November 5, 2024
by Daniel Corin Stig / November 5, 2024
Leaders are continually exploring avenues to boost efficiency and minimize operational costs. One example is implementing automation tools, which can streamline repetitive tasks and liberate valuable employee time for more strategic initiatives.
However, many struggle to balance core functions while managing complex processes, leading to bottlenecks that hinder growth. This is where Business Process Outsourcing (BPO) comes into play, offering a strategic solution to offload non-core tasks and focus on what truly matters—growing your business.
Business process optimization is the process of increasing operational efficiency by improving various workflows. This discipline of business process management (BPM) allows companies to focus on their core competencies while outsourcing non-essential tasks.
To maximize the benefits of outsourcing, integrating effective Business Process Management (BPM) software can further enhance workflow visibility and performance, ensuring that every aspect of your operations is optimized for success.
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.
is the projected revenue for the Business Process Outsourcing (BPO) market in 2024
Source: Statista
For some businesses, outsourcing is a strategic decision to gain competitive advantages. For others, it just makes the most sense for a particular function of the business. There are several reasons companies decide to outsource their processes:
BPO started as a way to decrease costs 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.
In front-end functions especially, outsourcing can help reach 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 a place where business infrastructure, ecosystem, and talent give access to innovations that may not be available to companies in other parts of the world.
It’s a well-known fact that companies tend to stay in their tracks for longer than they should when the winds of change are blowing. Inertia and internal resistance make strategic changes a slow process. On the other hand, outsourcing processes is normally easier to scale the amount of resources used and 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.
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.
To be competitive in a global market, it’s necessary for companies to find and continuously improve on the 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.
Understanding how BPO works is essential for companies looking to enhance their performance and reduce costs
BPO is often categorized according to the vendor's proximity to the buying company, which affects the types of benefits and relationships that are available.
Offshore BPO vendors are located in countries far away from where the buying company is located. This would normally 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 were different. Today, it’s not only a luxury of large companies, thanks to advancements in technology and the fact that most markets are welcoming foreign business.
Example: A U.S.-based company outsourcing its human resource operations to a vendor in the Philippines. The Philippines has a strong English-speaking workforce and cultural affinity with the U.S., making it an appealing choice.
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.
Example: A Canadian company outsourcing its IT support to a vendor in Mexico. The proximity allows for effective communication and collaboration, and the cultural similarities help ensure a smoother working relationship.
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.
Example: A retail company outsourcing its marketing services to an onshore agency in New York. By doing so, the company can tap into specialized marketing expertise and creative talent while maintaining close collaboration with the vendor.
If you are considering 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
Working with strategic BPO partners or BPO agencies 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.
Both sides need to carefully manage such high-complexity and strategically important partnerships. The interaction between the parties will focus on coordinating activities such as process development and planning.
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 prices and making sure delivery dates and quality standards are met.
The relationship can be kept at an arm's length distance, meaning less costs for the buyer’s side as the outsourcing vendor enjoys more independence and less need for the two parties to make a good cultural fit.
Most companies today work with business process management in one way or another.
Front office roles that can be outsourced:
Back office roles that can be outsourced:
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 are performed by other companies.
iPhone owners 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.
An outsider in this list is Tesla, as they have decided not to outsource dealerships and charging stations as 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.
By transferring specific business functions to external vendors, companies can leverage a range of advantages that contribute to their overall success. Below are some key benefits of business process outsourcing:
On the flip side, there are several disadvantages associated with business process outsourcing. While it offers numerous benefits, organizations must also navigate various challenges. Some of these challenges include:
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.
In their book ”Nine Keys to World-Class Business Process Outsourcing,” Mary Lacity and Leslie Willcocks draw on over 2,500 interviews with executives across the globe to define ways to improve the chance of success in an outsourcing setup.
Here’s a quick summary of the book:
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 on the horizon anytime soon.
To be successful at outsourcing business processes, it’s important to consider the type of relationship required. Choosing a partner with whom you have difficulty communicating 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.
Enhance your organizational efficiency by automating complete processes using digital process automation (DPA) software.
This article was originally published in 2020. It has been updated with new information.
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.
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