2. Business Process Outsourcing
BPO is the process of hiring another company to handle business activities for your
company as it focuses on its core business.BPO is distinct from information technology
(ITO) outsourcing, which focuses on hiring a third-party company or service provider to do
IT-related activities for instance, such as application management and application
development, data centre operations, or testing and quality assurance. Many of these BPO
efforts involve off shoring i.e. hiring a company based in another country to do the work.
India is a popular location for BPO activities.
Frequently, BPO is also referred to as ITES (information technology enabled services). Since
most business processes include some form of automation, IT "enables" these services to be
performed. An offshoot of BPO is KPO (knowledge process outsourcing). Considered by
some to be a subset of BPO, KPO includes those activities that require greater skill,
knowledge, education and expertise to handle. For example, whereas an insurance company
might outsource data entry of its claims forms as part of a BPO initiative, it may also choose
to use a KPO service provider to evaluate new insurance applications based on a set of
criteria or business rules; this work would require the efforts of a more knowledgeable set of
workers than the data entry would. The current definition of KPO encompasses R&D,
product development and legal e-discovery, as well as a number of other business functions.
Discipline where KPO has been incorporated includes;
equity, finance, insurance research
market research and competitive intelligent and general business research
data analytics integration and management
intellectual property , paralegal content and services
research and information services in HR
engineering and design services
animation and simulation services
medical content services
Also coming into use is the term BTO (business transformation outsourcing). This refers to
the idea of having service providers contribute to the effort of transforming a business into a
leaner, more dynamic, agile and flexible operation.
History BPO
Since the Industrial Revolution, companies have grappled with how they can exploit their
competitive advantage to increase their markets and their profits. The model for most of the
20th century was a large integrated company that can “own, manage, and directly control”
its assets. In the 1950s and 1960s, the rallying cry was diversification to broaden corporate
bases and take advantage of economies of scale. By diversifying, companies expected to
protect profits, even though expansion required multiple layers of management.
Subsequently, organizations attempting to compete globally in the 1970s and 1980s were
handicapped by a lack of agility that resulted from bloated management structures. To
increase their flexibility and creativity, many large companies developed a new strategy of
focusing on their core business, which required identifying critical processes and deciding
which could be outsourced.
3. Outsourcing was not formally identified as a business strategy until 1989. However, most
organizations were not totally self-sufficient; they outsourced those functions for which they
had no competency internally. The use of external suppliers for these essential but ancillary
services might be termed the baseline stage in the evolution of outsourcing. In the 1990s, as
organizations began to focus more on cost-saving measures, they started to outsource those
functions necessary to run a company but not related specifically to the core business.
Managers contracted with emerging service companies to deliver accounting, human
resources, data processing, internal mail distribution, security, plant maintenance, and the
like as a matter of “good housekeeping”. Outsourcing components to affect cost savings in
key functions is yet another stage as managers seek to improve their finances. Outsourcing it
has basically resulted into strategic partnerships
What is outsourcing
Outsourcing can be defined as “the strategic use of outside resources to perform activities
traditionally handled by internal staff and resources”. Sometimes known also as “facilities
management”, outsourcing is a strategy by which an organization contracts out major
functions to specialized and efficient service providers, who become valued business
partners. Companies have always hired contractors for particular types of work, or to level-
off peaks and troughs in their workload, and have formed long-term relationships with
firms whose capabilities complement or supplement their own. However, the difference
between simply supplementing resources by “subcontracting” and actual outsourcing is that
the latter involves substantial restructuring of particular business activities including, often,
the transfer of staff from a host company to a specialist, usually smaller, company with the
required core competencies.
Why do companies outsource
Here are some common reasons:
Reduce and control operating costs
Improve host company focus
Gain access to world-class capabilities
Free internal resources for other purposes
A function is time-consuming to manage or is out of control
Insufficient resources are available internally
Share risks with a partner company
In earlier periods, cost or headcount reduction was the most common reasons to outsource.
In today’s world the drivers are often more strategic, and focus on carrying out core value-
adding activities in-house where an organization can best utilize its own core competencies.
Main factors influencing successful outsourcing
The critical areas for a successful outsourcing program as identified are:
Understanding company goals and objectives
A strategic vision and plan
Selecting the right vendor
Ongoing management of the relationships
4. A properly structured contract
Open communication with affected individual/groups
Senior executive support and involvement
Careful attention to personnel issues
Short-term financial justification
In a nut shell, outsourcing allows organizations to be more efficient, flexible, and effective,
while often reducing costs.
Some of the top advantages brought by outsourcing include the following:
Staffing flexibility
Acceleration of projects and quicker time to market
High calibre professionals that hit the ground running
Ability to tap into best practices
Knowledge transfer to permanent staff
Cost-effective and predictable expenditures
Access to the flexibility and creativity of experienced problem solvers
Resource and core competency focus
Some examples of BPO services are telemarketing, technical support service, customer
support service, insurance processing, data entry and conversion services, bookkeeping and
accounting and online researching, and form processing.
Hot spots for various BPOs globally are as summarised in the table;
Countries Specialization BPOs
China Manufacturing and technical
India Engineering and technical
Mexico Manufacturing
USA Analysis and Creative
Philippines Administrative duties
Requirements for BPOs
i. Skilful management i.e. Human skills, professional teams, specification of staff roles
and training people
ii. Security technology i.e. system compatibility between buyer and vendor, data
systems security
Driving factors for BPO revolutions
Education attainment
Broadband connection
Inexpensive data storage
Business specialization
5. Internet security
Online analytical processing
BPO types
Offshore-movement of jobs and manufacturing plants outside countries to take
advantage of low wages overseas i.e. USA to Vietnam
Onshore- services are taken to another place but within the same country
Near shore- outsourcing services within the same continent
Challenges Faced by the BPO Industry, Challenges for the BPO Industry
Challenges Faced by the BPO industry today
BPOs have proved a grand success. However, certain problems have cropped up in the
process for which long-term solutions are necessary.
Areas of concern in BPOs:
Working in a BPO, many feel is a job that does not require much skill. Anybody
possessing a basic education, good communication skills is employable after some
training. Companies do not mind taking in people who are middle aged, and
homemakers. There is no sense of accomplishment among the employees.
Financial desperation on the part of some people leads them to take up jobs in BPOs-
People out of college join BPOs to earn money to finance their higher education,
some as a way of improving their life styles. Some others join because they could not
find anything else. In short, very few people take up employment in BPOs for the
love of it.
The tasks that BPOs perform are diverse: telemarketing, technical support service,
customer support service, insurance processing, data entry and conversion services,
bookkeeping and accounting and online researching, and form processing. The
problem that this creates is that there can be no standardized training program
suitable to all the BPOs that can be given to the prospective employees before they
are actually absorbed into the company.
High expectations from the outsourcing companies tend to de-motivate the workers.
In many cases, the outsourcers think only of achieving targets. They are obsessed
with quality work, business continuity, time frame, security of information.
However, satisfying them is not always possible. The expectations should be realistic
taking into account the work ethics of the region of the service provider, as well as,
its culture and polity.
Attrition in BPOs: The single largest worry of the BPO industry is attrition. In the
outsourcing context, attrition means a gradual reduction in the number of people
working in a company due to retirement, resignation, or death. The rate of attrition
in the BPO industry in India for instance is currently nearly 50%. Attrition in
individual firms varies from 15% in the larger firms to up to 40% in the smaller ones.
Analysts believed that if this left unchecked, there would be a shortage of
professionals.
6. Analysis of KPO, BPO and LPO
KPO VS BPO VS LPO
Parameter KPO BPO LPO
Primary value Knowledge arbitrage Cost arbitrage Cost arbitrage in
process legal process,
improvement and quality and
efficiency efficiency
Staff skill sets MBAs, Engineers, CFAs, Undergraduates in Legal studies, IT,
Actuarial studies etc commerce and attorneys and
finance and IT. engineers etc
Billing rates USD 10-45 per hour USD 1-15 per hour USD20-1000 per
hour
Process Highly complex Basic process Highly complex
complexity involving standard
procedures
Process quality Standard project Robust six sigma Driven by
management management application drive quality management
techniques supplemented by in house techniques with on practise and
modelling and accuracy and output experience
documentation control
Staff retention Equity and equity Focus on monetary Focus on
policies linked incentives incentives professionalisms
Technical excellence and international
Professional growth career growth
Job rotation
Regulatory strict regulations Focus on data Ethical issues,
issues focuses on intellectual protection issues confidentiality and
property and and privacy law discipline
management issues
Typical USD 15,000-40,000 in India USD 4,000-10,000 USD50,000-200,000
resource costs
Common India India , china, India, USA, Korea,
designations Philippines, Pakistan
Vietnam and Easten
Europe
Scalability Staff capabilities and Staff numbers, Management
drivers expertise volumes, and expertise and
output knowledge
expertise
Control of IP Key control required over IP IP not an issue IP key issue
generally
7. Conclusion
BPOs like ITO and LPO are outsourcing centres established to arbitrage the cost and
efficiency of business to supplement the core business.
While BPOs are more quantities and products oriented focussing on volumes and output
ITO, KPO and LPOs are more focussed to quality, High performance, Capital expenditure
minimization, flexibility and more service oriented.
BPO has a global market share of USD 100 Billion, with over 60% of Fortune 500 companies
outsource to India, Compared with LPO estimated at USD 1.5 Billion.
Generally it has been consistent that services that have been outsourced are services that
offer greatest outsourcing rewards, even though the risk perception is high too. To conclude
BPO s can be viewed as business tools used to bring improvement within a business
functions.
Resource Prepared By:
SCASS Governance Resources Team