Business process outsourcing
Business process outsourcing (BPO) contains the transmission of processes along with the associated operational activities and responsibilities, to a third party with at least a guaranteed equal service level and where the client contains a firm grip over the (activities of the) vendor for mutual long term success. BPO is positively related to the search for more efficient organizational designs: cost reduction, productivity growth and innovative capabilities. Hence, a source for strategic advantage.
In short it is just transmitting responsibilities to the third party.
Business process outsourcing ( BPO ) is the contracting of the operations and responsibilities of a
specific business function to a third-party service provider, primarily to achieve cost reduction and optimal resource allocation
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. [Tas, J. & Sunder, S. 2004, "Financial Services Business Process Outscourcing", Communications of the ACM, Vol 47, No. 5] However, BPO is nowadays rapidly conquering the service oriented firms as well. A well-known example is provided by the Bank of America, who outsourced their entire HR function to Exult, one of the leading Human Resources BPO vendors. [Harmon, P. 2003, "An Overview of Business Process Outsourcing", Business Process Trends Newsletter, Vol. 1, No. 9]
BPO is often divided into two categories:
back officeoutsourcing, which includes internal business functions such as billingor purchasing, and front office outsourcing, which includes customer-related services such as marketingor tech support. The endless opportunities IT provides, stimulates (cross-border) BPO activities. 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 outsourcingindustry. It is dependent on information technology, hence it is also referred to as information technology enabled services or ITES. Knowledge process outsourcingand legal process outsourcing are some of the subsets of business process outsourcing.
Indiahas revenues of 10.9 billion USD [ [http://www.nasscom.in/Nasscom/templates/NormalPage.aspx?id=53402 Cover Story ] ] 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, Egyptand South Africahave emerged to take a share of the market. Chinais 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, IBMDaksh, and TCS BPO. [ [http://www.nasscom.in/Nasscom/templates/NormalPage.aspx?id=51802 NASSCOM Announces Top-15 ITES-BPO Exporters Rankings for FY 06-07 ] ]
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.
Pakistanhas also emerged as potential market for IT based BPO companies. ["The Untapped Market for Offshore Services", 2006]
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. [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] 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. [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.] 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. [Kakabadse, A., Kakabadse. N. 2002. "Trends in Outsourcing: Contrasting USA and Europe." European Management Journal Vol. 20, No. 2: 189–198] 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. [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] 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. [Leavy, B. 2004. "Outsourcing strategies: opportunities and risk." Strategy and Leadership, 32 (6) : 20-25.]
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. [Tas, Jeroen, Sunder, Shyam. 2004. "Financial Services Business Process Outsourcing." COMMUNICATIONS OF THE ACM Vol. 47, No. 5]
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. [Fischer, L.M. 2001. "From vertical to Virtual; How Nortel’s Supplier Alliances Extend the enterprise [online] ." Strategy+Business, Available from http://www.strategy-business.com/press/16635507/11153 [Accessed
5 February 2008] ] 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. [(Leavy 2004, 20-25)]
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 [Michel, Vaughan, Fitzgerald, Guy. 1997. "The IT outsourcing market place: vendors and their selection." Journal of Information Technology 12: 223-237]
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. [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.] [K. Altinkemer, A. Chaturvedi and R. Gulati. "Information systems outsourcing: Issues and evidence", International Journal of Information Management 14- 4 (1994): 252- 268.]
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. [Forbes Gibb, and Steven Buchanan. "A framework for business continuity management", International Journal of Information Management 26- 2 (2006): 128- 141.]
Another framework, more focused on the identification process of potential outsourceable Information Systems, identified as AHP, is explained. [Chyan Yang and Jen-Bor Huang. "A decision model for IS outsourcing", International Journal of Information Management 20- 3 (2000): 225- 239.]
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. [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.]
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* [http://www.tutorial-reports.com/business/outsourcing/bpo/report.php Report on Business Process Outsourcing (BPO)]
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