across a range of complex procedures.
The principal activities that occupy business owners from large to small can be broken down into three categories: core business, critical activities, and non-core activities. Categorizing business activities are essential to making sure that resources, both capital, and human are appropriately dedicated to achieving maximum profit and operational effectiveness. It's helpful to define these activities as beginning the process of classification.
Core activities include everything that leads to the achievement of the business goal, and that contribute to gaining strategic advantage. These activities are must do. A business owner should be allocating a significant percentage of resources to these activities. When activities identified that are not currently being carried out, and that will lead to the stated goals of the business, it is essential to investigate how organizational capacity can grow to accommodate those newly identified activities. Core activities are the key, defining activities of an organization. If they are given to an external party, the result would be a new competitor or dissolution.
Critical but non-core activities meanwhile must be performed at a high level of competency, however, in and of themselves they do not constitute the core business goal. Logistics, for example, is an oft-cited example of critical but non-core activities. Failure to harness the potential of these businesses to differentiate one's business from the competitor can lead to a massive loss of market share. Consider, for example, Coca Cola's distribution network. It is not the core business goal of the company, and yet having mastered the art of effective and efficient global distribution they achieve deeper market penetration than their competitors.
Non-core activities are not contributing to your business goal. Also, they are not supporting the relationship between your product or service and the consumer. They are activities that should undoubtedly be divested or outsourced. It can be difficult to identify these activities because, of course, there are so many activities that go into successfully growing a business, however, rededicating your resources away from non-core activities frees up time, money and talent to be devoted to core operations. The following question can identify non-core activities: If we didn't conduct this activity for a week, would the company continue to exist and produce? If the answer is yes, then the action needs to be intelligently divested.
As companies redouble their efforts on core business operations and hone in on developing competitive advantage, non-core functions are increasingly outsourced. Companies are struggling to manage non-core, non-strategic processes, such as distribution and inventory management, accounting and HR, credit card processing and product testing. Although these processes are vital to the day-to-day operation of many businesses, they are increasingly seen as overhead functions that are not essential to the definition of the core business and as such, are not contributing to market share or profit.
Which of Them Are Outsourceable and What Is the Business Motivation for Doing So (To Be Developed Further In the Market Need and Advantages Sections)
The critical question that a company must ask is “what functions are outsourceable and what is the business benefit tare realized by doing so." As essential to a plan of activities are the activities that the company will not engage. This action demonstrates efficient use of time and resources. Business leaders often overlook the importance of choosing where not to focus attention and effort.
As companies are increasingly deciding which functions and processes are essential to their core business, and which is delegated, a range of alternative options is emerging to take on non-core activities. Digital penetration and mobile productivity applications have made it so that outsourcing these activities to specialists is both efficient and convenient. The total number of processes that companies consider core is shrinking, while the proportion of non-core, yet critical processes will continue to expand. Enterprises that are prepared to meet the opportunity to allocate resources to their core business by delegating non-core activities will see the gains in customer service, efficiency, and costs. These processes should transition to an outsourcer without disruption of duty or compromise quality or confidentiality.
Most important reasons for outsourcing
Business Process Outsourcing ("BPO") is one of the several areas in which a company can outsource their activities. It is a broad umbrella term designed to encompass the delegation of non-core business activities to an external service provider. These activities include legal services, payroll, IT, logistics and more. Both large multi-nationals and SMB’s outsource these kinds of activities to service providers who handle everything from back office to customer facing processes. BPO services can cover administration and business operations and can encompass hardware, software and elements of staffing as well. BPO has the potential to change the operating model of a company by moving non-core activities away from in-house staff. In this way, economies of scale realized, access gained to more sophisticated technology, and focus redirected to essential, core, and revenue-generating business activities .
Back Office Outsourcing (Internal Business Functions) and Front Office Outsourcing (Customer-Related Services)
BPO can be classified as either back office or front office. The main difference between the two is the extent to which the task is customer facing.
What is Front Office?
The front office consists of tasks whereby the customer is in direct contact with the BPO service provider. For example, a real estate company has front office staff that help converts leads into property buyers. In a telecommunications company, front facing staff work in retail environments to bring customers into contact with the product or service on offer. Front facing staff deal with customers daily in a sales and customer experience capacity. Contact centers were the first way in which front office, customer relationships management activities were outsourced at scale.
A contact center system provides digital call and contact routing for high-volume telephone transactions, with specialized "agent" stations to answer calls while relying on a nuanced real-time contact management system. Contact center systems allow businesses to handle inbound contact and distribute efficiently. The strategic result is the intelligent management of inbound telephone traffic. Increasingly, contact centers can now manage multiple types of incoming communication: text, emails, webform submissions and more. Because contact centers are software systems, they can operate in some ways: as an on-site service managed by the provider, as a hosted service managed off site, or as is increasingly popular as “software as a service”, or cloud based solution. Contact center system allows a business to generate reports systematically to review incoming contact activity, monitor activity in real time, and manage agents’ status and more.
Contact centers, which are part of the larger category of customer interactive services, are experiencing tremendous global growth with activity in 2014 measuring USD 51.6 billion. Radiant predicts that this value will exceed USD 68.6 billion by 2020, growing at a CAGR of 12.1% from 2014 to 2020.
What is Back Office?
Back office functions meanwhile do not have customer facing element. They can be thought of as the plumbing in a building. They are essential to keep a business running smoothly, however they are not customer facing and do not make up the core of the company’s business. Back office includes activities that do not directly encounter customers nor generate revenue for the company. All administrative, clerical and support functions are back office: managing payroll, HR department, accounting, IT, data entry, administration, legal.
In recent years there has been a growth in outsourcing these functions to other specialist companies rather than have people in-house to do it, there are reasons for this growth with advantages and disadvantages in deciding whether to outsource or not.
Outsourcing back office processes is a well-established global business practice. According to Grant Thornton, two out of every five businesses outsource back office process as a means of reducing costs, improving efficiencies and, in many cases, ensuring compliance.
Payroll and HR are most often outsourced with 34% of all businesses either currently outsourcing or planning to outsource these processes . Given that most companies’ priority in outsourcing is to increase efficiency and lower costs, HR and Payroll, heavily transactional processes, are an easy entry point to explore the potential of BPO.
Advantages of BPO
Talking to BPO clients, the main reasons they chose to outsource their business process are sensible business-wise:
Why business outsource back-office service
Global survey of senior executives from private companies
There are many potential advantages for contraction the BPO sector for business needs. Cost reduction with regard to labour is among the most oft cited reasons for exploring BPO. A BPO company is able to maximize efficiency and pass the savings on to their clients. BPO also frees up capital by eliminating overhead both human capital related, equipment relate. The need for office and warehouse space can also be eliminated and the costs of the BPO offset by these savings. A company that contracts BPO services also benefits their business by being able to make more space and time to focus on core business processes.
Quality and efficiency can be significantly improved with BPO. BPO’s make your non-core activities their core activities. As such they are always working to improve their processes and output. They are experts in their field. The result is a higher level of process expertise than the outsourcing company has time or resources to achieve. BPO’s will invest in state of the art process and technology that your business could not afford. This allows your business access to innovations and continuous improvements in your non-core activities.
When you rely on the BPO sector you can innovate and prototype more rapidly, and in general be nimble. Recruiting, training and retaining staff requires a great deal of effort and constrains the business decisions that managers are able to make. BPO allows a business to scale up and down as necessary. Customer service can also benefit from contracting BPO. Support can be provided multilingually and without having to invest in training or facility spaces, equipment or software.
Shifting non-core processes to an outsourcing provider can help your company avoid risks. Instead of investing large amounts of capital in facilities, equipment and staff, now you can invest in outcome-based contracts that can be evaluated and tweaked to improve outcomes. There is far less risk in product testing as it is easier to ramp up or wind down production when dealing with BPO providers. Risk can also be hedged by crafting contracts carefully that allow for a degree of certainty and accountability with regard to costs and quality.
BPO’s are increasingly a must have resource for a business’s compliance strategy. As organizations are increasingly operating globally, compliance can become complex and difficult to navigate. BPO services can also support a business in engineering more efficient internal processes. Performing as a consultant,a BPO service can help your business build a much better way or working.
Limitations and Risks
There is no business strategy that is entirely risk free. BPO is no different. Some of the risks facing the BPO industry, and its users include: the threat of a shrinking talent pool as global demographic trends; rising costs of labour in emerging markets; increasing reliance on robotics technology; the proliferation of smart devices which constitute the internet of things and reduce the need for human intervention, etc.
The BPO industry continues to evolve, and the increased demand is being met by a shortage of highly skilled labour to address rising demand. Increasingly, specialized skills in combination with each other - German and computer science, mathematics and accounting for example.
Automation is increasingly being explored by service providers. More than cost savings, automation could represent opportunity for major efficiency increases. Over the next two to three years, service providers expect that the traditional BPO engagement model will be transformed by robotics and greater levels of automation.
BPO and Client-Side Risk
Clients of BPOs have to be aware of the risks of outsourcing any part of their business. Most important is that the BPO service provider is compliant with all regulations, copyrights and procedures so as not to put their clients at risk. While businesses are increasingly savvy about how to manage the risk involved with BPO, data security, privacy and governance are still exposing clients to risk.
The US Federal Reserve has recently warned financial institutions of a number of risks of using BPO. Chief among them are risks related to compliance. It is imperative that the BPO service provider is well-versed in the applicable laws and regulations of their client. The client must make sure that the BPO is operating with the client’s reputation in mind. It take just a few failures of customer service or logistics to do significant damages the a company’s position in the market.
In addition, a foreign-based service provider is subject to the exigencies and instabilities of their home country. Geopolitical events can disrupt service. Operational risks caused by inadequacy or human error are also a risk - however are not particularly unique to BPOs. Contracting a BPO also exposes a business to legal risk. However this too is a risk that any company in operation, with or without BPO services is potentially exposed to.
Other risks to consider are those posed by cultural differences with regard to communication protocols and work ethics. Information sharing may be treated with a different kind of ethic or level of sensitivity. Businesses must be sure of the enforceability and legality of the contracts with which they enter into a professional relationship with a BPO provider. Finally, businesses must be sure that the BPO provider is prepared to mitigate against the partial or complete interruption of critical functionality.
Business-wise, most clients reports the following risks for outsourcing:
Most important risks for outsourcing
Other studies mention additional obstacles in outsourcing their business processes, however, most of them add up to the same core of perceived risks.
What are the major obstacles to your business in outsourcing?
Common Subsets of BPO: KPO, CPO, etc
BPO has spawned subsets: Knowledge Process Outsourcing (KPO), Creative Process Outsourcing (CPO), Legal Process Outsourcing (LPO) and so on. These subsets categorize and organize the wide range of highly specialized services that can potentially outsourced to third party service providers.
Creative Process Outsourcing (CPO) allows a company to divest itself of its marketing, and advertising needs to a third party. Through this B2B relationships, the work is of a higher quality and completed at lower cost. Depending on the specifics of the project, program or product, some companies outsource the more mechanical or technical aspects of their creative work while keeping the creative direction in-house. Outsourcing of tasks that a company does not specialize in, such as graphic design, photo editing and creation of videos is also common. It is not unusual for large multinationals to outsource their entire creative workflow as a way to augment and complement in-house marketing teams.
Knowledge process outsourcing (KPO) meanwhile, allows a business to contract relatively high-level tasks to specialists in a given field. For example, KPO involves sending long-term jobs out of house to intellectual, analytical and knowledgeable people within industries such as research and development, financial consultancy and services, business and technical analysis. KPO may not necessarily lead to cost savings, but certainly adds value. The services provided under the rubric of KPO are highly specialized and often technical and/or require statistical, analytical and research expertise.
Legal process outsourcing (LPO) is a subset of KPO. LPO services include a wide menu of offerings: patents, legal research, pre-litigation documentation, advising, licensing agreements and drafting distribution agreements. Law services have already begun to move offshore with thousands of jobs every year moving from the US to, in particular, India. Indian law, being based on English common law makes it a natural place to attract US, and UK business in particular.
RPO stands for Recruitment Process Outsourcing and deals primarily with human resources - and in particular recruitment. Research process outsourcing (also RPO) is relevant to the biotech industry in particular, where clients outsource their research and development work to medical researchers.
HRO stands for Human Resource Outsourcing. Outsourcing HR allows a company to take advantage of knowledgeable HR professionals who have expertise in contracting, salary, promotion, employee rights, evaluation, and professional development. HR is comprised of more than just hiring. It includes payroll management, training, staffing, benefits administration, travel and expenses management, retirement and benefits planning, risk management, compensation consulting, etc. In the US context, HR represent the primary and biggest example of BPO. Between 29-30 per cent of the BPO market is comprised of HR outsourcing.
Information technology outsourcing (ITO) refers to the outsourcing of software management, internet services, network management, servers, and digital protocols. ITO can involve everything from database management, website building, server and network management to mobile technology policy.
Market Demand for BPO
In terms of outsourcing, BPO is among the fastest growing sectors. Price sensitivity is driving the industry and provoking growth. However, businesses are also realizing efficiency gains, lowering risk, shortening the product development cycle, and fostering innovation. Concrete benefits include:
- Lower Operating Costs
- Improved Automation
- More Flexibility In Scaling
- Access To Experts And Technology
- Smarter Analytics About Both Consumers And Products
Outsourcing, increasingly a common business strategy, can result in significant competitive advantage.
Grant Thornton’s 2014 International Business Report , reveals intriguing trends in the outsourcing markets:
- Globally, 40% of business leaders currently or have plans to outsource business processes.
- Amongst larger businesses BPO is even more popular with 43% of larger businesses reporting usage of or plans for BPO.
- The larger the company, the more impact outsourcing can have on profit margins.
- Businesses in Spain are outsourcing 70% of the business practices, and businesses in Italy 62%.
- Argentinians and Brazilians among Latin American countries are large outsourcers with 64 and 53 per cent respectively being contracted out.
- In Africa, Botswana (68%) and South Africa (48%) are also capitalizing on the trend.
- Meanwhile, only 26% of businesses in southeast Asia are outsourcing business.
Grant Thornton also reports that, worldwide, tax services, which account for half of all BPOs, are more likely to be outsourced than anything else:
- 64% of all BPOs relate to taxes in North America and 58% in the G7 and Latin America.
- Larger companies are more likely to outsource tax services then SMBs.
- Though the market is smaller in Asia for BPOs, taxes capture the market share in Asia Pacific.
- IT services (46%) rank second globally; 52% of European businesses either currently or have plans to outsource IT. The Nordics, Southern and Eastern Europe are driving this statistic.
- HR-Payroll with 36% of all BPOs comes third globally, driven by the 55% of North American businesses.
- Like taxes, users of HR BPO are more likely to be of a larger scale. 40% of larger businesses outsource this function.
- A further 36% of all businesses outsource (or plan to outsource) other services which could include financial planning and bookkeeping.
In 2015, the main the main criteria based on which a business selected a service provider were reliability and cost.
Key Factors in the Growth of BPO
Developing nations that have, in the last two decades, made investments in infrastructure and education are set to reap the advantages of the the global movement of BPO. For the BPO sector, a confluence of factors has led to significant growth: a large pool of educated, english speaking labour, paired with high-speed wireless network penetration has meant that working across borders, space and time has never been easier or more cost-effective.
Economies of scale have also contributed to the profit potential for the BPO sector. The BPO sector has capitalized on the wage differential between the Global South and North so that companies in the North and West can take advantage of lower costs. BPO conforms to the theory of comparative advantage which states that countries benefit by exporting goods and services when they are cheaper to be made in the home country and benefit by importing goods and services from countries where they are cheap.
Finally, the BPO phenomenon has also been driven by demographics. As populations in the Global north and west age, and as populations in the south and east are younger, a huge pool of skilled workers represents massive potential for the growth of BPO. Price sensitivity as a result of the 2008 recession has led to the growth of the BPO sector amongst this skilled workforce.
The demand for outstanding customer experience
Contact center options with a positive return on investment (ROI) have come a long way over the years with the introduction of speech analytics, speech self-service, and, on the horizon, the use of artificial intelligence (AI) and robotics.
However, contact center leaders continue to recognize the value of trained and experienced analysts who possess the knowledge and the empathy to ensure the interaction with the customer meets expectations in a timely, thorough, and successful manner.
Global BPO Market Size and Reach
The main outsourcing destinations worldwide are India, China and Malaysia (scoring above 6 on a scale of 0 to 8.
India has excellence in a range of BPO service and as such has enjoyed a positions as the undisputed leader in the field for more than a decade. In terms of scale and skill level, India has demonstrated superiority. According to the National Association of Software and Service Companies (NASSCOM), the sector today employs one million people and represents 25 percent of India's total exports. The IT services sector dominates the BPO industry. Its exports are valued at USD 40 billion. Other non IT BPO exports are valued at USD 20 billion. The relative maturity of the Indian BPO market demonstrates how the services can evolve over time. IT service firms for example are continually expanding their service. Including R&D, product development, and other niche services, drawing on their extensive experience and highly skilled workforces. As technology grows into almost every aspect of operations, the line between IT and BPO is blurring and service providers are beginning to offer bundled, specialized services that understand the centrality of technology on other sector domains and specialities.
China, which occupies the second positions behind India in terms of the quality of the BPO market, is increasingly becoming more service-oriented. Government support is gaining for analytics and IT work. However, China is already becoming less competitive as rising wages are affecting price arbitrage. The majority of customers of Chinese BPO services are domestic.
Somewhat surprisingly, owing to its small labour pool, Malaysia competes in the third place spot against nearby India and the Philippines. It has the advantage of a politically stable, multilingual environment and reasonable rates.
Emerging Market Trends
BPO services emerged as an effort to reduce labour costs, but has now become an industry in its own right - one that is increasingly adapting and innovating to improve the quality and comprehensiveness of the services offered. Clients are increasingly able to find sector specific specialists to meet even the most niche need. Corporate clients have come to expect that BPO service providers will be able to offer analytics and big data services, in addition to traditional services.
In order to remain competitive BPO service providers will, in the coming years, have to broaden their service offerings by hiring sector-specific employees, gaining intellectual property, taking advantage of automation, and building a global network.
Business process improvement (BPI) is a trend to watch as it is expected to play a central role in the growth of BPO services in the coming years. BPO vendors must constantly be working to improve the quality and efficiency of their services. They will, like every other business, have to increasingly use social media to strategically target both talent and clients. They will have to reckon with increasing security fears and will likely move to private cloud model, rather than the less expensive public cloud. Using new platforms will allow BPO’s to help their clients gain new advantages by offering them advancement in automation, security and effectiveness.
Automation platforms are benefitting from advances in cognitive computing. Machines are increasingly able to understand, learn, communication, delegate and problem solve. Robotic process automation (RPA) is the convergence of low-cost, easy-to-implement process automation, leveraged by machine learning, data analytics, and cognitive innovations. It represents a new species of digital labour which can be applied to many tasks currently performed by human labour. Pew Research Center reports that the majority of 1,896 experts who responded to a study believe that robots and digital agents, who work at a fraction of the cost of an offshore FTE, will replace a large number of human labourers by 2025.
The future of work is very different than the past, or event the present. Because of the intersection of technology with education, economies are poised to take advantages of emerging trends. Many classes of jobs will be delegated to robotics, but in parallel, many jobs will be generated in creative and curating activities. Demand for creative services will grow as barriers to entry will continue to be diminished. For these class of jobs, robots will remain poor substitutes.
Robotic Process Automation has the potential to impact every single one of the functions described by BPO services. Currently, the technology is relatively immature; it can replicate the basic transactional tasks, probably impacting around 20% of processes. This percentage will most certainly increase as the technology becomes more sophisticated. The BPO industry will likely react by changing its business model to adopt RPA as a core capability. Though currently, most BPO providers are resistant to RPA, the threat is poses will have to addressed sooner rather than later.
The BPO sector will also, at some stage, have to confront the possibility that large companies will adopt a DIY approach by bringing automation in house, while third parties will be retained only in a consultative way. As software and automation technology becomes more accessible, the advantage that BPO providers currently have to reduce labour costs by up to 20% will be eroded by automating business processes in house.
However, the argument against automation remains that there are jobs that robots are not capable of performing. Empathy, creativity, judgment, or critical thinking—are required for many jobs, and as such, these types of jobs will never be threatened by widespread automation.
Industry Growth Potential and Projections
According to Global Industry Analysts, Inc., the global market for BPO is projected to reach USD $220 billion by 2020, driven by the mounting pressure among companies to rationalize costs, improve operational performance and increase customer satisfaction.
As stated in the report, the US represents the largest market worldwide. Asia-Pacific ranks as the fastest growing market with a CAGR of 10%. India still outcompetes in terms of being a lucrative destination for BPO services. Meanwhile, the Philippines will emerge as a strong competitor.
In reviewing IT-BPO outsourcing contracts signed in the last three years, from 2013 to 2015, KPMG identifies major trends influencing the BPO market globally and reveals that in 2015:
- the value of the 891 contracts signed globally had a total value of USD 159.1 billion.
- The sector has grown in value over the period with 2015 seeing the most contract activity.
- The average value of contracts has consistently risen. Though contracts signed by the Defense and Government sectors have continued to decline in comparison with other sectors, like Automotive and Aerospace, Insurance and Retail have all seen growth since 2014.