SHARING OUR THOUGHTS ON THE OUTSOURCING INDUSTRY AND MORE Business process management is about getting the work done. Love it or hate it, processes are
SHARING OUR THOUGHTS ON THE OUTSOURCING INDUSTRY AND MORE When organizations initially discussed the future of work post Covid, discussions were largely around setting expectations
We know many clients and partners whose business has been rooted in traditional ways of conducting business. They were impacted hard by (…)
Business process outsourcing (BPO) is a business practice in which an organization contracts with an external service provider to perform an essential business task.
Typically, an organization first identifies a process that is necessary for its operations yet is not part of its core value proposition in the market; this step requires a good understanding of the processes within the organization and strong business process management
Processes that are performed the same or similarly from company to company, such as payroll or accounting, are candidates for BPO.
Because these commodity processes don’t generally differentiate one organization from another, enterprise executives often determine there’s little value in having their own staff perform them. Indeed, companies calculate that outsourcing these processes to a company specializing in these processes could deliver better results.
BPO has its roots in the manufacturing industry. Manufacturers hired third-party vendors to handle parts of their supply chains after determining that the vendors could bring more skills, speed and cost efficiencies to that process than an in-house team could deliver. Over time, organizations in other industries adopted the practice.
Now, the use of BPO has expanded so much that organizations of all kinds — for-profit businesses, nonprofits and even government agencies — contract with BPO service providers in the United States, throughout North America and across the world to perform numerous processes.
Organizations engage in business process outsourcing for two main areas of work: back-office functions and front-office functions.
Back-office functions, sometimes called internal business functions, include accounting, information technology (IT) services, human resources (HR), quality assurance and payment processing.
Front-office functions include customer relation services, marketing and sales.
BPO contracts can involve outsourcing an entire functional area, such as the HR department, to a single vendor. Organizations also often outsource specific processes within a functional area. For example, an organization may outsource its payroll process but perform all other HR processes itself.
Commonly outsourced processes include the following: accounting; administration; customer services and call centers; HR; IT management and services; manufacturing; marketing; research; sales; shipping and logistics.
A survey from Clutch, a business-to-business research firm, found that small businesses most commonly outsourced their more technical tasks, with 37% outsourcing accounting, 37% outsourcing IT services and 34% outsourcing digital marketing.
For large and small businesses, the range of functions and services offered by the business process outsourcing industry has expanded greatly in recent decades.
The breadth of BPO functions spans from the conventional back- and front-office functions listed above to digital services, such as social media marketing.
In addition to these commodity functions, some companies also outsource strategic tasks, such as data mining and data analytics, both of which have emerged as essential elements for maintaining a competitive advantage in a digital economy.
Enterprise executives opt to outsource a business process for a variety of reasons.
Those reasons vary based on the type of organization, the age and size of the organization, market forces and economic conditions.
Startup companies, for example, often need to outsource back-office and front-office functions because they do not have the resources to build the staff and supporting functions to preform them in-house.
On the other hand, an established company may opt to outsource a task that it had been performing all along after an analysis determined that a third-party service provider could do the job better and at a lower cost.
Management experts advise enterprise executives to identify functions that can be outsourced and then determine if shifting that task to an outsourcing provider makes sense.
If so, the organization then must go through the process of not only identifying the best vendor for the work, but also shifting the work itself from in-house to the external provider.
This requires a significant amount of change management, as the move to an outsourced provider generally affects staff, established processes and existing workflows.
The shift to an outsourced provider also impacts the organization’s finances — not only in terms of shifting costs from the internal function to the outsourced providers, but often also in terms of corporate taxes and reporting requirements.
The organization might also have to invest in new technology to enable the smooth flow of work from the organization itself to the outsource provider, with the extent and cost of that technology product dependent on the scope of the function being outsourced and the maturity of the technology infrastructure in place at both enterprises.
In its “2020 Global Outsourcing Survey,” Deloitte found that companies use BPO to meet the following objectives:
Benefits of BPO typically cited by proponents include the following:
Organizations also take on potential risks when outsourcing business processes.
BPO risks include the following:
Deloitte found in its “2020 Global Outsourcing Survey” that enterprise leaders are focusing more on the potential risks of BPO and on the importance of risk management. Deloitte noted that “third-party ecosystems are more complex than ever, which has implications for regulatory compliance, security, risk, and data protection requirements” and noted that “the role of supplier management is more critical than ever; however, this function is still underpowered in many organizations.”
It is important to examine any security and regulatory concerns, requirements and restrictions in BPO contracts. For example, companies that are subject to regulations requiring local storage of certain types of data could be prevented from using an offshore provider in some circumstances.
Consequently, organizations seeking to outsource need to involve IT, security, legal and financial executives in the transaction, in addition to the business unit leader of the function being outsourced and the procurement office. Moreover, these executives need to be involved in periodic reviews of the outsourced function to determine whether regulatory and financial changes, as well as changing organizational strategies, render the need for changes in the outsourcing arrangements.
As an organization moves a function to a new outsourced provider, it must identify the scope of the work shifting from in-house staff to the external partner. Executives should identify the workflows and processes impacted by this shift and adjust, if necessary, those workflows and processes to accommodate the outsourcing of the work.
Executives should also identify the key objectives for outsourcing a function — whether cost savings, increased quality, quicker turnaround or some other objective — and then use that criteria to determine which provider is best suited to handle the work. Those objectives should also serve as the basis for contractual obligations that can be used to help assess the performance of the outsourced provider and success of the function once it is actually outsourced.
BPO is often divided into different types based on the service provider’s location:
Business process outsourcing is also sometimes referred to as IT-enabled services, or ITES — a name that recognizes that IT infrastructure enables outsourcing to happen.
Business process outsourcing is also sometimes referred to as IT-enabled services, or ITES — a name that recognizes that IT infrastructure enables outsourcing to happen.
Business process outsourcing is sometimes categorized by the types of services being provided; three categories commonly cited are the following:
Enterprise executives should select BPO providers who can support their business objectives, as well as help them be more agile, more flexible, faster, more innovative and, ultimately, more competitive.
According to executive advisors and management consultants, organizations should consider more than just the price of a BPO contract when choosing a provider. They must also consider how well the provider can deliver on those other points, evaluating each provider to determine whether it has the following:
Analysts predicted that the global business process outsourcing market will continue to grow.
Grand View Research, for example, predicted the BPO market will reach $435.9 billion by 2028, expanding at a compound annual growth rate of 8.5%. Researchers attributed that projected growth to ongoing demand from businesses for ways to lower their costs, although they also said that pressure on organizations to improve efficiency, customer service, innovation and flexibility is also driving the growth.
Grand View Research put the BPO market at $232.3 billion in 2020.
Future directions of the BPO industry
Executives continue to identify and reorder what they need and want from the vendors they contract with to handle their business processes.
Consider findings from service provider CGS, which surveyed more than 200 business leaders and decision-makers about what they’ll use to evaluate their BPO providers in 2021. CGS found the following:
Such findings fit with other reports showing that organizations see outsourcing decisions as an important part of their strategic planning. One such survey from Clutch found that 80% of small businesses planned to outsource in 2021 to save money, save time and/or access experts. Enterprise executives also said they planned to outsource functions as a way to support organizational growth.
BPO vendors, however, are contending with disruption as well.
The practice of business process outsourcing could be at least partially displaced in upcoming years by technology.
Robotic process automation and artificial intelligence can handle some of the business processes now frequently outsourced, and these technologies can often perform those functions at lower costs and higher speeds.
However, not all processes are easily automated; moreover, a BPO provider may be in a better position to utilize those process automation technologies than organizations are, thereby helping the BPO provider retain its appeal to organizations looking for the best way to handle business functions.
Share on:
Sign up to get updates.
We will let you know when we post new content.
