Business process outsourcing is a growing sector, and for good reason.
Most companies are outsourcing something, even if they are not thinking about it as outsourcing. Besides knowing what business process outsourcing is and how it works, companies should consider what benefits they are hoping to win, and what services are core to their businesses before they get started themselves.
What is business process outsourcing?
Business process outsourcing, or BPO, is a form of outsourcing where one company delegates one or more of its business processes to another company. The most common type of business process outsourcing deals with administrative work, such as accounting, IT infrastructure, HR, and payment processing. Together these are referred to as “back-office functions”. Another type of outsourcing deals with the customer facing “front-end functions,” such as customer service, sales, and marketing.
The outsourcing industry has been growing fast since it first appeared as a term in the 1970s. Back then, large manufacturing companies sought to lower the costs of non-essential processes. Today, it’s common practice in most industries and new technology and globalization have made outsourcing available to smaller companies as well.
Marketline reported that the global revenue for the BPO industry grew by an average of 3.3% between 2013 to 2017. The total revenue for BPO services in 2017 was $144.9 billion according to the report, with the US being the largest market.
Advantages and disadvantages of BPO
There are several advantages of business process outsourcing. The first that comes to mind is cost savings from outsourcing to countries with lower labor costs. However, today there are many more benefits to outsourcing that companies seek to leverage. With processes contracted out to vendors rather than kept in-house, companies enjoy more flexibility in both their budgets and in the way they operate. They can also focus more internally on their own competitive advantage, and source new innovations from strategic outsourcing partners.
On the flipside, there are also disadvantages of business process outsourcing. Some have to do with the costs of finding the right vendors and managing the relationships, others with the risks of getting a substandard quality result and the consequences of that. There are also potential strategic disadvantages, such as becoming too dependent on the outsourcing partner–especially if the outsourced processes are critical to the business or create lock-in effects with the vendor.
5 reasons businesses outsource their processes
There are several reasons companies decide to outsource their processes. For some, it’s a strategic decision to gain competitive advantages. For others, it just makes the most sense for a particular function of the business.
1. Decrease costs
BPO started as a way to decrease cost for processes that were non-essential to the business. With globalization and access to emerging economies, companies have been able to get jobs done for less offshore. Vendors in markets with lower labor costs and better tax conditions can offer better prices due to lower costs alone. Add to that the competitive pressures of being a supplier among many for a commodity service, and you have a market that’s working at its best to keep prices down.
2. Expand global presence
In the front-end functions especially, outsourcing can help with reaching customers across the globe. Call centers that operate overseas make it easier to support customers in different time zones, and local presence can help larger companies get access to new markets.
Additionally, companies that seek strategic outsourcing partners to drive innovation can tap into business clusters in regions where science has advanced further than anywhere else. Silicon Valley is a good example of where the business infrastructure, ecosystem and talent give access to innovations that may not be available for companies in other parts of the world.
3. Become more flexible
It’s a well-known fact that companies tend to stay in their wheel tracks for longer than they should when the winds of change are blowing. Inertia and internal resistance makes strategic changes a slow process. When outsourcing processes on the other hand, it’s normally easier to both scale the amount of resources used, and to adjust the operative direction of how those processes are performed. If the current vendor has the same problems with adjusting to new requirements, there’s always the possibility of changing vendors.
4. Enhance speed and efficiency
When outsourcing a process to an outside vendor, it’s likely that they have invested time and resources in perfecting the specific services that they offer. With more experience, specialized machines and optimized processes, they should be able to perform tasks faster and more efficiently than in-house teams working in companies where the process would be non-essential to the business.
5. Focus on core competencies
To be competitive in a global market, it’s necessary for companies to find and continuously improve on the most essential skills, products and services that they offer. With non-critical processes out of the way and handled by vendors, companies find more room for doing just that–improving on what they can do best.
Different companies within the same industry define their core differently. Among digital agencies, some see web design as one of their core strengths and outsource only web development. Others focus on customer journey and advertising and outsource both web design and web development.
Core BPO categories
BPO is often categorized according to the proximity of the vendor to the buying company, which affects the types of benefits and relationships that are available.
Offshore BPO vendors are located in countries that are far away from where the buying company is located. Normally, this would indicate that the outsourcing vendor can offer something that is not available domestically or in any of the neighboring countries, such as lower labor costs.
In the early days of outsourcing, this option was only available to the large companies that could afford to travel and learn to do business where the cultures and regulations are different. Today it’s not only a luxury of large companies, thanks to communication technology and the fact that most markets are welcoming foreign business.
Outsourcing processes to vendors in neighboring countries is referred to as “nearshoring”. Nearshore vendors can be assumed to be more similar to local vendors in terms of culture, labor costs and tax regulations than offshore vendors.
The final category of vendors is onshore vendors, that are located in the same country as the buying company. Labor costs and regulations are likely to be similar, except for differences between states. Hence, the main benefits of outsourcing to an onshore vendor are specialization, both internally and for the vendor, and flexibility.
5 examples of companies that outsource services
Most companies today work with business process outsourcing in one way or another. Here are a few business process outsourcing examples to illustrate its reach across different sectors.
Coca-Cola is an interesting example of how outsourcing can help both with global presence and focus. Production is not the key to their success, so they’ve outsourced that process via franchising to companies closer to each market. The syrup and its recipe are kept internally, but the bottling and distribution is performed by other companies.
2. United Airlines
United Airlines and many other airlines outsource the low-wage jobs that are needed on the ground within the airports. It helps decrease the costs, but the lower wages paid by contractors as compared to what the airlines normally charge have sparked protests from labor unions. In a comparison reported by Travel Weekly, the average salary of contracted workers was approximately 64% of what airline employees were paid for similar jobs. Not surprisingly, the share of contracted workers has increased by 50% since 2002.
About half of all smartphone owners in the US can see proof of another outsourcing example right in their pockets. The text on the back of the iPhone reads “Designed by Apple in California. Assembled in China”, and there are several reasons why Apple has production in China and not in the US. One important reason is to be able to cope with the volume of products, which requires both an ecosystem of suppliers in the area and access to workers.
Smaller companies make use of the benefits of BPO as well. The sporting equipment company Spikeball uses Bill.com to manage payments, claiming that they otherwise would have needed a full-time person doing that internally. Such back-end functions are especially useful for startups and smaller companies to outsource. Either because they don’t want to, or or because they cannot afford to, keep people on the payroll to handle non-core processes like administrative work.
An outsider in this list is Tesla, as they have decided not to outsource dealerships and charging stations like most other auto manufacturers do. Instead, they are betting on vertical integration of these businesses to keep closer control over them. Surveys have shown that customers are very satisfied with the services provided by Tesla on those services, but it has been an expensive investment and it remains to be seen how it pays off in the long run.
Complexity of BPO relationships
If you consider setting up a BPO agreement with a vendor, it’s good to analyze what characteristics the partnership will have before you choose a vendor and draft a contract. Three key dimensions to analyze are independence, complexity and strategic importance. “Strategic BPO” and “hands-off BPO” are two common archetypes of those three dimensions.
Strategic BPO relationships
Working with strategic BPO partners means rich interaction around a non-trivial business function. For instance, it could be a service development project, or the manufacture of a product where the product design and production process require mutual adaptations.
Such high-complexity and strategically important partnerships need to be carefully managed from both sides. The interaction between the parties will focus on coordination of activities, such as process development and planning.
Hands-off BPO relationships
For standardized services, there’s less need for coordination within the outsourcing partnership. The outsourcing vendor knows what to do, the buyer knows what to expect and the communication and managerial priorities will revolve around negotiating price and making sure delivery dates and quality standards are met.
The relationship can be kept at an arm's-length distance, meaning less costs involved from the buyer’s side as the outsourcing vendor enjoys more independence, and less need for the two parties to make a good cultural fit.
Business process outsourcing success factors
Before rounding off the topic, we wanted to leave you with a quick teaser to inspire you to learn more about BPO. After learning what it is and how it works, you’re probably eager to learn how to successfully do it.
Here’s a quick summary of the “nine keys” that they identified:
The leaders responsible for the relationship in each organization
Focusing on more benefits than just cost efficiency
Change management capabilities
Managing the relationship as a partnership
Setting up the remaining organization correctly after outsourcing a part of it
Effective conflict resolution practices
Use of technology for coordination and optimization
Using the vendor’s domain expertise to improve analytics and thereby performance
Incentivizing and pursuing innovations
As seen from this list, many skills and processes are required to master BPO. If it’s core to your business, knowing how to outsource processes exceptionally well could become a competitive advantage in itself. If not, perhaps you can outsource the process of outsourcing, too.
Finally, let’s see what Leslie Willcocks, one of the authors of the book about World-class BPO just mentioned, has to say about the future of outsourcing. Two things he projects are that there are going to be “digital businesses” supported by outsourcing, and that knowledge work will also become automated by outsourcing providers that can manage unstructured data:
Business process outsourcing has allowed many companies to invest more resources in their core businesses, lower their costs and be more agile in their operations. It’s been a growing industry for many years, and there’s no change to be seen on that horizon anytime soon.
The concept of outsourcing spans many types of industries, services, and purposes, so the examples of how companies make use of outsourcing are very different. Large companies like Coca-Cola and Apple are dependent on strategic partners for producing their products. Many others like United Airlines benefit from contracting lower-wage jobs instead of hiring internal staff.
To be successful at outsourcing business processes, it’s important to consider what type of relationship is required. Choosing a partner that you have difficulty communicating with may be alright for a hands-off style partnership, but if you’re co-investing in a complex process you need to make sure that there’s mutual trust and the right conditions for good coordination between the parties.
Daniel Corin Stig is a board member and former CEO of White Label Agency, a WordPress outsourcing company that helps digital agencies get more development capacity for their web projects. Daniel has a PhD in Technology Management from Chalmers University of Technology in Sweden.