Since the early days of the commercial manufacturing industry, it’s been common practice for companies to hire other companies to perform certain functions on their behalf. But the concept of outsourcing started out a lot simpler than what it’s evolved into today.
When manufacturing was maturing, companies quickly realized that it didn’t make sense for them to try to directly build out every conceivable function and ability that their products or clients might require of them.
On the flip side, if they only offered what they were capable of performing directly within their internal organization, they would be extremely limited and ultimately uncompetitive.
Rather than take on the cost and risk of expanding their direct capabilities into countless new avenues as dictated by market forces, most opted to stick to what they were uniquely good at—or the activities that made up the majority of their core offering—and subcontract these additional functions to other companies.
At its essence, business process outsourcing, or BPO, is no different. It’s just the evolution of that core concept spread to all types and sizes of companies in the modern business world.
Table of Contents
In This Article
In this article we’ll dive into exactly what modern business process outsourcing looks like for a variety of different types of companies. We’ll illustrate some great examples of strategic BPO, assess the pros and cons of business process outsourcing, and offer some key insights on how to capture the benefits while avoiding the risks.
Table of Contents
- Business Process Outsourcing (BPO) in the Modern World: Definition & Illustrations
- Commonly Outsourced Processes
- The Benefits of BPO
- Risks & Disadvantages of BPO
- Tips for Successfully Outsourcing Business Functions
- The Bottom Line on Business Process Outsourcing
What is Business Process Outsourcing (BPO)?
Whereas traditional outsourcing or subcontracting typically occurred for very specific tasks or inputs in a company’s business operations, business process outsourcing entails hiring an external provider to carry out entire functions—such as supply chain management, marketing, customer service, or even human resources.
The difference in practice may be quite large but at its core it stems from the same clear rationale: that companies do their best work—and earn higher profits—when they’re able to focus only on what they do best, leaving everything else to others.
That exact logic has led to the development of an entire industry of BPO providers and outsourcing companies.
While a fintech company may determine that its unique abilities lie with product development and expertise in the financial markets, and therefore that it’s inefficient for it to develop and manage an internal customer relations call center, the BPO market is full of customer service outsourcing companies with specialized expertise in operating call centers as an outsourced business process.
In our late-stage capitalistic global economy, efficiency and optimization are key to growth and profitability. The product of that wisdom is specialization, which in practice means smart businesses do less, and farm out “commodity processes” that don’t help them differentiate from their competition.
What Kinds of Business Functions Smart Organizations Outsource
With the knowledge that most of the world’s largest and most successful companies are now following that general guideline, it’s easy to envision that the BPO industry has ballooned far beyond those cliche outsourced call centers we all interact with when we have to ask a big company for help.
In fact nowadays there’s very little you can’t find an eager BPO company ready to take on for you. Around the world there are firms successfully outsourcing nearly all aspects of business.
Common Outsourced Business Processes
- Direct sales
- Customer service
- IT management
- Software development and web development
- Marketing and advertising
- Accounting and payroll
- Human resources
- Supply chain management and logistics
- Administration and management
The Benefits of Business Process Outsourcing (BPO)
Whether or not you can reap the benefits of business process outsourcing ultimately comes down to how well you execute it as a strategy within your company, and of course, the competency and reliability of your chosen BPO company.
But there’s no denying that in theory the advantages can be numerous and quite enormous.
Here are a few of the upsides you may be able to capitalize on:
Cost Savings & Efficiency
When you outsource business functions to a well-chosen, qualified BPO company or service provider, it immediately reduces your internal headcount.
Not only can you easily find an offshore outsourcing partner in a market with a far lower cost of living (and therefore well-paid employees that cost less to hire), outsourcing can quickly and thoroughly reduce other cost centers like insurance premiums, office space, infrastructure and employee benefits.
All these things and more will be handled by your BPO company. You’ll pay them a pre-arranged fee in exchange for their services.
Organizational Simplicity & Boosted Collaboration
Fewer functions managed in-house means a simpler, more focused organization. The larger your organization, the more complicated its structure, and the smaller your proportion of resources able to be devoted toward your core business functions like those that characterize your product or service.
Relegating non-differentiating business processes to outsourced services means everyone at your organization is closer to what really matters.
Access to Exceptional Talent (and a Broader Overall Talent Pool)
Business process outsourcing isn’t all about reducing, though. In fact it can often be a way to upgrade your business through access to a much, much larger talent pool.
By choosing a qualified BPO provider that focuses on service and differentiates based on their ability to deliver excellent work, you’ll benefit from the good work of people you never would have been able to even consider for a traditional internal position otherwise.
Access to New Markets
On the other side of the same coin, by contracting with BPO companies based abroad (choosing offshore outsourcing) your business is all of a sudden operating at least partially in that service provider’s location—at least indirectly.
But you nonetheless gain a line into their local markets and a window into how business is conducted overseas.
You can leverage this to gain valuable insights you otherwise would have struggled to come across, and perhaps eventually consider expanding.
Access to Innovative Technologies
Smart BPO companies leverage the best of business tech in order to run sharp, efficient and connected teams. After all, these firms exist to run teams of capable people on behalf of other companies, so their area of innovation is logically in how to do that better than their competition.
By working with a BPO provider you’ll get a front-row seat to how people-oriented businesses are leveraging technology to run better businesses, and you can then port these advancements back to your internal organization.
Better Management Responsiveness
There are definitely challenges in relying more on an external provider for functions you might have otherwise considered an internal business process. But the silver lining is that it will strengthen your management and leadership.
Since you will have to contend with less day-to-day control, you’ll be forced to develop results-oriented and change-driven management styles and tactics that will go a long way to benefit you as your company grows.
Increased Performance & Growth
If you combine all of the benefits above, one major takeaway stands out: they can all easily stack to create a significant opportunity to modernize and grow a company.
Fewer people and functions to directly manage as part of your core operation means more people on the same page working specifically toward your company’s core offering while increased flexibility, cost savings, smarter management and even access to a global business landscape present substantial opportunities to increase innovation, reach, and sales.
Specialization Benefits Everyone
In addition, consider that the company you outsource to will (hopefully) just be better at what their whole company is built around than one internal department at a more complex, cross-functional company. It stands to reason that those that specialize in things like software development would be.
In essence consider that as you outsource—and therefore specialize more toward your core product or service offering—these companies come into existence to fill that gap. They in turn are extremely specialized in what they do.
So as you improve because of your increased focus, they are able to excel because of theirs. The result is you gain an organization of experts working for you in place of an internal department that was just one of many things your company had to spread its attention across.
Risks to Avoid When Outsourcing a Business Process
Reduced Oversight & Control
As mentioned, it’s inevitable that in order to capitalize on the upsides of business process outsourcing, you’ll be giving up at least some degree of control.
Whether you go with onshore outsourcing, nearshore outsourcing or fully offshore outsourcing, you’re strategically detaching a function from your internal structure.
You’ll have to trust your new service provider to do what they’ve promised—at least on a day-to-day basis—and to uphold the values you share that ultimately led you to go with them.
Risk of Budget Overruns & Hidden Costs
More commonly a risk to first-time outsourcers—and entirely avoidable with sound due-diligence—is the risk of hidden fees and cost triggers arising in the course of the agreement.
Many of these agreements include extensive terms and contingency scenarios that warrant extra charges. Some or all of these may be legitimate and acceptable to you, but many companies with tales of disappointment and frustration with the BPO industry have been disillusioned by unexpected costs.
This is why it’s absolutely critical to discuss every detail of your outsourcing arrangement explicitly over the course of your courting period with BPO providers, and of course, to read the fine print.
If you’re exploring working with some of the more modern, service-oriented BPO companies like Iglu, you won’t have this problem as we prioritize maintaining an open, consultative relationship with our clients as well as keeping our cost structure as straightforward as possible.
Shared Reputational Risks
Another caution to be aware of before going into a relationship with a business process outsourcing (BPO) company is the reality that what they do can affect you beyond the day-to-day. While some hypothetical problems are self-evident—such as what you might endure if your trusted supply chain management partner incorrectly routed a critical shipment—others can be larger with longer-lasting effects.
If, for example, that supply chain management company was to be embroiled in an ethical scandal involving where they were sourcing your materials from, it could end up damaging your brand image when your market discovers that those questionable materials are inside your company’s product.
Security & Compliance Risks
Of course, if any part of your company is subject to legal regulations, bringing on an outside party to handle one of your business functions entails handing an even higher level of trust to them. You’ll need to make sure that they’re verifiably capable of and qualified to operate under the same high standards as your internal organization to remain in compliance depending on the laws in your country and possibly theirs.
It’s also key to keep in mind the access and privileged information your partner may have in order to facilitate them working for you. Even if your internal organization is locked down with state-of-the-art security protocols, a bad actor may view your outsourcing company as a weak link and target them to breach your infrastructure.
How to Successfully Outsource Business Processes
Assess Your Business & Identify a Function
Start by identifying the function or process that’s already most detached from your core organization, and least integral to what makes your product or service unique.
Define Your Key Performance Indicators
Evaluate what’s most important in terms of that function’s success or failure. How would you gauge whether or not it’s doing its job well?
What indicates whether it’s worth its costs or needs to be scaled back, restructured or even eliminated? Quantify these indicators so you can include them in your negotiations with and oversight of your provider.
Find Your Ideal Business Process Outsourcing (BPO) Provider
There’s a huge, global market of BPO companies out there, many with specialized expertise in a diverse range of key business processes.
Start by deciding what your key performance indicators are for the outsourcing initiative as a whole (cost savings, improved service, more advanced capabilities, etc.), and then begin to explore the field.
You can narrow down BPO providers based on their field of specialty, the markets they operate in, their operational expertise, references from clients, and importantly, employee satisfaction on sites like Glassdoor.
Implement the Right Management Style
To manage outsourcing companies, you need a results-oriented leadership approach and qualified managers with experience overseeing remote operations. Having someone in place who’s skilled in change management and supplier relations will be an asset.
Start Small to Test the Waters
If it’s your first time outsourcing, it never hurts to start with a portion of the function you want to detach from your internal organization. As you experience normal employee turnover, start farming out capacity to your chosen BPO company instead of hiring internally.
Over time, increase the proportion of outsourced talent until you’re comfortable.
Have a Smart Contingency Plan
It’s always best practice to know what you’ll do in the event something stops working the way you expect it to, and business process outsourcing is no different.
Even with an excellent BPO company you trust and have worked with for years, you should know what you would do if circumstances changed and required you to react in a way that minimized disruption to your business.
The Bottom Line: Business Process Outsourcing Today
Modern business economics make BPO an enormous asset to companies looking to run smarter. With efficiency and optimization becoming more and more of a critical competitive advantage for companies of all sizes, it’s never been more pertinent to leverage the rapidly maturing market for outsourcing business functions—from back office functions to marketing and customer service outsourcing.
If you approach it strategically and prepare to minimize the risks, the advantages promise to far outweigh them in terms of savings, focus, improved service offerings, access to better technology, a runway to new markets and new paths to long-term growth.
Iglu Brings You The Best of Offshore Outsourcing Services
THE BPO COMPANY PIONEERING EXCEPTIONAL REMOTE WORK SINCE THE 2000S
When it comes to leveraging the benefits of business process outsourcing, Iglu can help you achieve the best of both worlds. You can utilize our talent or even bring your team members to us.
Our employees benefit from getting to live and work in some of the most desirable locations in the world—with distinctively low costs of living and improved overall quality of life.
As a result you save money, reduce HR-associated risks, simplify your operational expenses into a single monthly fee, and increase team retention. Through us you can scale your team(s) rapidly to meet demand or cut costs without compromising on service level or reliability.
As the leaders in remote work since well before it was cool, we can offer you comfort in our experience, abilities and track record. Contact us today to discuss your options for a fully custom BPO solution tailored to your needs.