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Business process outsourcing (BPO) is a form of outsourcing which involves
the contracting of the operations and responsibilities of a specific business
function to a third-party service provider.
Traditionally, BPO is undertaken by manufacturing firms, for instance Coca Cola,
where almost the entire supply chain is outsourced and the company is
essentially becoming a marketing organization.[1] More recently, it is also used
by service oriented businesses, such as the Bank of America, who outsourced
their entire Human Resources function to the BPO firm Exult Inc.[2]
BPO is often divided into two categories: back office outsourcing, which
includes internal business functions such as billing or purchasing, and front
office outsourcing, which includes customer-related services such as marketing
or tech support. BPO that is contracted outside a company's own country is
sometimes called offshore outsourcing. BPO that is contracted to a company's
neighboring country is sometimes called nearshore outsourcing.
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 to 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.
BPO is a part of the outsourcing industry. It is dependent on information
technology, hence it is also referred to as information technology enabled
services or ITES. Knowledge process outsourcing and legal process outsourcing
are some of the subsets of business process outsourcing.
Industry size
India has revenues of 10.9 billion USD[3] from offshore BPO and 30 billion USD
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
Eastern Europe, Philippines, Morocco, Egypt 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.
The top five Indian BPO exporters for 2006-2007 according to NASSCOM are Genpact,
WNS Global Services, Transworks Information Services, IBM Daksh, and TCS BPO.[4]
According to McKinsey, the global "addressable" BPO market is worth $122 - $154
billion, of which: 35-40 retail banking, 25-35 insurance, 10-12
travel/hospitality, 10-12 auto, 8-10 telecoms, 8 pharma, 10-15 others and 20-25
is finance, accounting and HR. Moreover, they estimate that 8% of that capacity
was utilized as of 2006.
BPO increasing the flexibility of organizations
One of the most important advantages 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 helps a company becoming more flexible by transforming fixed into variable
costs.[5] A variable cost structure helps a company responding to changes in
required capacity and does not requisite a company in investing in assets and
hereby making the company more flexible.[6] Outsourcing may provide a firm with
increased flexibility in its resource management and 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 dictate.[7] 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.[8] The key in this lies in
knowing, which of the main value drivers to focus on – customer intimacy,
product leadership, or operational excellence. Focusing on one of these drivers
may help a company create a competitive edge.[9]
A third way in which BPO increases organizational flexibility is by increasing
the speed of business processes. Using techniques such as linear programming is
a way to reduce cycle time and inventory levels, which reduces a company’s
slack. 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.[10]
Finally, flexibility is seen as a stage in the organizational life cycle. BPO
helped to transform Nortel from a bureaucratic organization into a very agile
organization. A company can hereby help maintaining ambitious growth goals,
which do not fit with regular incumbent strategies.[11] BPO therefore allows
firms to retain their entrepreneurial speed and agility, which they would
otherwise sacrifice in order to become efficient as they greatly expanded. It
avoids a premature internal transition from its informal entrepreneurial phase
to a more bureaucratic mode of operation.[12]
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. Some tends to change their attitudes, personalities and
character on how the way they talk to other clients. Although BPO has many
potential advantages there are a few stumbling blocks, which could counter these
advantages. Among problems, which arise in practice are: A failure to meet
service levels, unclear contractual issues, changing requirements and unforeseen
charges. When BPO does not work out as planned the company might well experience
the way in which BPO makes a company very dependent on a vendor and therefore
very inflexible. Consequently, these challenges need to be considered before a
company decides to engage in business process outsourcing