Business process outsourcing

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Business Process Outsourcing (BPO) is a subset of outsourcing that involves the contracting of the operations and responsibilities of a specific business process to a second-party service provider. Originally, this was associated with manufacturing firms, such as Coca-Cola that outsourced large segments of its supply chain. [1]

Contents

BPO is typically categorized into back office outsourcing, which includes internal business functions such as human resources or finance and accounting, and front office outsourcing, which includes customer-related services such as contact centre (customer care) services. [2]

BPO that is contracted outside a company's country is called offshore outsourcing. BPO that is contracted to a company's neighbouring (or nearby) country is called nearshore outsourcing.

Often the business processes are information technology-based, and are referred to as ITES-BPO, where ITES stands for Information Technology Enabled Service. [3] Knowledge process outsourcing (KPO) and legal process outsourcing (LPO) are some of the sub-segments of business process outsourcing industry.

Benefits

The main advantage of any BPO is the way in which it helps increase a company's flexibility. In early 2000s BPO was all about cost efficiency, which allowed a certain level of flexibility at the time. Due to technological advances and changes in the industry (specifically the move to more service-based rather than product-based contracts), companies who choose to outsource their back-office increasingly look for time flexibility and direct quality control. [4] Business process outsourcing enhances the flexibility of an organization in different ways:

Although the above-mentioned arguments favour the view that BPO increases the flexibility of organizations, management needs to be careful with the implementation of it as there are issues, which work against these advantages. Among problems, which arise in practice are: A failure to meet service levels, unclear contractual issues, changing requirements and unforeseen charges, and a dependence on the BPO which reduces flexibility. Consequently, these challenges need to be considered before a company decides to engage in business process outsourcing. [15]

A further issue is that in many cases there is little that differentiates the BPO providers other than size. They often provide similar services, have similar geographic footprints, leverage similar technology stacks, and have similar Quality Improvement approaches. [16]

Threats

Risk is the major drawback with business process outsourcing. Outsourcing of an information system, for example, can cause security risks both from a communication and from a privacy perspective. For example, security of North American or European company data is more difficult to maintain when accessed or controlled in other countries. From a knowledge perspective, a changing attitude in employees, underestimation of running costs and the major risk of losing independence, outsourcing leads to a different relationship between an organization and its contractor. [17] [18]

Risks and threats of outsourcing must therefore be managed, to achieve any benefits. In order to manage outsourcing in a structured way, maximising positive outcome, minimising risks and avoiding any threats, a business continuity management model is set up. This model consists of a set of steps, to successfully identify, manage and control the business processes that are, or can be outsourced. [19]

Analytic hierarchy process is a framework of BPO focused on identifying potential outsourceable information systems. [20] L. Willcocks, M. Lacity and G. Fitzgerald identify several contracting problems companies face, ranging from unclear contract formatting, to a lack of understanding of technical IT processes. [21]

Technological pressures

Industry analysts have identified robotic process automation software as a potential threat to the industry [22] [23] and speculate as to the likely long term impact. [24] In the short term, however, there is likely to be little impact as existing contracts run their course: it is only reasonable to expect demand for cost efficiency and innovation to result in transformative changes at the point of contract renewals. With the average length of a BPO contract being 5 years or more [25] – and many contracts being longer – this hypothesis will take some time to play out.

On the other hand, an academic study by the London School of Economics was at pains to counter the so-called "myth" that robotic process automation will bring back many jobs from offshore. [26] One possible argument behind such an assertion is that new technology provides new opportunities for increased quality, reliability, scalability and cost control, thus enabling BPO providers to increasingly compete on an outcomes-based model rather than competing on cost alone. With the core offering potentially changing from a "lift and shift" approach based on fixed costs to a more qualitative, service-based and outcomes-based model, there is perhaps a new opportunity to grow the BPO industry with a new offering.

Financial risks

One of the primary reasons businesses choose to outsource is to reduce costs. However, this can also come with significant financial risks. If the cost of outsourcing increases due to changes in the global market or if the outsourced company increases its fees, the financial benefits can be eroded. In addition, hidden costs, such as transition and management costs, can also emerge. This can make outsourcing less financially viable than originally anticipated. [27]

Loss of control

Outsourcing also potentially leads to a loss of control over certain business operations. This can create challenges in terms of managing and coordinating these operations. Moreover, the outsourced company might not fully understand or align with the hiring company's business culture, values, and objectives, leading to potential conflicts and inefficiencies. [28]

Quality control

Quality control can become more challenging when business operations are outsourced. While third-party companies might be experts in their fields, they may not maintain the same standards as the hiring company. This can result in a decline in the quality of goods or services, potentially damaging the company's brand and customer relationships. [28]

Industry size

Convergys call center in Baguio, the Philippines (example of a third party outsourcing firm) Convergys Baguio.JPG
Convergys call center in Baguio, the Philippines (example of a third party outsourcing firm)

One estimate of the worldwide BPO market from the BPO Services Global Industry Almanac 2017, puts the size of the industry in 2016 at about US$140 billion. [29]

India, China and the Philippines are major powerhouses in the industry. In 2017, in India the BPO industry generated US$30 billion in revenue according to the National Industry Association. [30] The BPO industry is a small segment of the total outsourcing industry in India. The BPO industry workforce in India is expected to shrink by 14% in 2021.[ citation needed ]

The BPO industry and IT services industry in combination are worth a total of US$154 billion in revenue in 2017. [31] The BPO industry in the Philippines generated $22.9 billion in revenues in 2016, [32] while around 700 thousand medium and high skill jobs would be created by 2022.[ citation needed ]

In 2015, official statistics put the size of the total outsourcing industry in China, including not only the BPO industry but also IT outsourcing services, at $130.9 billion. [33]

See also

Related Research Articles

Outsourcing is a business practice in which companies use external providers to carry out business processes, that would otherwise be handled internally. Outsourcing sometimes involves transferring employees and assets from one firm to another.

Offshoring is the relocation of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting. Usually this refers to a company business, although state governments may also employ offshoring. More recently, technical and administrative services have been offshored.

Strategic sourcing is the process of developing channels of supply at the lowest total cost, not just the lowest purchase price. It expands upon traditional organisational purchasing activities to embrace all activities within the procurement cycle, from specification to receipt, payment for goods and services to sourcing production lines where the labor market would increase firms' ROI. Strategic sourcing processes aim for continuous improvement and re-evaluation of the purchasing activities of an organisation.

A contract manufacturer (CM) is a manufacturer that contracts with a firm for components or products. It is a form of outsourcing. A contract manufacturer performing packaging operations is called copacker or a contract packager. Brand name companies focus on product innovation, design and sales, while the manufacturing takes place in independent factories.

Knowledge process outsourcing (KPO) describes the outsourcing of core information-related business activities which are competitively important or form an integral part of a company's value chain. KPO requires advanced analytical and technical skills as well as a high degree of specialist expertise.

<span class="mw-page-title-main">Business process outsourcing in the Philippines</span> Overview of the process of outsourcing of various business processes

One of the most dynamic and fastest growing sectors in the Philippines is the information technology–business process outsourcing (IT-BPO) industry. The industry is composed of eight sub-sectors, namely, knowledge process outsourcing and back offices, animation, call centers, software development, game development, engineering design, and medical transcription. The IT-BPO industry plays a major role in the country's growth and development.

Business process outsourcing to India refers to the business process outsourcing services in the outsourcing industry in India, catering mainly to Western operations of multinational corporations (MNCs).

Legal outsourcing, also known as legal process outsourcing (LPO), refers to the practice of a law firm or corporation obtaining legal support services from an outside law firm or legal support services company. When the LPO provider is based in another country, the practice is called offshoring and involves the practice of outsourcing any activity except those where personal presence or contact is required, e.g. appearances in court and face-to-face negotiations. When the LPO provider is based in the same country, the practice of outsourcing includes agency work and other services requiring a physical presence, such as court appearances. This process is one of the incidents of the larger movement towards outsourcing. The most commonly offered services have been agency work, document review, legal research and writing, drafting of pleadings and briefs, and patent services.

On-demand outsourcing is a trend in outsourcing wherein major internal operations processes of a company are being shifted to a provider that is paid for by the number of transactions involved. The business transferring the services pays for the quality, special skills and the competence of the service provider's employees. There has been an expansion of the outsourcing concept to include on-demand outsourcing. This refers to the process undertaken by business managers to adopt an outsourcing policy that ensures that the specific business and supplies including technical manpower are accessed as the need arises. It focuses a business strategy to improve its goods and services and to drive a business towards quality improvement.

Global sourcing is the practice of sourcing from the global market for goods and services across geopolitical boundaries. Global sourcing often aims to exploit global efficiencies in the delivery of a product or service. These efficiencies include low cost skilled labor, low cost raw material, extreme international competition, new technology and other economic factors like tax breaks and low trade tariffs. Common examples of globally sourced products or services include labor-intensive manufactured products produced using low-cost Chinese labor, call centers staffed with low-cost English speaking workers in the Philippines, India and Pakistan, and IT work performed by low-cost programmers in India, Pakistan and Eastern Europe. While these are examples of low-cost country sourcing, global sourcing is not limited to low-cost countries.

A vendor management system (VMS) is an Internet-enabled, often Web-based application that acts as a mechanism for business to manage and procure staffing services – temporary, and, in some cases, permanent placement services – as well as outside contract or contingent labor. Typical features of a VMS application include order distribution, consolidated billing and significant enhancements in reporting capability that outperforms manual systems and processes.

Software Testing Outsourcing is software testing carried out by an independent company or a group of people not directly involved in the process of software development.

The information technology (I.T.) industry in India comprises information technology services and business process outsourcing. The share of the IT-BPM sector in the GDP of India is 7.4% in FY 2022. The IT and BPM industries' revenue is estimated at US$ 245 billion in FY 2023. The domestic revenue of the IT industry is estimated at $51 billion, and export revenue is estimated at $194 billion in FY 2023. The IT–BPM sector overall employs 5.4 million people as of March 2023. In December 2022, Union Minister of State for Electronics and IT Rajeev Chandrasekhar, in a written reply to a question in Rajya Sabha informed that IT units registered with state-run Software Technology Parks of India (STPI) and Special Economic Zones have exported software worth Rs 11.59 lakh crore in 2021–22.

Online outsourcing is the business process of contracting third-party providers, which can be overseas, to supply products or services which are delivered and paid for via the Internet.

Outsource Partners International (OPI) was acquired by EXL in June 2011. The acquisition marked the end of F&A outsourcing of OPI. OPI was a multinational company with headquarters in New York, NY and Los Angeles, CA. It operates from more than a dozen global locations throughout the US, UK, India, Bulgaria, and Malaysia. OPI was formed in 2002 through the acquisition of big four accounting firm's Business Process Outsourcing (BPO) division and itAccounts, a finance and accounting BPO company with an offshore F&A outsourcing facility in Bangalore, India. It offers finance, accounting and tax outsourcing services.

Impact sourcing, also known as socially responsible outsourcing, refers to an arm of the business process outsourcing (BPO) industry. It employs people at the base of the pyramid or socioeconomically disadvantaged individuals as principal workers in BPO centers to provide high-quality, information-based services to domestic and international clients. The traditional BPO sector is typically associated with high-end, high-contact functions like call centers, which require significant education and language literacy levels. The impact sourcing sector focuses on utilizing workers from poor and vulnerable communities to perform functions with lower and moderate skill requirements such as scanning documents, data-entry work, data verification and cleaning, video tagging, and microwork.

Third-party logistics is an organization's long term commitment of outsourcing its distribution services to third-party logistics businesses.

Robotic process automation (RPA) is a form of business process automation that is based on software robots (bots) or artificial intelligence (AI) agents. RPA should not be confused with artificial intelligence as it is based on automotive technology following a predefined workflow. It is sometimes referred to as software robotics.

The business process outsourcing industry in China including IT and other outsourcing services for onshore and export markets surpassed 1 trillion yuan in 2016 according to the Ministry of Commerce (MOC).

Accounting outsourcing, also known as finance and accounting outsourcing, is a subset of outsourcing that involves contracting operations related to accounting and other internal financial controls to a second-party service provider. Accounting outsourcing is a type of back office outsourcing, which includes internal business functions such as human resources or finance and accounting.

References

  1. ↑ Tas, J. & Sunder, S. 2004, Financial Services Business Process Outsourcing, Communications of the ACM, Vol 47, No. 5
  2. ↑ "Getting A Piece Of Business Process Outsourcing". Forbes.
  3. ↑ J. G. Nellis; David Parker (2006). Principles of Business Economics. Financial Times Prentice Hall. p. 213. ISBN   978-0-273-69306-2.
  4. ↑ Sagoo, Anoop. "How IT is reinvigorating business process outsourcing" Archived 2013-04-20 at archive.today CIO. 6 Sep 2012. Retrieved 25 March 2013.
  5. ↑ BPM Watch. "In-Sourcing Remotely: A Closer Look at an Emerging Outsourcing Trend" "In-sourcing…Remotely: A Closer Look at an Emerging Outsourcing Trend". Archived from the original on 2013-03-03. Retrieved 2013-03-25.
  6. ↑ "CIO-Asia – Boundaries between IT outsourcing and BPO are becoming blurred: Ovum". Archived from the original on 2014-10-25. Retrieved 2013-03-25.
  7. ↑ Willcocks, L., Hindle, J., Feeny, D. & Lacity, M. 2004, IT and Business Process Outsourcing: The Knowledge Potential, Information Systems Management, Vol. 21, pp 7–15
  8. ↑ Gilley, K.M., Rasheed, A. 2000. Making More by Doing Less: An Analysis of Outsourcing and its Effects on Firm Performance. Journal of Management, 26 (4): 763-790.
  9. ↑ Kakabadse, A., Kakabadse. N. 2002. Trends in Outsourcing: Contrasting USA and Europe. European Management Journal Vol. 20, No. 2: 189–198
  10. ↑ Weerakkody, Vishanth, Currie, L. Wendy and Ekanayake, Yamaya. 2003. Re-engineering business processes through application service providers – challenges, issues and complexities. Business Process Management Journal Vol. 9 No. 6: 776-794
  11. ↑ Leavy, B. 2004. Outsourcing strategies: opportunities and risk. Strategy and Leadership, 32 (6) : 20-25.
  12. ↑ Tas, Jeroen, Sunder, Shyam. 2004. Financial Services Business Process Outsourcing. Communications of the ACM. Vol. 47, No. 5
  13. ↑ "From Vertical to Virtual: How Nortel's Supplier Alliances Extend the Enterprise". Archived from the original on 2008-04-08. Retrieved 2008-02-19.
  14. ↑ (Leavy 2004, 20-25)
  15. ↑ Michel, Vaughan, Fitzgerald, Guy. 1997. The IT outsourcing market place: vendors and their selection. Journal of Information Technology 12: 223-237
  16. ↑ Adsit, D. (2009) Will a Toyota Emerge from the Pack of Me-Too BPO's?, In Queue "NACC". Archived from the original on 2009-04-10. Retrieved 2009-05-06.
  17. ↑ Bunmi Cynthia Adeleye, Fenio Annansingh and Miguel Baptista Nunes. "Risk management practices in IS outsourcing: an investigation into commercial banks in Nigeria", International Journal of Information Management 24 (2004): 167-180.
  18. ↑ K. Altinkemer, A. Chaturvedi and R. Gulati. "Information systems outsourcing: Issues and evidence", International Journal of Information Management 14- 4 (1994): 252- 268.
  19. ↑ Forbes Gibb, and Steven Buchanan. "A framework for business continuity management", International Journal of Information Management 26- 2 (2006): 128- 141.
  20. ↑ Chyan Yang and Jen-Bor Huang. "A decision model for IS outsourcing", International Journal of Information Management 20- 3 (2000): 225- 239.
  21. ↑ L. Willcocks, M. Lacity and G. Fitzgerald. "Information technology outsourcing in Europe and the USA: Assessment issues", International Journal of Information Management 15- 5 (1995): 333- 351.
  22. ↑ Robotic Automation Emerges as a Threat to Traditional Low Cost Outsourcing, HfS Research, archived from the original on 2015-09-21
  23. ↑ Gartner Predicts 2014: Business and IT Services Are Facing the End of Outsourcing as We Know It, Gartner
  24. ↑ "Visions of the Future: The Next Decade in BPO", Outsource Magazine, archived from the original on 2015-04-13
  25. ↑ Market Trends: Outsourcing Contracts, Worldwide, Gartner
  26. ↑ Robotic Process Automation at Xchanging (PDF), London School of Economics
  27. ↑ Engineering Services Outsourcing Market Size & Share Analysis – Growth Trends & Forecasts (2023–2028). Mordor Intelligence Inc. 2023.
  28. 1 2 Harland, Christine; Knight, Louise; Lamming, Richard; Walker, Helen (2005-09-01). "Outsourcing: assessing the risks and benefits for organisations, sectors and nations". International Journal of Operations & Production Management. 25 (9): 831–850. doi:10.1108/01443570510613929. ISSN   0144-3577.
  29. ↑ "The battle of the BPO titans: Eastern Europe vs. India". itproportal.com. 13 December 2018.
  30. ↑ "India holds its global edge in BPM sector with $28billion revenue". ETCIO.com.
  31. ↑ Pramanik, Ayan (12 October 2017). "BPM sector sees faster growth than IT services: Nasscom". Business Standard.
  32. ↑ "Philippine BPO industry wary of Duterte's anti-West rhetoric – Nikkei Asian Review". Archived from the original on 2017-12-08. Retrieved 2017-12-07.
  33. ↑ "China's service outsourcing grows in 2015". China Daily. January 20, 2016.
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