Today’s global market is highly competitive and ever changing. In order for a company to survive in this dynamic environment, effective methods have to be developed in which to improve productivity in the most cost effective ways possible. One strategy that has gained increasing popularity over the past few years is called Business Process Outsourcing (BPO). A definition given of BPO by NelsonHall describes it as a process whereby the outsourcing of business functions or processes are handed over to a third party. In these contracts the provider is responsible for performing and managing the outsourced function or process on behalf of the customer.
In other words, BPO is the leveraging of technology or specialist process vendors to provide and manage an organisation’s processes and applications. Some of the most common processes which are outsourced include customer service call centres, accounting and payroll, and human resources. It is very often found that the use of offshore resources tend to be more economically viable in some BPO models, and many companies choose this option when outsourcing non-core operations such as back or front office operations typically performed by white collar and clerical workers.
Use of a BPO as opposed to an application service provider (ASP) usually also means that a certain amount of risk is transferred to the company that is running the process elements on behalf of the outsourcer. BPO includes the software, the process management, and the people who operate the service, while a typical ASP model includes only the provision of access to functionalities and features provided or ‘served up’ through the use of software, usually via web browser, to the customer. Offshoring is similar to BPO, but differs slightly in that it means the work is generally transferred to a different company in another country. Insourcing and captive service are terms that refer to the use of subcontractors within an organisation created to deal specifically with a certain task or process.
As of late the trend towards BPO has become increasingly popular. The main motive behind BPO is to allow an organisation to invest more time, money and human resources into core activities such as building strategies for the development and growth of its business interests. It has grown to such an extent that managers no longer need to justify a decision to outsource a process, but rather in some cases need to justify why work should be done internally, when it could easily be outsourced in a more cost effective manner.
Although BPO might at first glance seem like a convenient way of delegating processes which are not of the most importance to an organisation, this is not always the case. In many instances the focus of BPO is on competencies, meaning that a process which is integral to the successful functioning of the organisation will be delegated to an external service provider who has a very high level of expertise in the given field. Examples of such processes include data analysis, engineering design and medical coding and transcription.
Despite its ever increasing popularity, recent research by firms such as Gartner and Forrester warn that the cost savings envisioned by BPO deals may not always live up to their expectations. This is mainly due to the fact that no two organisations are alike, and therefore cannot adopt the same outsourcing model to go with their business structure. This has lead to the fact that the rewards and risks of BPO have to be constantly evaluated to be understood by individual companies. As enterprises and service providers evolve, it has become clear that there is no right model for a given company. Instead, enterprises will use parts of a model or a combination of models as they begin to explore and iron out the issues around business processes outsourcing.
In a report published by Gartner Research, it is suggested that three criteria be used to evaluate the use of outsourcing:
- Firstly, enterprises should consider the exact reason for outsourcing: Is it to focus on core business, improve service levels, to benefit from industry best practices or reduce transaction costs?
- Secondly, enterprises need to consider the specific processes they would like to outsource. Repetitive, transaction-intensive are the best choices for offshore outsourcing. At the same time, many enterprises looking at end-to-end business processing do not want to give up control of the process because of strategic and security concerns. In this situation, offshore insourcing or captive service centres are viable options.
- Finally the enterprise has to consider how well the function is currently performed. If it has benchmarks which are currently outperforming the industry standard, offshore insourcing may be the best bet, whilst on the other hand, if statistics show a less than average performance, outsourcing may be the best option.
Some criticisms of BPO include the fact that quality of service might degrade due to outsourced workers not actually being paid agents of the company. It has been argued that there is less incentive for an agent to show loyalty or work ethic in its representation of the client. Furthermore, BPO has been criticised as having a negative effect on local economies by taking away job opportunities from the population in countries such as the USA and UK. Another criticism worth noting and which is of greater financial concern to the companies involved is that of security risks. Many measures have been taken to combat these risks in various ways, but it cannot be denied that they are a reality that has to be dealt with.
The main benefits of outsourcing include:
- Potential to increase product quality, whilst lowering costs
- Developing countries benefit from patronage of companies that outsource to them, in terms of increased wages, job prestige, education and quality of life.
- With the ability to purchase intellectual capital, businesses have the ability to utilize the know-how of other organisations.
- Outsourcing provides an organization with the ability to focus on distinctive core competencies which will help yield long term benefits.
- Through the contract development of any outsourcing contract, organisations have the ability to determine and better anticipate any future costs. Through bids vendors have the ability to make offers to perform the outsourcing for a given project. When a bid has been accepted the organization has an exact figure illustrating what the expense will be to outsource the project.
When considering the use of BPO for your business, it is in general good practice to consider the above mentioned principles in order to make the most effective decision for your organisation. BPO is a very popular and efficient way increasing your business’s productivity, but in order to make the most of this method, it needs to be implemented in the correct manner.