What is Business Process Outsourcing (BPO)
Business process outsourcing has transformed the way organizations operate. But what exactly is it and what are its many benefits?
What is Business Process Outsourcing?
Business process outsourcing (BPO) is the contracting of a specific business task, function or service to a third-party service provider. The market slowed in the recession years of 2008-09, but by 2015, Global industry Analysts predict that the worldwide BPO market will be worth $930bn (£570bn).
BPO should not be confused with micro outsourcing. Although these two forms of outsourcing confer similar benefits, the players in the BPO industry are large businesses and organizations. Micro outsourcing, however, enables small and medium-sized businesses (SMBs or SMEs) to benefit from outsourcing. Their service providers are generally highly skilled freelancers or similarly sized independent businesses.
Why do Organizations Outsource their Processes?
The central idea behind BPO is that organizations should focus on what they do best and that non-core activities that add little or nothing to an organisation’s success should be performed by organizations that specialize in those areas and do those tasks more efficiently or cheaply. In a survey of members, the Outsourcing Institute found that the top 5 reasons why companies outsource were:
- Reduce and control operating costs
- Improve company focus
- Gain access to world-class capabilities
- Free internal resources for other purposes
- Resources are not available internally
What do Organizations Outsource?
Business process outsourcing occurs across various horizontal segments, some of which include:
- Human Resources (HR)
- Finance and accounting (F&A)
- Customer Relationship Management (CRM)
- Procurement
- Knowledge services (e.g., legal, engineering, facilities management)
Thus, a television broadcaster might outsource its payroll or all of its HR transactional activities whilst keeping in-house its program development and scheduling. Similarly, a motor manufacturer might outsource its customer contact centers, part of its CRM operations, but retain the design and development of motor vehicles.
Where does Outsourcing Take Place?
Outsourcing occurs locally within a country as onshoring, in a nearby country as nearshoring or further afield as offshoring. However, the continuous search for BPO efficiencies and cost savings has meant that BPO activities are increasingly being delivered internationally by countries such as India, China and Malaysia where large numbers of highly educated and skilled workers operate at a fraction of the cost of their counterparts in, say, the US or UK.
Nonetheless, the shift to offshoring has not been seamless, as some firms have decided to bring back onshore such activities as call centre operations or near shore in say Mexico, in the case of US firms, or Central or Eastern Europe, in the case of UK and Western European firms.
Who are the Players in BPO?
According to the International Association of Outsourcing Professionals, the top 5 global outsourcing firms in 2010 were:
- Accenture
- Infosys Technologies
- Sodexo
- Wipro Technologies
- IBM
These global enterprises operate huge workforces and earn large revenues from their operations. For example, Sodexo is a world leader in food and facilities management services. It employs 355,000 employees on 30,600 sites in 80 countries. In fiscal year 2010, Sodexo earned revenues of €15.3bn ($22.3bn or £13.7bn).
Firms that have signed BPO deals include:
- BP
- GM
- Powergen
- BBC
- Johnson & Johnson
Deals can range from tens of millions of dollars to hundreds of millions of dollars. For example, in 2010, Accenture won a seven-year contract extensionwith the Educational Testing Service worth $160m (£98m). In 2008, the NHS Shared Business Service, a joint venture between the Department of Health and Steria, won a $22.5m (£13.8m) F&A outsourcing dealwith 12 NHS bodies.
However, in 2006, Unilever signed a groundbreaking HR outsourcing (HRO) agreement with Accenture valued at over $1bn (£613m) over seven years. The deal involves Accenture providing HR services to Unilever’s 206,000-person strong global workforce from delivery centres in India, the Philippines, China, Romania, the Czech Republic and Brazil.
Summary
Business process outsourcing, or BPO, is the contracting out of a business process or activity to a third-party service-provider. Its benefit to business is that it allows a firm to focus on its core business activities, reduce costs, improve processes and introduce world-class capabilities among other advantages. It is predicted that by 2015, the global market for BPO will be worth $930bn (£570bn).