What is Business Process Outsourcing - BPO

Business process outsourcing (BPO) is a method of subcontracting various business-related operations to third-party vendors. When business process outsourcing began, it applied chiefly to manufacturing entities, such as soft drink manufacturers that outsourced large segments of their supply chains. However, it is now applicable to the outsourcing of services.

BREAKING DOWN Business Process Outsourcing - BPO

Many businesses, from small startups to large companies, choose to outsource processes as new and innovative services are being offered in an ever-changing, highly competitive business climate. Two areas in which companies adopt business process outsourcing are in the back office and front office. People who work in the back office are typically tasked with internal business functions, such as logistics, collections and receivables or procurement. Back office outsourcing refers to contracting a company’s core business operations — accounting, payment processing, IT services, human resources, regulatory compliance, quality assurance, etc. — to well versed professionals who can ensure that the business runs smoothly.

Examples of commonly outsourced front office tasks include customer-related services like tech support, inbound and outbound sales, trading and marketing.

A business has multiple BPO options, depending upon whether it contracts its operations within or outside the borders of its home country. Business process outsourcing is considered offshore outsourcing if the contract is sent to another country where there is both political stability and lower labor costs or tax savings, for example, a U.S. company using an offshore BPO vendor in Singapore. BPO is referred to as nearshore outsourcing if the job is contracted to a neighboring country, for example, a U.S. company using a nearshore BPO vendor in Canada. Another option is onshore outsourcing, or domestic sourcing. This is BPO contracted within the company’s own country, although the vendors may be located in a different city or state, for instance, a company in Boston using an onshore BPO vendor in Philadelphia.

Because BPO often depends on necessary technology/infrastructure that allows external companies to efficiently perform their roles, it’s frequently referred to as information technology-enabled services (ITES).

The main advantage that business process outsourcing offers a company is flexibility. By outsourcing non-core and administrative functions, a company can better allocate resources and time to its core competencies, such as customer relations, product leadership or operational excellence. A business that is able to perfect its core operations develops a competitive advantage over competing businesses in its industry.

BPO offers businesses the opportunity to access the latest technological resources that they might not otherwise have access to. BPO partners and companies are constantly working on improving their processes by adopting the most recent technologies and practices in order to excel in a highly competitive environment.

Since the U.S. corporate income tax is one of the highest in the developed world, U.S. companies benefit from outsourcing operations to countries with a lower income tax, because businesses pay the tax rate of their host country. This serves as a form of cost reduction without having to sacrifice quality for a company that outsources some of its business operations. The business also saves expenses if it outsources to a location where in-house labor costs are significantly lower than its home country’s or city’s costs.

Other benefits of business process outsourcing include quick and accurate reporting, improved productivity, the ability to reassign resources, increase in organizational growth due to capital and asset expenditures not required, expansion of business’ global presence and more.

While there are many advantages of BPO, there are also disadvantages. A business that outsources its business processes may be prone to data breaches, communication issues that delay project completion, underestimating running costs and overdependence on BPO providers.