What Is Business Process Outsourcing?

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.

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.

Key Takeaways

  • 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.
  • 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.

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 operations such as accounting, payment processing, IT services, human resources, regulatory compliance, and quality assurance, to outside professionals who ensure the business runs smoothly. Contrarily, front office BPO tasks commonly include customer-related services such as tech support, sales, and marketing.

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.

Special Considerations

The Attraction of Business Process Outsourcing (BPO)

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 its industry.

BPO offers businesses access to innovative technological resources 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.

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, and they may underestimate the running costs of BPO providers.

[Important: 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--up $12 billion from the year prior.]