Business Process Outsourcing (BPO)

Last Updated: August 17, 2020

Definition - What does Business Process Outsourcing (BPO) mean?

Business process outsourcing (BPO) involves using a third-party provider company for any business process that could otherwise be done in-house, especially those considered “non-primary” business activities and functions.

Examples include the outsourcing of payroll, human resources (HR), accounting and customer/call center relations, as well as various kinds of data gathering, front-line service work, among others.

Some types of BPO are also known as information technology-enabled services (ITES).

Techopedia explains Business Process Outsourcing (BPO)

In a very basic sense, most types of Business Process Outsourcing can be separated into two major categories – front office and back-office services.

Back office services, in general, are things like accounting and research, as well as various types of IT support services. A lot of the human resources types of BPO would go into that category, too.

Front office services involve things like customer interaction services and the use of third-party companies for things like on-site demos and selling to customers or answering questions, in person, on the phone or through digital media.

Within these two bigger categories, there is any number of different types of business process outsourcing. There are also things like payroll outsourcing, the outsourcing of employee records analysis and the outsourcing of business intelligence, which we’ll discuss a little bit later.

An entirely separate category of BPO involves what's called "knowledge process outsourcing" or KPO. Companies may be outsourcing the work of mining business data for insights, or looking at dashboards to support top-level decisions. However, the whole phenomenon of KPO could rightly be called business intelligence consulting, so it may not be something that, in some people’s minds, falls into the category of BPO as a whole.

Domestic and International BPO Strategies

Another way to analyze business process outsourcing is to look at where third-party services are provided. Here, there are three categories—offshore, nearshore and onshore BPO.

Offshore BPO involves outsourcing business processes to any country in the world, typically countries that are overseas from the client company.

Nearshore BPO involves outsourcing business processes to companies that are in a country adjacent to the client company's headquarters (ex: a company in the U.S. outsourcing business processes to a company in Mexico, or vice versa).

Onshore BPO requires that the client and the third-party service provider are in the same country.

Benefits of BPO

One of the biggest benefits of BPO is cost control.

Typically, the client can get the third-party services for BPO at a cheaper price than what it would cost to pay people to do it in-house. Then, too, there are any of a number of savings in terms of international tax strategies and the cost of setting up services in a given country.

Another related benefit is that in-house people can focus on core operations, rather than having to do all of the human resources and payroll work, or whatever else is being outsourced.

Concerns with BPO

One major concern with BPO is security. To a large extent, many BPO setups require the company to surrender vital or sensitive information to the vendor. They have to trust the vendor, to a certain extent, because that vendor has access to part of their data supply chain. Sometimes issues of compliance with national or industry standards come up as well.

Another concern with BPO involves the control that clients have to give to third-party providers. Sometimes there's a lot of concern about cost thresholds, where third-party service companies will suddenly raise the cost of services due to some benchmark.

Another big concern with BPO has to do with branding and customer interactions.

You could call this the identity management problem—it involves figuring out whether the third-party service company can make it look like the business processes are being done in-house, if that’s important to a particular process.

For example, if a third party company is providing people to demo products and services or engaging in customer interactions on behalf of the client, what will that look like to the customer? Will the front line worker be identified with the client or with the third-party service provider, or both?

In general, business process outsourcing can be an effective way for companies to fine-tune their operations to cut costs and create efficiencies if it’s done with the right research, analysis and due diligence.

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