Business process outsourcing (BPO) is the practice of contracting an external service provider to fulfill a business function or process. BPO is sometimes referred to as information technology-enabled services (ITES) because outsourced processes in the modern business world are often reliant on IT in one way or another.
Generally, companies outsource non-core tasks—functions that, while essential to business, are not part of its core value proposition—that are similar across companies and industries. These include back-office operations (internal business functions) like accounting, IT services, procurement, quality assurance and human resources management, and front-office (client-facing) roles like sales, marketing or customer support. Deloitte’s 2021 Global Shared Services and Outsourcing Survey Report found that IT, finance and payroll are the most commonly outsourced roles.
Traditionally, companies have outsourced functions mainly to cut costs, save time and improve performance. While these benefits remain the primary drivers of BPO, the trend toward digital transformation has more firms looking beyond cost-saving strategies with an increased focus on access to technology and provider expertise.
BPO was first used in the manufacturing industry, where firms gained efficiencies by outsourcing tasks for supply chain management. Today, BPO services are used in healthcare, asset management, energy, pharmaceuticals, e-commerce and many other industries as companies leverage new and innovative ways to improve customer experience and gain competitive advantages.
With the proliferation of new technologies like robotic process automation, artificial intelligence, and machine learning, and the widespread acknowledgement of their value in improving agility, standardization and scalability, a new paradigm is emerging in the BPO industry. Increasingly, companies are seeking providers who can bridge their technology gap and drive transformation through integrated analytics, AI, ML, automation and other new technologies.
As a result, outsourcing is transitioning from simply a cost play to a value play, with vendor compensation often structured around outcomes and the technology solutions offered rather than just the time and materials spent.
A McKinsey analysis of BPO deals closed between 2016 and 2020 found that a quarter included at least one digital component—analytics, automation or cloud capabilities, for example—and that the number of such deals doubled during that period as the overall outsourcing industry saw single digit growth.
Identifying which functions are appropriate for business process outsourcing requires strong business process management and a complete understanding of organizational processes. Typically, the outsourcing of a function or process will involve the following steps:
Business process outsourcing offers valuable benefits for organizations and allows for greater focus on highly skilled and specialized roles essential to core objectives. These benefits include:
Business process outsourcing can be classified according to the location of the hired outsourcing company and the type of service rendered.
BPO, based on location:
BPO, based on the type of service:
Choosing a service provider to meet an organization’s outsourcing needs requires thorough planning. The goal is to choose an affordable vendor with the right mix of expertise and experience. The following are general steps to follow when evaluating and choosing a BPO provider:
Though it offers many benefits, BPO exposes an organization to some risks as well. Outsourcing your organization’s business processes to an external service provider raises questions about work quality, data security, and work culture compatibility, especially when the provider is located in a different part of the world. BPO can introduce the following risks:
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