Business process outsourcing
Encyclopedia
Business process outsourcing (BPO) is a subset of outsourcing
that involves the contracting of the operations and responsibilities of specific business functions (or processes
) to a third-party service provider. Originally, this was associated with manufacturing
firms, such as Coca Cola that outsourced large segments of its supply chain. In the contemporary context, it is primarily used to refer to the outsourcing of business processing services to an outside firm, replacing in-house services with labor from an outside firm.
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
services.
BPO that is contracted outside a company's country is called offshore outsourcing
. BPO that is contracted to a company's neighboring (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. Knowledge process outsourcing
(KPO) and legal process outsourcing (LPO) are some of the sub-segments of business process outsourcing industry.
has revenues of US$10.9 billion from offshore BPO and US$30 billion from IT and total BPO (expected in FY 2008). India thus has some 5-6% share of the total BPO Industry, but a commanding 63% share of the offshore component. This 63% is a drop from the 70% offshore share that India enjoyed last year: despite the industry growing 38% in India last year, other locations like Philippines
, and South Africa
have emerged to take a share of the market. China
is also trying to grow from a very small base in this industry. However, while the BPO industry is expected to continue to grow in India, its market share of the offshore piece is expected to decline. Important centers in India
are Bangalore
, Hyderabad, Chennai
, Kolkata
, Mumbai
, Pune
, Patna
and New Delhi
.
The top five Indian BPO exporters for 2009-2010 according to NASSCOM are Genpact
, TCS BPO
, WNS Global Services
, Wipro BPO
, and Aegis Ltd.
.
Most services provided by BPO vendors are offered on a fee-for-service basis . This can help a company becoming more flexible by transforming fixed into variable costs. A variable cost structure helps a company responding to changes in required capacity and does not require a company to invest in assets, thereby making the company more flexible. Outsourcing may provide a firm with increased flexibility in its resource management and may reduce response times to major environmental changes .
Another way in which BPO contributes to a company’s flexibility is that a company is able to focus on its core competencies, without being burdened by the demands of bureaucratic restraints. Key employees are herewith released from performing non-core or administrative processes and can invest more time and energy in building the firm’s core businesses. The key lies in knowing which of the main value drivers to focus on – customer intimacy
, product leadership, or operational excellence. Focusing more on one of these drivers may help a company create a competitive edge.
A third way in which BPO increases organizational flexibility is by increasing the speed of business processes. Supply chain management with the effective use of supply chain partners and business process outsourcing increases the speed of several business processes, such as the throughput in the case of a manufacturing company.
Finally, flexibility is seen as a stage in the organizational life cycle: A company can maintain growth goals while avoiding standard business bottlenecks. BPO therefore allows firms to retain their entrepreneurial speed and agility, which they would otherwise sacrifice in order to become efficient as they expanded. It avoids a premature internal transition from its informal entrepreneurial phase to a more bureaucratic mode of operation.
A company may be able to grow at a faster pace as it will be less constrained by large capital expenditures for people or equipment that may take years to amortize, may become outdated or turn out to be a poor match for the company over time.
Although the above-mentioned arguments favor 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
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.
Risks and threats of outsourcing must therefore be managed, to achieve any benefits. In order to manage outsourcing in a structured way, maximizing positive outcome, minimizing risks and avoiding any threats, a Business continuity management (BCM) model is set up.
BCM consists of a set of steps, to successfully identify, manage and control the business processes that are, or can be outsourced.
Another framework, more focused on the identification process of potential outsourceable Information Systems, identified as AHP, is explained.
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.
Outsourcing
Outsourcing is the process of contracting a business function to someone else.-Overview:The term outsourcing is used inconsistently but usually involves the contracting out of a business function - commonly one previously performed in-house - to an external provider...
that involves the contracting of the operations and responsibilities of specific business functions (or processes
Business process
A business process or business method is a collection of related, structured activities or tasks that produce a specific service or product for a particular customer or customers...
) to a third-party service provider. Originally, this was associated with manufacturing
Manufacturing
Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...
firms, such as Coca Cola that outsourced large segments of its supply chain. In the contemporary context, it is primarily used to refer to the outsourcing of business processing services to an outside firm, replacing in-house services with labor from an outside firm.
BPO is typically categorized into back office
Back office
A back office is a part of most corporations where tasks dedicated to running the company itself takes place. The term "Back office" comes from the building layout of early companies where the front office would contain the sales and other customer-facing staff and the back office would be those...
outsourcing - which includes internal business functions such as human resources
Human resources
Human resources is a term used to describe the individuals who make up the workforce of an organization, although it is also applied in labor economics to, for example, business sectors or even whole nations...
or finance
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
and accounting, and front office outsourcing - which includes customer-related services such as contact centre
Contact centre (business)
A contact centre is a facility used by companies to manage all client contact through a variety of mediums such as telephone, fax, letter, e-mail and increasingly, online live chat....
services.
BPO that is contracted outside a company's country is called offshore outsourcing
Offshore outsourcing
Offshore outsourcing is the practice of hiring an external organization to perform some business functions in a country other than the one where the products or services are actually developed or manufactured. It can be contrasted with offshoring, in which the functions are performed in a foreign...
. BPO that is contracted to a company's neighboring (or nearby) country is called nearshore outsourcing
Nearshoring
Nearshoring is "the transfer of business or IT processes to companies in a nearby country, often sharing a border with your own country", where both parties expect to benefit from one or more of the following dimensions of proximity: geographic, temporal , cultural, linguistic, economic, political,...
.
Often the business processes are information technology
Information technology
Information technology is the acquisition, processing, storage and dissemination of vocal, pictorial, textual and numerical information by a microelectronics-based combination of computing and telecommunications...
-based, and are referred to as ITES-BPO, where ITES stands for Information Technology Enabled Service. Knowledge process outsourcing
Knowledge process outsourcing
Knowledge process outsourcing is a form of outsourcing, in which knowledge-related and information-related work is carried out by workers in a different company or by a subsidiary of the same organization, which may be in the same country or in an offshore location to save cost...
(KPO) and legal process outsourcing (LPO) are some of the sub-segments of business process outsourcing industry.
Industry size
IndiaIndia
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
has revenues of US$10.9 billion from offshore BPO and US$30 billion from IT and total BPO (expected in FY 2008). India thus has some 5-6% share of the total BPO Industry, but a commanding 63% share of the offshore component. This 63% is a drop from the 70% offshore share that India enjoyed last year: despite the industry growing 38% in India last year, other locations like Philippines
Philippines
The Philippines , officially known as the Republic of the Philippines , is a country in Southeast Asia in the western Pacific Ocean. To its north across the Luzon Strait lies Taiwan. West across the South China Sea sits Vietnam...
, and South Africa
South Africa
The Republic of South Africa is a country in southern Africa. Located at the southern tip of Africa, it is divided into nine provinces, with of coastline on the Atlantic and Indian oceans...
have emerged to take a share of the market. China
China
Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...
is also trying to grow from a very small base in this industry. However, while the BPO industry is expected to continue to grow in India, its market share of the offshore piece is expected to decline. Important centers in India
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
are Bangalore
Bangalore
Bengaluru , formerly called Bengaluru is the capital of the Indian state of Karnataka. Bangalore is nicknamed the Garden City and was once called a pensioner's paradise. Located on the Deccan Plateau in the south-eastern part of Karnataka, Bangalore is India's third most populous city and...
, Hyderabad, Chennai
Chennai
Chennai , formerly known as Madras or Madarasapatinam , is the capital city of the Indian state of Tamil Nadu, located on the Coromandel Coast off the Bay of Bengal. Chennai is the fourth most populous metropolitan area and the sixth most populous city in India...
, Kolkata
Kolkata
Kolkata , formerly known as Calcutta, is the capital of the Indian state of West Bengal. Located on the east bank of the Hooghly River, it was the commercial capital of East India...
, Mumbai
Mumbai
Mumbai , formerly known as Bombay in English, is the capital of the Indian state of Maharashtra. It is the most populous city in India, and the fourth most populous city in the world, with a total metropolitan area population of approximately 20.5 million...
, Pune
Pune
Pune , is the eighth largest metropolis in India, the second largest in the state of Maharashtra after Mumbai, and the largest city in the Western Ghats. Once the centre of power of the Maratha Empire, it is situated 560 metres above sea level on the Deccan plateau at the confluence of the Mula ...
, Patna
Patna
Paṭnā , is the capital of the Indian state of Bihar and the second largest city in Eastern India . Patna is one of the oldest continuously inhabited places in the world...
and New Delhi
New Delhi
New Delhi is the capital city of India. It serves as the centre of the Government of India and the Government of the National Capital Territory of Delhi. New Delhi is situated within the metropolis of Delhi. It is one of the nine districts of Delhi Union Territory. The total area of the city is...
.
The top five Indian BPO exporters for 2009-2010 according to NASSCOM are Genpact
Genpact
Genpact Limited is a global business process and technology management company. It was formerly a GE owned company called GE Capital International Services or GECIS. It operates from India, China, Guatemala, Hungary, México, Morocco, the Philippines, Poland, the Netherlands, Romania, Spain, South...
, TCS BPO
Tata Consultancy Services
Tata Consultancy Services Limited is a global IT services, business solutions and outsourcing company headquartered in Mumbai, India. It is the largest provider of information technology in Asia and second largest provider of business process outsourcing services in India...
, WNS Global Services
WNS Global Services
WNS Limited is a global Business Process Outsourcing company headquartered in Mumbai, India. The company is a wholly owned subsidiary of WNS Limited, which is incorporated in Jersey, Channel Islands...
, Wipro BPO
Wipro
Wipro Limited formally Western India Products Limited is a global IT services and consulting company headquartered in Bangalore, India. As of 2011, Wipro is the second largest IT services company by turnover in India and employs more than 120,000 people worldwide as of March 2011...
, and Aegis Ltd.
Aegis
An aegis is a large collar or cape worn in ancient times to display the protection provided by a high religious authority or the holder of a protective shield signifying the same, such as a bag-like garment that contained a shield. Sometimes the garment and the shield are merged, with a small...
.
Benefits and limitations
An advantage of BPO is the way in which it helps to increase a company’s flexibility. However, several sources have different ways in which they perceive organizational flexibility. Therefore business process outsourcing enhances the flexibility of an organization in different ways.Most services provided by BPO vendors are offered on a fee-for-service basis . This can help a company becoming more flexible by transforming fixed into variable costs. A variable cost structure helps a company responding to changes in required capacity and does not require a company to invest in assets, thereby making the company more flexible. Outsourcing may provide a firm with increased flexibility in its resource management and may reduce response times to major environmental changes .
Another way in which BPO contributes to a company’s flexibility is that a company is able to focus on its core competencies, without being burdened by the demands of bureaucratic restraints. Key employees are herewith released from performing non-core or administrative processes and can invest more time and energy in building the firm’s core businesses. The key lies in knowing which of the main value drivers to focus on – customer intimacy
Customer intimacy
Customer intimacy is a concept from marketing, which describes the ability of a supplier to become accepted and known as the regular partner with its customer...
, product leadership, or operational excellence. Focusing more on one of these drivers may help a company create a competitive edge.
A third way in which BPO increases organizational flexibility is by increasing the speed of business processes. Supply chain management with the effective use of supply chain partners and business process outsourcing increases the speed of several business processes, such as the throughput in the case of a manufacturing company.
Finally, flexibility is seen as a stage in the organizational life cycle: A company can maintain growth goals while avoiding standard business bottlenecks. BPO therefore allows firms to retain their entrepreneurial speed and agility, which they would otherwise sacrifice in order to become efficient as they expanded. It avoids a premature internal transition from its informal entrepreneurial phase to a more bureaucratic mode of operation.
A company may be able to grow at a faster pace as it will be less constrained by large capital expenditures for people or equipment that may take years to amortize, may become outdated or turn out to be a poor match for the company over time.
Although the above-mentioned arguments favor 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
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.
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 the Sub-Continent. 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.Risks and threats of outsourcing must therefore be managed, to achieve any benefits. In order to manage outsourcing in a structured way, maximizing positive outcome, minimizing risks and avoiding any threats, a Business continuity management (BCM) model is set up.
BCM consists of a set of steps, to successfully identify, manage and control the business processes that are, or can be outsourced.
Another framework, more focused on the identification process of potential outsourceable Information Systems, identified as AHP, is explained.
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.
See also
- OutsourcingOutsourcingOutsourcing is the process of contracting a business function to someone else.-Overview:The term outsourcing is used inconsistently but usually involves the contracting out of a business function - commonly one previously performed in-house - to an external provider...
- OffshoringOffshoringOffshoring describes the relocation by a company of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting. Even state governments employ offshoring...
- NearshoringNearshoringNearshoring is "the transfer of business or IT processes to companies in a nearby country, often sharing a border with your own country", where both parties expect to benefit from one or more of the following dimensions of proximity: geographic, temporal , cultural, linguistic, economic, political,...
- Homeshoring
- GlobalizationGlobalizationGlobalization refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import...
- List of call centre companies
- Banking BPO ServicesBanking BPO ServicesBanking business process outsourcing or banking BPO is a highly specialized sourcing strategy used by banks and lending institutions to support the business acquisition and account servicing activities associated with the customer lending lifecycle...
- RecruitmentRecruitmentRecruitment refers to the process of attracting, screening, and selecting qualified people for a job. For some components of the recruitment process, mid- and large-size organizations often retain professional recruiters or outsource some of the process to recruitment agencies.The recruitment...
- Recruitment Process OutsourcingRecruitment Process OutsourcingRecruitment Process Outsourcing is a form of business process outsourcing where an employer outsources or transfers all or part of its recruitment activities to an external service provider....
- Software testing outsourcingSoftware testing outsourcingSoftware testing outsourcing provides for software testing carried out by the forces of an additionally engaged company or a group of people not directly involved in the process of software development...
- BPO securityBPO securityInformation security has emerged as a significant concern for banks, mobile phone companies and other businesses that use call centers or business process outsourcing, or BPO...
- Business process outsourcing in IndiaBusiness process outsourcing in IndiaThe business process outsourcing industry in India refers to the business process outsourcing services in the outsourcing industry in India, catering mainly to Western operations of multinational corporations ....
- Business process outsourcing in the PhilippinesBusiness process outsourcing in the PhilippinesBusiness process outsourcing or BPO is an emerging industry in the Philippines.-Overview:The business process outsourcing industry in the Philippines has grown 46% annually since 2006. This boom is led by demand for offshore call centers...
- Website Management Outsourcing
- Captive serviceCaptive serviceCaptive Service is a portion of Business Process Outsourcing where an organization will use a wholly owned subsidiary instead of a Third Party Vendor. The benefit of doing such an arrangement would be to leverage the cost savings of using offshore resources, while maintaining complete control over...
- Offshoring Research NetworkOffshoring Research NetworkThe Offshoring Research Network is an international network of researchers and practitioners studying organizations in their transition to globalizing their business functions, processes and administrative services...
- Legal outsourcingLegal outsourcingLegal Process Outsourcing refers to the practice of a law firm or corporation obtaining legal support services from an outside law firm or legal support services company...