Business process outsourcing

Business process outsourcing (BPO) contains the transmission of processes along with the associated operational activities and responsibilities, to a third party with at least a guaranteed equal service level and where the client contains a firm grip over the (activities of the) vendor for mutual long term success. BPO is positively related to the search for more efficient organizational designs: cost reduction, productivity growth and innovative capabilities. Hence, a source for strategic advantage.

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] However, BPO is nowadays rapidly conquering the service oriented firms as well. A well-known example is provided by the Bank of America, who outsourced their entire HR function to Exult, one of the leading Human Resources BPO vendors.^[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. The endless opportunities IT provides, stimulates (cross-border) BPO activities. 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.

ITES

Information technology enabled services, or ITES, is a form of outsourced service which has emerged due to involvement of IT in various fields such as banking and finance, telecommunications, etc. Some of the examples of ITES are medical transcription, back-office accounting, insurance claim, credit card processing and many more.

Firms usually from developed countries outsource such services to countries like Egypt, India, Bangladesh, China, Romania and Philippines in order to gain from large talent pool and low labor cost.

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, 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]

The global BPO Industry is estimated to be worth 120–150 billion dollars, of this the offshore BPO is estimated to be some US$11.4 Billion.^{[citation needed]}

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 of for instance a fraction of the workforce provides firm flexibility and reconfiguring resource deployments 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 it’s 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 operate excellence. This is exemplified by for instance the case of Dell. Focusing on one of these drivers instead of more helps a company create a competitive edge. Herewith the company becomes more responsive and is able to react faster on changes in a an organization’s environment ^[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. For instance in the case of Nortel, which used to be a very rigid and bureaucratic organization, BPO helped to transform the company from a bureaucratic organization into a very agile organization by means of BPO. 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]

Challenges

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. 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 ^[13]

Threats

Unfortunately, several studies reveal the disappointing fact that most outsourcing contracts fail to live up to their expectations. The potential dangers for achieving long term success are loss of internal business process know-how and dependency towards the vendor, not to mention theft of data. In instances of off-shore outsourcing, customer and employee information is commonly sold cheaply on the open market. Refer to the Kkaran Bahree.

A major drawback involved, in Business Process Outsourcing are the risks. Outsourcing of an Information System, for example causes for instance securityrisks, both from a communication- and from a privacy perspective, and from a knowledge perspective, a changing attitude in employees, underestimation of running costs and the major risk of losing independence, outsourcing leads to a different relationship between an organization and its contractor.^[14][15]

Risks and treats of outsourcing must therefore be managed, to achieve any benefits. In order to manage outsourcing in a structured way, maximizing positive outcome, and minizing risks and avoiding any treats, a Business Continuity Management (BCM) model is setup. BCM consists of a set of steps, to succesfully identify, manage and control that business processes that are, or can be outsourced. ^[16]
Another framework, more focussed on the the identification process of potential outsourcable Information Systems, identified as AHP, is explained.^[17]
L. Willcocks, M. Lacity and G. Fitzgerald identify several conctracting problems, companies face, ranging from unclear contract formatting, to a lack of understanding of technical IT- processes.^[18]

References

See also

• Outsourcing
• Offshoring
• Nearshoring
• Homeshoring
• Globalization
• Recruitment
• Recruitment Process Outsourcing
• Software testing outsourcing
• BPO security
• Business process outsourcing in India
• Business process outsourcing in the Philippines
• Bangalored
• Website management outsourcing

External links

• Report on Business Process Outsourcing (BPO)de:Business Process Outsourcing

es:Business Process Outsourcing ja:ビジネス・プロセス・アウトソーシング pt:Business Process Outsourcing