What Is Business Process Outsourcing and How Does It Work?

KEY TAKEAWAYS:

• BPO was first implemented back in the 18th century when large US companies hired external parties for supply chain management.
• Nowadays, BPO model spread to various industries, among which are IT, customer service, and supply chain.
• BPO allows businesses to contract out both front and back office tasks in neighboring country (nearshore BPO), in the same territory (onshore BPO), and in other countries (offshore BPO). 
• Certain agreements, documents and contracts are required to ensure hassle-free cooperation between BPO provider and client company. These include service-level agreements (SLAs), master service agreements (MSAs), statement of work (SOW), and data security and confidentiality agreement. 
• Companies must choose a trusted BPO service provider that has cost transparency as well as strict Quality Assurance and Quality Control processes.

As your customer base grew, your company may have to face immense challenges in dealing with increasing workload. At this point, it becomes necessary to outsource specific tasks to external parties. This practice is called Business Process Outsourcing (or BPO for short). You’ve probably heard of or even used this model before. One example of this is when A U.S. company partnered with a Vietnamese vendor to take advantage of cheap labor costs and infrastructure expense. 

 In this article, we’re gonna explain business process outsourcing, how BPO works, its main benefits & drawbacks as well as the most popular BPO services. 

1. BPO business process outsourcing definition

According to Sage, BPO stands for Business Process Outsourcing, which is a business practice where a company or organization contracts specific tasks to external companies. One example is hiring outside customer service and call center operations to help deal with increasing customers’ requests. BPO allows companies to focus on their core activities by delegating non-core or auxiliary processes to external professionals, thereby reducing costs and improving customer experience. 

Just when you think this is a modern model. BPO process dates back to the 18th century when companies in the United States outsourced manufacturing tasks to external suppliers. However, only after the 1990s and early 2000s when advancements in technology empowered companies to outsource various non-core functions did modern BPO gain huge popularity. 

Business process outsourcing involves outsourcing back-office or front-office functions. Back-office functions refer to internal administrative tasks and operations, such as payroll processing and inventory management. In contrast, front-office functions encompass customer-facing activities and interactions, such as sales, marketing, and customer support.

Besides, BPO comes in three main types: offshore, onshore, and nearshore. Offshore BPO involves outsourcing business processes to overseas company to take advantage of lower labor costs. Onshore BPO, however, refers to outsourcing to companies within the same country, allowing for less distance and easier communication. Lastly, nearshore BPO strikes a balance by outsourcing to service providers in neighboring or nearby countries.

Since then, BPO has become a significant part of the global business landscape. And many large companies around the world utilize BPO services to enhance competitiveness and optimize their operations.

2. How Business Process Outsourcing works

Once a company identifies which processes or tasks can be outsourced, BPO process begins. These are typically non-core functions such as customer support, data entry, accounting, human resources, and IT services. Next, the company must choose a BPO service provider based on criteria, like their expertise, track record, cost-effectiveness, and cultural compatibility.

The company and the chosen BPO provider then work together to define the objectives and expectations of the outsourcing relationship. This includes establishing key performance indicators (KPIs) and service level agreement (SLAs) to measure and monitor the quality and efficiency of the outsourced processes. The BPO company will then draw up a contract, master service agreement (MSA) or a service-level agreement to govern the outsourcing relationship. The biggest difference between these two is that while MSA sets the general terms and conditions for the business relationship, SLA defines performance metrics and service levels specific to services being provided. 

The last type of contract in BPO  process outsourcing is often called a statement of work (SOW). It is a detailed document that accompanies the MSA and SLA, specifying the scope of work, tasks, timelines, and deliverables for a specific project or set of services within the broader outsourcing relationship. Unlike the MSA and SLA, the SOW is task-specific and operational in nature, providing a detailed blueprint for the work to be performed.

3. Benefits of Business Process Outsourcing 

There are numerous advantages of business process outsourcing, including cost savings, access to top talent, focus on core functions, flexibility and risk mitigation. That is just to name a few. Here’s a closer look at these benefits.

Cost savings

BPO in company can significantly reduce operational costs as companies can access skilled labor in lower-cost regions. This includes savings in labor costs, office space, technology, and infrastructure expenses. Top countries to outsource are Vietnam, Philippines, India, and South Africa. 

Access to top talent

BPO providers often have specialized expertise in various fields, such as IT, finance, customer service, and marketing. Companies can tap into this knowledge and experience without the need for in-house training or hiring. You can access our top 5% talent pool, comprising over 500 skilled IT staff, by outsourcing to InApps technology.

Focus on core functions

Outsourcing non-core functions allows companies to concentrate on their core business activities and strategic goals, improving overall efficiency and competitiveness.

Increased flexibility

BPO arrangements can easily scale up or down to accommodate changes in business needs, such as seasonal fluctuations or growth spurts. This flexibility minimizes the risk of overstaffing or understaffing, leaving your core personnel focused on their main competencies.

Risk mitigation

Sharing certain business functions with a trusted and experienced outsourcing partner can help distribute and manage risks. For example, when the company hires outside IT staff from BPO, the hired IT experts are more likely to know how to minimize risks and maximize productivity thanks to their experience. 

4. Disadvantages of Business Process Outsourcing 

BPO, like other business practices, has pros and cons. Despite the amazing benefits to BPO, the drawbacks should be taken into equal consideration. Let’s take a closer look at some notable downsides. 

Loss of Control

When a company outsources processes, it surrenders some control over these activities. This can lead to concerns about the quality of service, adherence to company policies, and the ability to quickly address issues that may arise. Therefore, it’s important to hire a trusted BPO company that has strict quality control (QC), and quality assurance (QA) process.

Communication Challenges

 Differences in time zones, languages, and cultural norms can create communication challenges between the client and the BPO provider. Therefore, a communication plan is very much needed to ensure smooth communication. Otherwise, misunderstandings or miscommunication can lead to errors and delays.

Data Security Risks

 Sharing sensitive data with a third-party provider can pose data security and privacy risks. Data breaches or mishandling of confidential information can result in legal and reputational consequences for the client. In this case, a data security and confidentiality agreement should be included.

Hidden Costs

While outsourcing can lead to cost savings, there may be hidden costs associated with managing the outsourcing relationship, such as legal fees, travel expenses for oversight, and additional coordination efforts. Companies should make informed decisions about which outsourcing BPO they’re going to partner with. Choosing a BPO that ensures transparency in costs is, therefore, a must. 

5.  Business process outsourcing services

IT Staff outsourcing 

IT staff outsourcing, also known as IT outsourcing or IT staffing, is a business practice in which a company hires a third-party service provider to obtain IT-related services, personnel, or expertise. Instead of building an in-house IT team which is often costly and unnecessary, organizations leverage external IT professionals and resources to meet their technology needs. 

Payroll

Payroll refers to the process through which a company or organization calculates and disburses compensation (wages or salaries) to its employees for the work they have performed during a specific period. It involves various financial aspects of employment, including the calculation of gross pay, the deduction of taxes and other withholdings, and the issuance of net paychecks or direct deposits to employees. 

Obviously, processing payroll can take a lot of time, and work, so companies outsource this process to manage their payroll processes and related tasks. This can be an efficient way to ensure accurate and compliant payroll management while freeing up time and resources for core business activities.

Call Center Customer Service

Call center customer service means providing customer support and assistance to individuals or businesses through telephone to ensure best company services. These centers are specialized units or facilities within organizations dedicated to handling incoming and outgoing customer inquiries, requests, and concerns via phone calls. More often than not, in order to achieve greatest customer satisfaction, many companies do not have the time and resources to support customers 24/7. This is one of the main reasons why outsourcing call center service comes into scene.

5. Frequently Asked Questions (FAQs) 

What is an example of a business process outsourcing? Call Center Customer Service

Let’s say company A is a telecommunications company that provides mobile phone services to millions of customers.  They have to handle a high volume of customer inquiries, including billing questions, technical support, service activation, and more. To efficiently manage this workload, Company A decides to outsource its call center customer service operations to an outside BPO provider.

What is the difference between BPO and RPO?

Recruitment Process Outsourcing (RPO) is a form of Business Process Outsourcing. It serves distinct purposes within an organization. BPO focuses on operational efficiencies and cost reduction in various business functions. RPO, on the other hand, concentrates on optimizing the recruitment process and acquiring top talent to meet workforce needs.

What are five business process outsourcing services?

Five common BPO services include customer support and service, finance and accounting, human resources outsourcing, including recruitment process outsourcing (RPO) and payroll administration, IT outsourcing services, and supply chain management. 

Who is the largest BPO?

The largest business process outsourcing company in the world is currently Accenture. A multinational professional services firm that provides a wide range of services in IT services and consulting. Accenture operates in numerous countries and serves clients across various industries.

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