Business Process Outsourcing (BPO): A Complete Guide

With technology developing at breakneck speed, it has been getting significantly easier to communicate and work with teams across the other end of the world.

Accordingly, business process outsourcing has been growing in popularity. In fact, according to research by CreditDonkey, over 300,000 jobs are outsourced from the US annually.

Which makes sense - the benefits of process outsourcing are really hard to pass on, since it can result in lowering company expenses by 15% on average.

What is business process outsourcing (BPO)?

Business Process Outsourcing (BPO) is the contracting of a specific business function, such as customer support, marketing, etc.

It shouldn’t be confused with the concept of outsourcing as a whole, though. The difference is that with BPO, you outsource an entire business function (all of lead generation, for example), rather than a single job (think, hiring a VA from a developing country).

The processes outsourced, however, are rarely the core ones. After all, if it’s something critical to company success, you really wouldn’t trust a contractor doing it.

You are more likely to benefit from outsourcing support roles, such as customer relations. This way, your team back home can focus more on your core functions, rather than trying to learn new skills.

This is, at the end of the day, a win-win. Instead of having to start a customer support team from scratch, you are giving the job to a company that specializes in it - and you will end up spending less, to boot.

In terms of outsourcing functions, there is back office and front office. Back office includes internal company processes - accounting, purchasing, etc. The front office, on the other hand, is anything that deals with customers: sales, customer support, and so on.

There are 3 different types of outsourcing:

Offshore - Outsourcing in a distant country. Think, USA to China. This usually means very significant cost-cutting, since the salaries in developing countries can be 8x cheaper than in the US.

Nearshore - For countries that are located close to the contracting company. Think, USA to Mexico.

Onshore - Outsourcing within the same country but a different city or location. The main value here is still cutting costs, while maintaining the added benefit of your employees being native, cutting out chances for miscommunication. Lyft, for example, is moving its support team from San Francisco to Nashville, where living costs (and accordingly, salaries) are 3-4x times cheaper.

Benefits of business process outsourcing

There are a lot of benefits for business process outsourcing, given that you manage to find the right partner company.

Some of the benefits include…

Lowered costs

The most popular and talked-about benefit for outsourcing is the significantly lower expenses.

Depending on where you are sourcing, prices can be slightly lower (Think, San Francisco to Nashville), or significantly (development from San Francisco to India).

Other than the lower salaries, there is the added benefit of getting a “tax break.” While the government does not straight-off give you a tax break, you get the option to defer paying income tax on profits made abroad.

Focus on core functions and improved support

If you’re an up-and-coming software startup, you really can’t be bothered with starting a huge customer support team from scratch.

While doing it right is important, chances are, in-house isn’t the best place for that. If your founding team has a technical background, they won’t be as good in training a support team.

So, by outsourcing to a company that specializes in support, you end up with better processes at the same price.

This, in turn, allows your team to focus on what is important for the company - the core processes that make the company stand out.

Global expansion

If you decide to enter the French market, for example, you would be having a very difficult time getting started.

First of all, you can’t just import your American sales team because of the language barrier. So, you would have to send someone from company management to start a regional department.

This, in turn, leads to some other issues - even if the company official is fluent in the language, they are unlikely to know how the market in that specific country works.

So, instead, it is easier to find a local partner company with a native workforce. They are already aware of how the market works, as well as having the knowledge of the language and culture on their side.

And, of course, you can manage the 3rd party company as much as needed.

Risks of business process outsourcing

At a glance, outsourcing might seem to be hard to pass on. That’s the appeal. After all, you end up getting higher quality service in exchange for lower costs. Based on feedback from teams - with financial services (17%) and technology (9%) leading BPO adoption - success depends heavily on vendor selection and ongoing relationship management.

The thing with outsourcing is, though, that you really have to get it right. Otherwise, you’re opening yourself up to significant risks.

Outsourcing a specific job function is pretty simple - you find a capable enough employee online and get them to work. If it doesn’t work out, you can always just replace them.

When outsourcing business processes, though, it’s not always that simple. You become highly dependant on a local company on a lot of your operations, and if you’re not careful with choosing the right partner, you might have some problems:

Dependance on a foreign company

Unlike a single employee, it is significantly harder to cut ties with a company.

Once you have outsourced your processes, the other company becomes an integral part of your operations. Meaning, if they start underperforming, there would not be a lot you could do.

If you fire them, you would have to invest a lot in switching companies - you would have to re-orient the employees in the new company.

Hidden expenses and time waste

Selecting a vendor is not a simple matter - it can take a lot of effort on your end for due diligence, and up to a year of your time to actually get the initiative started.

You can also end up wrapping yourself up in unwanted expenses - while a developer in India can be 10x cheaper than one in the US, it doesn’t mean that you’ll be saving nearly as much. In discussions with operations teams - particularly the 45% from enterprises with formal procurement - this cost underestimation is the most common complaint about BPO initiatives.

To get a proper estimation of the real cost, you would need to consider the cost of your management team’s time spent on picking the right vendor, as well as anyone else involved in the process. This can be a while, taking up to 500 hours.

Then there is a whole chunk of other misc. expenses - legalities, vendor-search, outside BPO consultant, etc.

Security risks

While you might have state-of-the-art security back home, with an unpenetrable office building, your partner company might not be nearly as good.

While in the western world, security is a very major factor, it is less so in the developing countries. Hence, you would have to be careful about what system privileges you are giving to the outsourced company, or invest more money in exchange for a more expensive company.

Communication issues

If you are outsourcing some business-critical function, the language barrier might turn out to be a problem.

With support services, this is rarely the case, since you interact with company management, specifically. If you are outsourcing development, on the other hand, your CTO might have to work with five developers with sub-par English.

The developers might be highly skilled, but mistakes due to miscommunication can turn out to be very costly.

How to pick the right BPO partner

As we have already mentioned, picking the right business process outsourcing partner is critical - if you mess up here, finding a new one will be both expensive and time-consuming.

So, we have put together a step-by-step guide on how to do it right:

1. Define your requirements - It is important to have a clear understanding of what processes, exactly, you will be outsourcing. Without the specifications, you will have trouble finding a partner perfect for the job. Make it as specific as possible, to ensure that the partner company understands what, exactly, the job entails.

2. Draft a request for proposal (RFP) and start looking for partners - According to your company requirements, develop an RFP that includes all the details about the project. Then, start sending it out to potential partner companies.

3. Evaluate proposals and select the partner - Go through all the proposals and find the one that is the best for you.

Do not just go for the lowest-cost partner, though. Chances are, the lowest bidder is not the best in terms of service offerings. A sub-par partner might lead to even more expenses since if they do not work out, you will end up spending even more on switching partners.

4. Draft and negotiate the contract - Establish all the minor details about the project - how will you communicate with the company, in what time periods?

What is expected of them, for what cost? Costs and details for ending the contract prematurely? How do you negotiate disagreements?

5. Set the project in motion - Once you have got all the details figured out, it is time to kick off the project. By now, you should already have an action plan established on your end.

6. Monitor your partner company performance - Starting the project is only the first step. You will have to monitor the company’s performance, ensuring that it does not degrade in quality over time.

Managing the BPO initiative

Depending on what process you are outsourcing, you might need to have some control over the partner company’s operations.

With customer support, for example, your oversight might be minimal - communicating through reports on a monthly basis. If you are outsourcing software development, though, you would need to actively manage the company.

While they have the technical skills, your team knows the industry, what problems the software should solve, etc.

Without the right software, though, managing a remote company can be hard. Tallyfy is a business process management software that helps you track, manage and automate processes. It allows you to smoothly collaborate with partner companies from around the world, making BPO easier than ever before.

If you want to learn more about how business process management software works, read up our article on different BPM solutions.

Do you have any experience with outsourcing business processes? Was it as good as it is made out to be? Let us know down in the comments!

Related questions

What is business process outsourcing used for?

Firms use business process outsourcing as a way to get help from external experts with time-consuming chores.

It is like when you hire a cleaning service for your house - rather than doing the whole thing yourself, you pay the professionals to do some of it. This enables an organization to hire outsiders to take over tasks such as handling customer phone calls, running payroll or managing the I.T. system.

This enables them to spend less and save time, and to get expert help.

What are the different types of BPO?

There are two main flavors of BPO: back office and front office.

Back office is essentially the restaurant kitchen - it is where all the grunt work happens (like accounting and data entry). The front office functions (like the dining room) are where your customers directly interact with your business - customer service, sales calls etc.

How much money can companies save through BPO?

Businesses that outsource get to save 30-50%.

To do so - some of the time, part of the time - they can lease talented workers in lower-cost countries, get by with less office space and avoid having to train or pay benefits for full-time staff.

Which countries are popular for BPO services?

The leading country in this line is India, just a nose ahead of the Philippines (celebrated for its English-speaking workforce).

Other rising stars? Mexico, Poland and Vietnam. Each and every country has its strength - some are strong in technical, while others in training and customer relations.

How do you choose a good BPO provider?

Shopping for a BPO supplier is like shopping for a room mate - you want one that is reliable and one who will fit your life style.

Get evidence of what they have done for clients, testimonials and assurances of how they will keep your data safe (distributed cloud data center server is a magical way of saying “I do not want people to ever get their mitts on your stuff” fyi) and make sure they understand your business.

You will be working so, so close with this person, so it is worth taking the time to figure this out.

What is the future of business process outsourcing?

AI, automation is making BPO smarter.

Now, unlike before, wherein BPO is just focused in doing transactions, they now provide higher value added services like digital marketing and data analytics. The future appears to be a blend of human expertise and smart tech teaming up.

How long does it take to set up a BPO arrangement?

It typically takes between 3 to 6 months to establish a BPO relationship.

This means finding the right partner, setting terms, training their team, transferring work etc. smoothly! It is like moving into your own house - you need time to pack, plan and then move in exactly the way you want to.

What industries use BPO the most?

It is not just one industry that is employing some kind of BPO, although the healthcare, banking, retail, and technology sectors consume the most BPO.

These are fields with a fair amount of routine work and customer contact that can be more effectively managed by remote specialists.

How does BPO affect company culture?

Outsourcing can change how a business functions day to day.

In-house staff could then focus on more creative or strategic tasks and farm out the mundane work to BPO partners. You want to ensure that everyone remains in the know and you have tight co-ordination between internal and external groups to ensure that company culture stays in good health.