What is Business Process Outsourcing definition advantages and disadvantages
Business process outsourcing
Business Process Outsourcing (BPO) is a type of outsourcing in which a company outsources non-core business processes to another company. BPO is the most flexible form of outsourcing, involving a close relationship between the customer and outsourcing provider.
Unlike piecemeal outsourcing of individual projects with specific deadlines and budgets, business process outsourcing may not have fixed time or budget restrictions. With BPO, outsourcers are in charge of an entire functional area of the business, not just separate tasks.
While BPO is defined as outsourcing of any process area, the term is often used to also refer to narrower types of outsourcing. Outsourcing of industrial manufacturing (essentially a type of BPO) is often broken out into a separate type of manufacturing (or industrial) outsourcing. BPO is rarely used to describe outsourcing of auxiliary processes such as facilities cleaning or cafeteria services.
Most often, BPO refers to outsourcing of high-level processes, typically related to finance, personnel, marketing, or legal support. IT and corporate information systems are often included as part of business process outsourcing.
BPO advantages and shortcomings
The advantages of BPO are virtually identical to the advantages of piecemeal outsourcing. In both cases, the main goal of outsourcing is to control costs thanks to the greater competency of the contractor in the relevant business processes or tasks. Compared to task-by-task outsourcing, BPO achieves even greater cost savings over the long term but requires more initial preparation.
In some cases the main push for BPO is not due to cost savings, but the desire for greater control and predictability. BPO makes costs predictable through clear financial terms stipulated in the contract and service level agreement (SLA).
The main disadvantages of BPO include its relative complexity: it is much more difficult to entrust entire business processes, as opposed to specific tasks, to an outside contractor. So this kind of outsourcing requires more comprehensive preliminary analysis when selecting a contractor, as well as possible adaptation of business processes before outsourcing them.
The economic benefits of BPO are accomplished through the contractor s greater competence in non-core (for the customer) business processes. Transfer of specific business processes is rarely the goal of BPO. In most cases, BPO involves outsourcing of processes that are found at almost all organizations, such as personnel management, tax accounting and payroll. BPO tends to have a smaller scope of application than simpler outsourcing of tasks.
With BPO, outsourcers are responsible for larger functional areas and the customer is naturally concerned about the quality and safety of services. This worry is one of the factors holding back BPO, since the high expectations of customers are not always in keeping with the reputation and past experience of some service vendors on the market.
Overall, the advantages and shortcomings of BPO are very similar to those of outsourcing in general. As the most flexible form of outsourcing, business process outsourcing can bring maximum benefits but has larger shortcomings and a smaller scope of application.
There are many types of BPO worldwide today and many of these are in successful use at Russian businesses. Depending on the specifics and industry of each specific company, the processes to be outsourced can differ significantly. Nonetheless, there are several textbook examples of BPO that are representative of almost all sufficiently large businesses.
HR management outsourcing
All companies have to deal with personnel management: hiring, payroll, and tax reporting. The vast majority of companies do not specialize in these services, however, and do not have the necessary expertise. This is one of the reasons why Human Resources Outsourcing (HRO) has become so popular.
In most cases, outsourced tasks are related to employee selection and recruitment (as well as staff leasing and outstaffing). HR administration and payroll are outsourced less frequently.
Russian companies often outsource HR management. Staffing agencies are examples of companies providing selection and hiring services. There are relatively few providers of comprehensive staff management and HR recordkeeping services, among which the UCMS Group and Intercomp are among the largest in Russia.
Outsourcing of customer management and call centers
One widespread example of BPO is outsourcing of customer relationship management (CRM), including outsourcing of phone calls to dedicated call centers. The vast majority of Western companies use this type of BPO, placing expensive call centers in locations with low prevailing wages and even in other countries.
India is regarded as the hotbed of call center outsourcing services, by providing acceptable quality to Western companies at very low prices (thanks to low wages). Oftentimes call centers are located in Eastern Europe and in some Arab countries (such as Egypt).
Outsourcing of call centers is quite common in Russia, but is of a slightly different form. Russian-language requirements rule out all countries except for parts of the former Soviet Union. Many Russian companies prefer to place their customer service centers in provincial Russian cities with comparatively low wages. A special legal entity is established for running the call center, which allows calling the process outsourcing. There are also independent companies on the market that provide comprehensive services for call center outsourcing.
Outsourcing of accounting
Outsourcing of accounting and bookkeeping is much like outsourcing of HR management. In both cases, the contractor is given non-specific functions that are necessary for companies of all sizes and industries.
In theory and in practice, outsourcers can perform all accounting functions, down to completing bank payments and providing source documents to contract partners. However, this does not prevent setting up complicated and flexible business processes that combine outside companies and in-house staff to achieve maximum efficiency.
One of the most common concerns about outsourcing of accounting and bookkeeping concerns the security of sensitive financial information – any outsourcing company will go to great lengths to protect its market reputation and existing customer base.
Outsourcing of IT processes
Many types of BPO have become more available thanks to the near-universal adoption of IT, reducing the cost and time necessary for coordination between the customer and outsourcer. Before the 1990s, some types of outsourcing (such as offshore call centers) were almost impossible due to technical reasons. This is why the term “outsourcing” is so often associated with IT, although the term itself does not imply it.
Today s IT industry is rich with examples of BPO: manufacturing and software development are often outsourced. Traditionally, the leader in IT manufacturing is China, with offshore software development concentrated in India, Eastern Europe and Russia. In 2007–08, several leading IT firms swooped into Russia to set up development centers.
Often “IT BPO” is taken to mean outsourcing of corporate IT processes that are not related to IT itself. In Western countries, comprehensive IT outsourcing has caught on, in which the contractor manages the customer s entire IT infrastructure. This approach is extremely rare in Russia, where companies prefer to limit themselves to certain types of IT BPO, such as hosting of applications or corporate sites. The main providers of IT outsourcing in Russia today are traditional systems integrators for which BPO is not their core business. At the same time, IBM and HP are very actively increasing their presence in the Russian IT services market.
Software on Demand
Software on Demand (SoD) is a type of IT process outsourcing. Unlike ordinary hosting, an SoD outsourcer both provides the hardware for hosting information systems and ensures their installation, support, and updates.
With SoD, customers pay not for ownership of software per se, but rent it (accessing it through a web interface). So unlike traditional software licensing schemes, the customer has relatively small recurring payments and does not have to make large investments in system acquisition. Recurring payments also mean that if the customer does not need the software for a time, the customer can stop using it and freeze payments to the developer.
SoD is a clear example of the relationship between different kinds of BPO. Developers of SoD systems for personnel management or bookkeeping can also be providers of BPO in these areas. One example is the UCMS Group, which develops the Quinyx HR management system while also providing outsourcing of HR processes.