What is Business Process Outsourcing (BPO)?

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Definition:

Business process outsourcing is the practice by which a company has third-party vendors handle business tasks that aren’t a direct part of providing the company’s core product or service.

🤔 Understanding business process outsourcing

Business process outsourcing (BPO) is the practice by which companies have someone else perform tasks for them that are not part of their core product or service. Companies might use BPO for both public-facing “front-office” tasks like customer service and marketing and for internal “back-office” tasks like bookkeeping, payroll services, and technology support. BPO practices can save a company money and help make it more efficient, by allowing employees to focus on core business functions while outsourcing other tasks to third-party vendors with greater resources and expertise in those areas. But BPO can also cause tensions with a company’s workforce or government officials if it moves jobs elsewhere, and security or privacy concerns could arise when part of the company’s operations aren’t within its control.

Example

Suppose a new car manufacturer is opening a plant in Wisconsin. The company’s owners feel they can make great cars, but they aren’t as confident in their ability to market the cars, manage the company’s books, or install and service the computers they use.

The owners decide to use business process outsourcing. They contract with a marketing company, an accounting firm, and an information-technology specialist to manage those parts of their business for them, so they can focus on their strengths.

Takeaway

Business process outsourcing is like ordering takeout after a busy day…

Suppose you’ve got a job at which you excel. But it keeps you going all day, and finding something to throw together for dinner after you come home is always a struggle. Making home-cooked meals isn’t a top priority for you, so you decide to outsource that part of your life by ordering takeout instead. Businesses do the same thing when they use business process outsourcing to let someone else handle tasks for them that aren’t their strong suit.

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How does BPO work?

When a company adopts business process outsourcing (BPO), they outsource some or all of their non-core business operations to third parties.

Non-core activities are those that are not central to producing a company’s product or service. At a chain of restaurants, for instance, that would be anything not directly related to preparing and serving food.

BPO began in the manufacturing industry. These types of firms have complex supply chains to manage, and it was too expensive for them to do so in-house, so they contracted with third-party vendors for those tasks instead.

Companies of all types and sizes use BPO, even small and one-person businesses. A small online web development business might not be big enough to require the owner to hire staff, but they might hire an accountant to do their bookkeeping and taxes.

What services do businesses outsource?

Tasks that companies outsource can be divided into back-office services and front-office services.

Back-office services are a company’s internal business operations - those the customer doesn’t see, like accounting, human resources, and information technology. All companies need someone to track revenue and expenses, and companies with more than a handful of employees need a human-resources function. These tasks typically require special expertise, and some companies might feel that having an internal department for these services isn’t the best use of their resources.

Front-office services are those visible to the public, such as customer support, marketing, and sales. Some companies, especially small companies, handle these matters themselves: A small local mechanic handles customer service himself anytime he communicates with his customers, so he probably isn’t going to outsource that task.

But outsourcing front-office services can be far more necessary for larger companies. A large retailer might start off doing customer service internally, and eventually they decide it’s no longer practical for the store clerk to be taking customer calls all day. Instead, they contract with a call center to handle that for them.

You can also break BPO services down into knowledge process outsourcing (KPO), legal process outsourcing (LPO), and research process outsourcing (RPO).

KPO refers to services that companies outsource because of the specific expertise required. For example, companies outsource their accounting services because of the specialized knowledge and skills needed in accounting.

LPO refers to the outsourcing of legal services. Rather than keeping their own attorney on staff, companies might instead choose to use an outside attorney for their legal needs, such as drafting legal documents.

RPO refers to the outsourcing of research and analysis tasks. A company might hire a third-party vendor to perform market research about a new product or service before the company introduces it.

What is a BPO company?

A business process outsourcing (BPO) company is one that specializes in performing the tasks that other companies outsource to them.

Some BPO companies specialize in a particular service area. An accounting firm keeps the books for other companies and helps them file their taxes, but they aren’t also going to handle the companies’ IT and marketing.

Other outsourcing companies offer multiple important services a company might need. Some might provide various back-office services, such as accounting and human resources. Others might offer key front-office services such as customer service, marketing, and public relations.

Here are some of the biggest BPO companies in the market:

  • Accenture: This Dublin, Ireland-based company provides both front-office and back-office services, including accounting, marketing, supply chain management, and human resources.
  • IBM: New York-based IBM offers primarily back-office services, including procurement, risk management, and real estate management.
  • Cognizant: Based in New Jersey, Cognizant provides back-office tasks like insurance claims processing, human resources, and medical billing.

What are the different types of BPO?

Business process outsourcing can be divided into offshore outsourcing, nearshore outsourcing, and onshore (or domestic) outsourcing.

Offshore outsourcing: When a company sends business operations to a foreign country, as when a U.S. company outsources its IT services to a company in India. Often the company outsourcing operations saves money on labor and/or taxes.

Nearshore outsourcing: When a company outsources operations to a bordering country. For a U.S. company, that would be Canada or Mexico.

Onshore outsourcing: When companies contract with a third-party vendor within the same country, as when a company in New York outsources operations to a company in Indiana.

The type of outsourcing a company chooses has a lot to do with what their needs are. If a company’s primary goal in outsourcing is to lower its costs, they might send business operations to a country where costs are lower - offshore or nearshore outsourcing.

If a company has a particular task they want to outsource, and seeks out a BPO company that can help them with that, then they might prefer onshore outsourcing so as to work with a vendor that’s in the same time zone.

What are the advantages and disadvantages of BPO?

Advantages

Outsourcing allows companies to focus their energies on the tasks most central to the product or service they offer, rather than having to worry about administrative or tangential matters also.

Outsourcing operations can also help reduce costs. Wages and tax rates in many other countries are lower than in the U.S., so companies can save on labor costs and pay less in taxes. They can also save when they don’t have to invest in software, infrastructure, and other expenses needed for particular tasks.

For example, if a large company handles its human resources in-house, it has to spend money on office space, costly HR programs, and hiring, training, salaries, and benefits for HR employees.

But if they outsource their HR needs to a third-party HR firm, that firm already has what the company needs, and can offer the company top-of-the-line tools and resources to boot. The company saves money and time, and can focus on the tasks most directly relevant for its future success.

Disadvantages

Despite the upsides, there are also reasons why business process outsourcing might be problematic for companies.

First, companies who outsource outside the U.S. can face criticism from their workforce, government officials, or customers that they’re taking jobs away from Americans.

In addition, outsourcing specific parts of the business requires that firms give outside parties access to company information. That could result in data breaches or leaks, which would be especially detrimental to companies that deal with sensitive or proprietary information.

Also, if companies are overly dependent on outside service providers, it could leave them in a lurch down the road. Suppose a company outsources its IT work, and suddenly loses the relationship with its outside provider. The company wouldn’t have anyone who knows the ins and outs of its IT needs.

There can also be hidden costs to BPO, like the time costs of seeking out vendors, the possibility that the outside vendor will increase prices in the future, and the risk that the vendor could go out of business.

Finally, BPO requires a lot of trust in the company you’re hiring. When a business that is family-owned or family-controlled outsources something like customer service, they have to trust that a third-party vendor will care about their customers as much and treat them as well as the company itself would.

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This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.

Robinhood Financial LLC (member SIPC), is a registered broker dealer. Robinhood Securities, LLC (member SIPC), provides brokerage clearing services. Robinhood Crypto, LLC provides crypto currency trading. All are subsidiaries of Robinhood Markets, Inc. (‘Robinhood’).

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© 2023 Robinhood. All rights reserved.