Business process outsourcing
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Business process outsourcing (BPO) is a form of outsourcing which involves the
contracting of the operations and responsibilities of a specific business function to a
third-party service provider.
Traditionally, BPO is undertaken by manufacturing firms, for instance Coca Cola, where
almost the entire supply chain is outsourced and the company is essentially becoming a
marketing organization.[1] More recently, it is also used by service oriented businesses,
such as the Bank of America, who outsourced their entire Human Resources function to
the BPO firm Exult Inc.[2]
BPO is often divided into two categories: back office outsourcing, which includes
internal business functions such as billing or purchasing, and front office outsourcing,
which includes customer-related services such as marketing or tech support. BPO that is
contracted outside a company's own country is sometimes called offshore outsourcing.
BPO that is contracted to a company's neighboring country is sometimes called nearshore
outsourcing.
Use of a BPO as opposed to an application service provider (ASP) usually also means
that a certain amount of risk is transferred to the company that is running the process
elements on behalf of the outsourcer. BPO includes the software, the process
management, and the people to operate the service, while a typical ASP model includes
only the provision of access to functionalities and features provided or 'served up' through
the use of software, usually via web browser to the customer.
BPO is a part of the outsourcing industry. It is dependent on information technology,
hence it is also referred to as information technology enabled services or ITES.
Knowledge process outsourcing and legal process outsourcing are some of the subsets of
business process outsourcing.
Contents
[hide]
• 1 Industry size
• 2 BPO increasing the flexibility of organizations
• 3 Challenges
• 4 Threats
• 5 References
• 6 See also
• 7 External links
[edit] Industry size
India has revenues of 10.9 billion USD[3] from offshore BPO and 30 billion USD from IT
and total BPO (expected in FY 2008). India thus has some 5-6% share of the total BPO
Industry, but a commanding 63% share of the offshore component. This 63% is a drop
from the 70% offshore share that India enjoyed last year, despite the industry growing
38% in India last year, other locations like Eastern Europe, Philippines, Morocco, Egypt
and South Africa have emerged to take a share of the market. China is also trying to grow
from a very small base in this industry. However, while the BPO industry is expected to
continue to grow in India, its market share of the offshore piece is expected to decline.
The top five Indian BPO exporters for 2006-2007 according to NASSCOM are Genpact,
WNS Global Services, Transworks Information Services, IBM Daksh, and TCS BPO.[4]
According to McKinsey, the global "addressable" BPO market is worth $122 - $154
billion, of which: 35-40 retail banking, 25-35 insurance, 10-12 travel/hospitality, 10-12
auto, 8-10 telecoms, 8 pharma, 10-15 others and 20-25 is finance, accounting and HR.
Moreover, they estimate that 8% of that capacity was utilized as of 2006.
[edit] BPO increasing the flexibility of organizations
One of the most important advantages of BPO is the way in which it helps to increase a
company’s flexibility. However, several sources have different ways in which they
perceive organizational flexibility. Therefore business process outsourcing enhances the
flexibility of an organization in different ways.
Most services provided by BPO vendors are offered on a fee-for-service basis. This helps
a company becoming more flexible by transforming fixed into variable costs.[5] A
variable cost structure helps a company responding to changes in required capacity and
does not requisite a company in investing in assets and hereby making the company more
flexible.[6] Outsourcing may provide a firm with increased flexibility in its resource
management and reduce response times to major environmental changes.
Another way in which BPO contributes to a company’s flexibility is that a company is
able to focus on its core competencies, without being burdened by the demands of
bureaucratic dictate.[7] Key employees are herewith released from performing non-core or
administrative processes and can invest more time and energy in building the firm’s core
businesses.[8] The key in this lies in knowing, which of the main value drivers to focus on
– customer intimacy, product leadership, or operational excellence. Focusing on one of
these drivers may help a company create a competitive edge.[9]
A third way in which BPO increases organizational flexibility is by increasing the speed
of business processes. Using techniques such as linear programming is a way to reduce
cycle time and inventory levels, which reduces a company’s slack. Supply chain
management with the effective use of supply chain partners and business process
outsourcing increases the speed of several business processes, such as the throughput in
the case of a manufacturing company.[10]
Finally, flexibility is seen as a stage in the organizational life cycle. BPO helped to
transform Nortel from a bureaucratic organization into a very agile organization. A
company can hereby help maintaining ambitious growth goals, which do not fit with
regular incumbent strategies.[11] BPO therefore allows firms to retain their entrepreneurial
speed and agility, which they would otherwise sacrifice in order to become efficient as
they greatly expanded. It avoids a premature internal transition from its informal
entrepreneurial phase to a more bureaucratic mode of operation.[12]
[edit] Challenges
Although the above-mentioned arguments favor the view that BPO increases the
flexibility of organizations, management needs to be careful with the implementation of
it. Some tends to change their attitudes, personalities and character on how the way they
talk to other clients. Although BPO has many potential advantages there are a few
stumbling blocks, which could counter these advantages. Among problems, which arise
in practice are: A failure to meet service levels, unclear contractual issues, changing
requirements and unforeseen charges. When BPO does not work out as planned the
company might well experience the way in which BPO makes a company very dependent
on a vendor and therefore very inflexible. Consequently, these challenges need to be
considered before a company decides to engage in business process outsourcing[13]
[edit] Threats
Risk is the major drawback with Business Process Outsourcing. Outsourcing of an
Information System, for example, can cause security risks both from a communication
and from a privacy perspective. From a knowledge perspective, a changing attitude in
employees, underestimation of running costs and the major risk of losing independence,
outsourcing leads to a different relationship between an organization and its contractor.[14]
[15]
Risks and threats of outsourcing must therefore be managed, to achieve any benefits. In
order to manage outsourcing in a structured way, maximizing positive outcome, and
minimizing risks and avoiding any threats, a Business Continuity Management (BCM)
model is setup. BCM consists of a set of steps, to successfully identify, manage and
control that business processes that are, or can be outsourced.[16]
Another framework, more focused on the identification process of potential
outsourceable Information Systems, identified as AHP, is explained.[17]
L. Willcocks, M. Lacity and G. Fitzgerald identify several contracting problems
companies face, ranging from unclear contract formatting, to a lack of understanding of
technical IT- processes.[18]
[edit] References
1. ^ Tas, J. & Sunder, S. 2004, Financial Services Business Process Outscourcing,
Communications of the ACM, Vol 47, No. 5
2. ^ Harmon, P. 2003, An Overview of Business Process Outsourcing, Business Process
Trends Newsletter, Vol. 1, No. 9
3. ^ Cover Story
4. ^ NASSCOM Announces Top-15 ITES-BPO Exporters Rankings for FY 06-07
5. ^ Willcocks, L., Hindle, J., Feeny, D. & Lacity, M. 2004, IT and Business Process
Outsourcing: The Knowledge Potential, Information Systems Management, Vol. 21, pp
7–15
6. ^ Gilley, K.M., Rasheed, A. 2000. Making More by Doing Less: An Analysis of
Outsourcing and its Effects on Firm Performance. Journal of Management, 26 (4): 763-
790.
7. ^ Kakabadse, A., Kakabadse. N. 2002. Trends in Outsourcing: Contrasting USA and
Europe. European Management Journal Vol. 20, No. 2: 189–198
8. ^ Weerakkody, Vishanth, Currie, L. Wendy and Ekanayake, Yamaya. 2003. Re-
engineering business processes through application service providers - challenges,
issues and complexities. Business Process Management Journal Vol. 9 No. 6: 776-794
9. ^ Leavy, B. 2004. Outsourcing strategies: opportunities and risk. Strategy and
Leadership, 32 (6) : 20-25.
10. ^ Tas, Jeroen, Sunder, Shyam. 2004. Financial Services Business Process Outsourcing.
COMMUNICATIONS OF THE ACM Vol. 47, No. 5
11. ^ Fischer, L.M. 2001. From vertical to Virtual; How Nortel’s Supplier Alliances Extend
the enterprise [online]. Strategy+Business, Available from [Link]
[Link]/press/16635507/11153 [Accessed 5 February 2008]
12. ^ (Leavy 2004, 20-25)
13. ^ Michel, Vaughan, Fitzgerald, Guy. 1997. The IT outsourcing market place: vendors
and their selection. Journal of Information Technology 12: 223-237
14. ^ Bunmi Cynthia Adeleye, Fenio Annansingh and Miguel Baptista Nunes. "Risk
management practices in IS outsourcing: an investigation into commercial banks in
Nigeria", International Journal of Information Management 24 (2004): 167-180.
15. ^ K. Altinkemer, A. Chaturvedi and R. Gulati. "Information systems outsourcing: Issues
and evidence", International Journal of Information Management 14- 4 (1994): 252- 268.
16. ^ Forbes Gibb, and Steven Buchanan. "A framework for business continuity
management", International Journal of Information Management 26- 2 (2006): 128- 141.
17. ^ Chyan Yang and Jen-Bor Huang. "A decision model for IS outsourcing", International
Journal of Information Management 20- 3 (2000): 225- 239.
18. ^ L. Willcocks, M. Lacity and G. Fitzgerald. "Information technology outsourcing in
Europe and the USA: Assessment issues", International Journal of Information
Management 15- 5 (1995): 333- 351.
[edit] See also
• Outsourcing
• Offshoring
• Nearshoring
• Homeshoring
• Globalization
• List of call centre companies
• Recruitment
• Recruitment Process Outsourcing
• Software testing outsourcing
• BPO security
• Business process outsourcing in India
• Business process outsourcing in the Philippines
• Website Management Outsourcing
• Captive service
[edit] External links
• Report on Business Process Outsourcing (BPO)
Retrieved from "[Link]
Categories: Business process | Business terms | Information technology management
