Business Process Outsourcing: Definition, Benefits & Guide

With technology developing at breakneck speed, it’s been getting significantly 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 of 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 should not 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 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’re 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’re giving the job to a company that specializes in it – and you’ll end up spending less, to boot.

In terms of outsourcing functions, there’s 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.

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Business Process Outsourcing Benefits

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’re 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’s the added benefit of getting a “tax break.” While the government doesn’t straight-off give you a tax break, you get the option to defer paying income tax on profits made abroad.

Focus on Core Functions & 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’s 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’d 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’d 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’re unlikely to know how the market in that specific country works.

So, instead, it’s easier to find a local partner company with a native workforce. They’re 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.

Business Process Outsourcing Risks

At a glance, outsourcing might seem to be hard to pass on. After all, you end up getting higher quality service in exchange for lower costs. 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’s significantly harder to cut ties with a company. Once you’ve outsourced your processes, the other company becomes an integral part of your operations. Meaning, if they start underperforming, there wouldn’t be a lot you could do. If you fire them, you’d have to invest a lot in switching companies – you’d have to re-orient the employees in the new company.

Hidden Expenses & Time Waste

Selecting a vendor isn’t 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.

To get a proper estimation of the real cost, you’d 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 t0 500 hours. Then there’s 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’d have to be careful about what system privileges you’re giving to the outsourced company, or invest more money in exchange for a more expensive company.

Communication Issues

If you’re 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’re 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 do Business Process Outsourcing: Picking the Right Partner

As we’ve already mentioned, picking the right business process outsourcing partner is crucial – if you mess up here, finding a new one will be both expensive and time-consume. So, we’ve put together a step-by-step guide on how to do it right…

  1. Define your requirements – It’s important to have a clear understanding of what processes, exactly, you’ll be outsourcing. Without the specifications, you’ll 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 & select the partner – Go through all the proposals and find the one that’s the best for you. Don’t just go for the lowest-cost partner, though. Chances are, the lowest bidder isn’t the best in terms of service offerings. A sub-par partner might lead to even more expenses since if they don’t work out, you’ll end up spending even more on switching partners.
  4. Draft & 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’ve got all the details figured out, it’s 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’ll have to monitor the company’s performance, ensuring that it doesn’t degrade in quality over time.

Managing the BPO Initiative

Depending on what process you’re 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’re outsourcing software development, though, you’d 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 seamlessly 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’s made out to be? Let us know down in the comments!

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About the author - Amit Kothari

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