What Is Business Process Outsourcing (BPO)?

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.

Key Takeaways

  • Business process outsourcing (BPO) utilizes third-party vendors or subcontractors to carry out certain parts of their business operations.
  • BPO began with large manufacturing companies to aid with supply chain management, but today BPO has grown to include all sorts of sectors, including services companies.
  • BPO will be considered "offshore outsourcing" if the vendor or subcontractor is located in a different country; for instance, in the case of customer support.

Understanding Business Process Outsourcing (BPO)

Many businesses, from small startups to large companies, opt to outsource processes, as new and innovative services are increasingly available in today's ever-changing, highly competitive business climate.

Broadly speaking, companies adopt BPO practices in the two main areas of back-office and front office operations. Back office BPO refers to a company contracting its core business support operations such as accounting, payment processing, IT services, human resources, regulatory compliance, and quality assurance to outside professionals who ensure the business runs smoothly.

By contrast, front office BPO tasks commonly include customer-related services such as tech support, sales, and marketing.

Business process outsourcing is on the climb, evidenced by the fact that in 2017, the estimated global market size of outsourced services was 88.9 billion U.S. dollars, which was up $12 billion from the previous year.

Special Considerations

The breadth of a business' BPO options depends on whether it contracts its operations within or outside the borders of its home country. BPO is deemed "offshore outsourcing" if the contract is sent to another country where there is political stability, lower labor costs, and/or tax savings. A U.S. company using an offshore BPO vendor in Singapore is one such example of offshore outsourcing.

BPO is referred to as "nearshore outsourcing" if the job is contracted to a neighboring country. Such would be the case if a U.S. company partnered with a BPO vendor located in Canada.

A third option, known as "onshore outsourcing" or "domestic sourcing," occurs when BPO is contracted within the company’s own country, even if its vendor partners are located in different cities or states.

BPO is often referred to as information technology-enabled services (ITES) because it relies on technology/infrastructure that enables external companies to efficiently perform their roles.

The Attraction of Business Process Outsourcing

Companies are often drawn to BPO because it affords them greater operational flexibility. By outsourcing non-core and administrative functions, companies can reallocate time and resources to core competencies like customer relations and product leadership, which ultimately results in advantages over competing businesses in their industry.

BPO offers businesses access to innovative technological resources that they might not otherwise have exposure to. BPO partners and companies constantly strive to improve their processes by adopting the most recent technologies and practices.

Since the U.S. corporate income tax is among the highest in the developed world, American companies benefit from outsourcing operations to countries with lower income taxes and cheaper labor forces as viable cost reduction measures.

BPO also offers companies the benefits of quick and accurate reporting, improved productivity, and the ability to swiftly reassign its resources, when necessary.

Some Disadvantages of BPO

While there are many advantages of BPO, there are also disadvantages. A business that outsources its business processes may be prone to data breaches or have communication issues that delay project completion, and such businesses may underestimate the running costs of BPO providers.

Another disadvantage could be customer backlash against outsourcing if they perceive this to be of inferior quality or at the expense of domestic employment.

What Is the Goal of BPO and What Are Its Types?

BPO is the abbreviation for business process outsourcing, which refers to when companies outsource business processes to a third-party (external) company. The primary goal is to cut costs, free up time, and focus on core aspects of the business. The two types of BPO are front office and back office. Back-office BPO entails the internal aspects of a business, such as payroll, inventory purchasing, and billing. Front-office BPO focuses on activities external to the company, such as marketing and customer service.

What Are the Advantages of BPO?

There are numerous advantages to BPO. One of the primary advantages is that it lowers costs. Performing a certain job function internally costs a specific amount. BPO can reduce these costs by outsourcing this job to an external party, often in a less cost-intensive country, reducing the overall cost of performing that job function.

Other advantages include a company being allowed to focus on core business functions that are critical to its success, rather than administrative tasks or other aspects of running a company that are not critical. BPO also helps with growth, particularly in global expansion. If a company is interested in opening an overseas branch or operating overseas, utilizing a BPO company that has experience in the local industry and that speaks the language is extremely beneficial.

What Are the Types of BPO Companies?

There are three primary types of BPO companies. These are local outsourcing, offshore outsourcing, and nearshore outsourcing. Local outsourcing is a company that is in the same country as your business. Offshore outsourcing is a company that is in another country, and nearshore outsourcing is a company that is in a country that is not too far from your country.