What is Business Process Outsourcing (BPO)? 

Outsourcing (also referred to as contracting out) is a business practice used by companies to reduce costs or improve efficiency by shifting tasks, operations or processes to an external contracted third party for a significant period of time. Therefore, the task to be contracted out can be performed by the third party either onsite or offsite of the business.

Why and when do we need Outsourcing?

Outsourcing of one’s business functions and activities helps one to concentrate well on one’s core functions and helps controlling costs while working. Consequently, if the following questions come to your mind, then you should consider outsourcing your work:

• Are we working at a best possible favorable cost?
• Are the available resources utilized to the fullest efficiency?
• Whether the current available resources are able to support new technology and fight the market competition?
• Is there any other efficient way to handle these processes more professionally and quickly?
• Does the organizational team have the professional expertise to deliver efficient work?
• How can we cut down the recruitment and training costs?

How outsourcing works :

Outsourcing involves subcontracting parts of a company’s value-chain, (i.e.  steps in the design, supply, production, marketing, sales and services processes) to other companies or contractors that specialize in those activities.

Through outsourcing agreements, the client company hires separate companies to perform specific tasks in the value-chain on its behalf.  Often, the work is performed under the name of the client. The kinds of outsourcing work performed vary widely across industry sectors.

Some of the common outsourcing activities include: human resource management, facilities management, supply chain management, accounting, customer support and service, marketing, computer aided design, research, design, content writing, engineering, diagnostic services, and legal documentation.

Benefits of outsourcing

• Cost advantage; the most visible benefit relates to the cost savings. You can get your job done at a lower cost and of higher quality as well. The cost saving by a big margin is enhanced by outsourcing plus high quality of service. However, ensuring low-cost does not mean low quality.
• Increased efficiency; this is doing the job better with knowledge and understanding of the domain. This leads to an increase in productivity and efficiency.
• Focus on core business; outsourcing enables a company to focus on building their own brand, invest in research and development and hence providing high value added services.
• Save on infrastructure and technology; outsourcing eliminates the need of investing in infrastructure. This is  because the outsourcing partner takes the responsibility of the business processes and hence develops infrastructure for the same.

Key drivers for outsourcing by companies

• Focus; companies may choose to outsource so as to continue focusing  on their core business processes while delegating time consuming processes to external agencies.
• Value; lower operational and labour costs are among the primary reasons why a company outsources. When properly executed it has a defining impact on a company’s revenue recognition and can deliver significant savings.
• Outsourcing helps companies to tap in to and leverages a global knowledge base, having access to worldwide capabilities.
• Company can outsource to gain access to resources not available internally.
• Outsourcing saves cost and provide better capital funds to companies thus increasing the company’s profit.
• By delegating responsibilities to external agencies, companies can be able concentrate on core functions there by increasing revenue.
• Risk-sharing; outsourcing helps companies mitigate/share risks.
• Outsourcing enables companies to realize the benefits of business re-engineering.
• Some companies also outsource to help them expand and gain access to new markets. This is by taking closer  of the service offered to their end users. For instance, many manufacturers outsource the services of distribution by appointing distributors within a certain region.

Challenges of outsourcing 

• Fall in service quality; the service delivered across the globe may not meet the quality expectations. When outsourcing, companies should examine the performance of the vendor and the technical competence.
• Security concerns; the core concern in outsourcing ethics is confidential information security. Companies should know about the security systems in place and also the safety of electronic data storage. If your outsourcing partner does not have adequate information about security measures, it might be a good idea to be clear on them.
• Environmental issues; the vendor companies may practice environmentally damaging processes. They may need to conduct periodic audits to ensure compliance.
• Access to skilled resources; gets access to expertise and capabilities from your outsourcing partner.
• Faster and better services; outsourcing makes service offering better with high quality deliverables and decrease the lead time it takes for the company’s product to reach the market.

Risks related to outsourcing

• Risk of exposing confidential data; when an organization outsources, it involves the risk of exposing confidential company’s information to a third party.
• Hidden costs; although outsourcing most of the times are cost- effective, at times the hidden costs involved in signing a contract across international boundaries may pose a serious threat.
• Lack of customer focus; an outsourced vendor may be catering to the expertise-needs of multiple organizations. At a time in such situations, vendors may leave complete focus on your organization task.

Various types of Business Process outsourcing

a. Professional Services Outsourcing

It’s very common for many companies to outsource their complicated tasks and processes. It is the most popular type of outsourcing as it saves a massive amount of money on overhead. The most outsourced services are skill specific such as IT, legal and accounting.

b. Manufacturing Outsourcing

This is the most pushed towards type. However, the cost of making your own products locally is significantly high. Moreover, paying the factory workers and raw material cost is massive. But, if you outsource your manufacturing to china for example, you’ll get much lower cost per product. This has been a growing trend for a while now. So, companies are leaning towards reducing blue collar jobs. Many car company utilizes this process to cut down on their product assembly time and cost. Tedious processes such as installing windows in all their models.

c. Process-Specific Outsourcing

Other models include very niche processes. Internal procedures and such vital processes for the continuity of the system. Many companies outsource processes revolving around their main product. For example, a beer brewing company would normally outsource their delivery of their products to a courier company such as DHL, Bollore logistics etc. Normally, these procedures would include a very detailed contract that entails the nitty-gritty information such as delivery timelines, customer contacts and costs.

This type of outsourcing enables the company to focus on their core strength and improve their overall customer service. All that while reducing the costs and time it would normally take for them to fulfil all their orders personally.

d. Operational Outsourcing Service

This type is normally associated with the manufacturing industry. That’s because there’s normally quite a bit of operational tasks and steps required to be taken for the end result to be achieved properly. For example, the equipment repairs and machine maintenance is very commonly outsourced to a 3rd party that specializes in such tasks.

In conclusion, The phrase “Do what you do best and leave the rest” has become an internationally recognized business tagline. that is, a company should only seek to subcontract in those areas in which it demonstrates no special ability. This is evident based on the information shared by this article.

About the Author