Business Process Outsourcing - Explained
What is Business Process Outsourcing?
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Table of ContentsWhat is Business Process Outsourcing?How Does Business Process Outsourcing (BPO) Work?Services that Companies OutsourceAcademic Research on Business Process Outsourcing (BPO)
What is Business Process Outsourcing?
Business process outsourcing is a method used by companies to subcontract other business entities to take responsibility for one of their activities that could otherwise be done internally. Sometimes the responsible company will send employees and assets to the outsourcing company to carry on the tasks.
How Does Business Process Outsourcing (BPO) Work?
The outsourcing may also be termed as the process of handing over public services control to private entities both on a long-term and short-term basis. Outsourcing applies to both domestic and foreign contracting. It may, from time to time, also include offshoring, where a firm may decide to relocate a business function to a faraway country. It may also engage in nearshoring where a business transfers its service to a neighboring nation. There is also onshore or domestic outsourcing, where an organization can opt for outsourcing from within the country. A good number of companies today, whether small, large, or new, opt for business process outsourcing. Outsourcing ensures that they remain competitive in the ever-increasing new innovative services and products in the market.
Services that Companies Outsource
There are two broad areas in which companies adopt BPO functions - the back office and front office.
Back office - The back office is when a company outsources for services from for its core business operations such as:
- Human resource
- Quality assurance
- Information technology services
- Payment process
- Regulatory compliance
- Product design
Front office - Services outsourced from office functions include customer services, sales, tech support, and marketing. Reasons for either outsourcing or operating in-house is based on the companys desire to achieve various things.
- To lower the cost of production
- To properly utilize facilities including other resources like office space, furniture, and equipment
- To focus their efforts on the buyers key competencies
- Make good use of the labor
For those companies that opt for outsourcing services, they do this to achieve the following:
Cost-saving: Outsourcing saves on cost by ensuring quality levels, cost restructuring, and work scope reduction.
Cost restructuring: A company outsources so that it can achieve operating leverage. It can compare variable costs to fixed costs and work on balancing the two to ensure flexibility in its operations.
Improved quality: Outsourcing ensures that the companys operations follow the specified and agreed on new service level to provide quality services.
Academic Research on Business Process Outsourcing (BPO)
- A business process outsourcing framework based on business process management and knowledge management, Mahmoodzadeh, E., Jalalinia, S., & Nekui Yazdi, F. (2009). A business process outsourcing framework based on business process management and knowledge management.Business Process Management Journal,15(6), 845-864. The paper finds that BPM and KM could reduce risks of outsourcing and enable a BPO lifecycle.
- Outsourcing to emerging markets: Theoretical perspectives and policy implications, Javalgi, R. R. G., Dixit, A., & Scherer, R. F. (2009). Outsourcing to emerging markets: Theoretical perspectives and policy implications.Journal of International Management,15(2), 156-168. Creating value through outsourcing has emerged as a popular competitive strategy for firms in various industries. In order to survive in the domestic and international marketplaces, firms, especially in developed countries, are seeking opportunities offshore, which is one focus of globalization. Offshore outsourcing has emerged as a popular competitive strategy and emerging markets have become increasingly attractive locations. As firms in developed countries (e.g., the US) continue to face enormous challenges to sustain competitive advantage, outsourcing to emerging markets is becoming an increasingly important source of business renewal and corporate transformation. In spite of the growing strategic significance of sourcing, we have limited knowledge of offshoring and outsourcing to emerging markets. The objectives of this review are fourfold: (1) to provide a better understanding of the concepts of offshoring and outsourcing business models, (2) to discuss relevant theoretical perspectives related to outsourcing, (3) to present a taxonomy of outsourcing strategies drawing on the extant literature, and (4) to discuss public policy implications. Conclusions and direction for future research are provided.
- Developing a decision model for business process outsourcing, Yang, D. H., Kim, S., Nam, C., & Min, J. W. (2007). Developing a decision model for business process outsourcing.Computers & Operations Research,34(12), 3769-3778. Information technology (IT) outsourcing has been one of the critical issues in organization management. Business process outsourcing (BPO) is an advanced type of IT outsourcing, which will be the next big wave in information technology services. Nevertheless, since prior studies have only examined issues related to traditional IS outsourcing, there have been few researches that introduce and discuss the important factors that should be considered in the decision of BPO adoption. This paper identifies factors affecting the BPO decision and structures a decision model using the analytic hierarchy process (AHP) method. By proposing a quantitative decision model, this paper will not only assist management in making better decisions in outsourcing their business processes, but also help them to obtain the most benefits from BPO.
- CEO personality, strategic flexibility, and firm performance: The case of the Indian business process outsourcing industry, Nadkarni, S., & Herrmann, P. O. L. (2010). CEO personality, strategic flexibility, and firm performance: The case of the Indian business process outsourcing industry.Academy of Management Journal,53(5), 1050-1073. We examine the relationships between CEO personality, strategic flexibility (ability to adapt quickly to environmental changes), and firm performance, using a sample of 195 small and medium-sized firms from the Indian business process outsourcing industry. We hypothesize that strategic flexibility mediates the relationships between CEO personality and firm performance. Our results extend previous research by not only highlighting the importance of CEO personality in driving strategic flexibility, but also indicating how each facet of CEO personality either enhances or inhibits strategic flexibility.
- The impact of process standardization onbusiness process outsourcingsuccess, Wllenweber, K., Beimborn, D., Weitzel, T., & Knig, W. (2008). The impact of process standardization on business process outsourcing success.Information Systems Frontiers,10(2), 211-224. What is the impact of business process standardization on business process outsourcing (BPO) success? This paper argues that there is a direct impact of process standardization on BPO success, due to production cost economies, and also an indirect effect via improved contractual and relational governance resulting from better monitoring opportunities and facilitated communication and coordination. This threefold impact of standardization on BPO success is empirically confirmed using data from 335 BPO ventures in 215 German banks.
- An empirical analysis of the impact of information capabilities design on business process outsourcing performance.Mani, D., Barua, A., & Whinston, A. (2010). An empirical analysis of the impact of information capabilities design on business process outsourcing performance.Mis Quarterly,34(1). Organizations today outsource diverse business processes to achieve a wide variety of business objectives ranging from reduction of costs to innovation and business transformation. We build on the information processing view of the firm to theorize that performance heterogeneity across business process outsourcing (BPO) exchanges is a function of the design of information capabilities (IC) that fit the unique information requirements (IR) of the exchange. Further, we compare performance effects of the fit between IR and IC across dominant categories of BPO relationships to provide insights into the relative benefits of enacting such fit between the constructs. Empirical tests of our hypotheses using survey data on 127 active BPO relationships find a significant increase (decrease) in satisfaction as a result of the fit (misfit) between IR and IC of the relationship. The results have implications for how BPO relationships must be designed and managed to realize significant performance gains. The study also extends the IPV to identify IC that provide the incentives and means to process information in an interfirm relationship.
- Challenges and opportunities of business process outsourcing in India, Mehta, A., Armenakis, A., Mehta, N., & Irani, F. (2006). Challenges and opportunities of business process outsourcing in India.Journal of Labor Research,27(3), 323-338. We identify managerial challenges and opportunities faced by business process outsourcing (BPO) firms in India by interviewing 28 executives in lower (n = 10), middle (n = 11), and upper management (n = 7) in 15 BPO firms. Content analysis of the responses revealed human resources and organization related challenges as the most critical issues. SWOT (Strengths, Weaknesses, Opportu-nities, Threats) analysis uncovered future opportunities, e.g., Knowledge Process Outsourcing. Secondary data, from four global research agencies and a national trade association, supported our findings. Organizational changes to address challenges and to exploit opportunities are explored.