Business Process Outsourcing(BPO)
The allocation of one or more intense processes of business to an outsider is called as business process outsourcing. The outsider who is an external provider provides the products or service design and quality to the business based on the agreed terms and conditions. It is an independent company but works in collaboration with the parent company.
Divisions of business process outsourcing
The business process outsourcing (BPO) provides service to a wide variety of businesses. They are as follows,
Outsourcing activities provide a great help for the content development activities in different areas such as network consultancy and management, engineering, design and animation, biotech research etc.
Business process outsourcing (BPO) undertakes activities of human resources which include education and training, recruitment and staffing, administration of benefits, hiring activities, payroll services and management of records.
Outsourcing in financial sector includes reporting and analysis of financial transactions, risk management services, tax consultation issues, transactions of accounting and billing services.
Services in administration department include processing of tax and claims, translation, transcription, management of assets and documents.
Credit/debit card services, processing of cheques and transaction processing which come underpayment services.
Business process outsourcing is also extending help in customer care which involves customer analysts, marketing of database, telemarketing, telesales, marketing and sales on the web, inbound call center, and administration of marketing and sales.
There are three kinds of Business process outsourcing models
Transactional Business process outsourcing
Comprehensive Business process outsourcing
Niche Business process outsourcing
Transactional Business process outsourcing:
In this process, the customer has to bear the risk involved in this process as it involves the customer keeping track of the predominant part of the in-house process. Only a single element of the whole process is controlled y the transactional business process outsourcing.
Comprehensive Business process outsourcing
All the transactional operations involved in the process and administrative issues are controlled by the comprehensive BPO model. This model is accountable for the huge amount, nearly 70% of the output produced. Comprehensive BPOs undertake deals that continue for a huge period of time i.e., for 7-10 years. In this model, the vendor acquires the assets of the buyer and even hires most of these employees.
Niche Business process outsourcing:
In niche BPO model there is a close coordination between the buyer and vendor. The vendor may ask for services from the employees of the customers. The BPO in this model is focused on enhancing the efficiency of the process and invests in the customer’s process. Unlike transactional BPO, it controls up to 3-4 aspects of the process.
Drivers of Outsourcing
The following are the important drivers of outsourcing as mentioned,
The client firm can get effective services at reduced costs. Cost cutting is one of the most important reasons for the companies to outsource their service activities as a process of carrying in-house manufacturing of these services would be expensive than outsourcing their activities due to economies of scale
Better Operational Efficiency
Outsourcing can increase the operational efficiency of the client firm in different ways like, operations are carried out managed and tackled by those companies which have expertise and excellence in carrying out the processes effectively. This further increases the overall efficiency which results in properly taking care of cost and operations.
The top level companies have shifted their services to the low-cost countries in search of abundant skilled manpower and resources.
Scarcity of Internal Resources
Quite a few times there exists scarcity of internal resources for performing certain operations. In such a case, the foreign company can outsource that specific activity or service to the service or outsource provider.
Accelerate Speed and Time to Market
Through outsourcing, the client company would be able to minimize its cycle time and develop time to market for any product. This further increases the overall efficiency and productivity.
Maximize Resource Utilization
When the client company begins outsourcing certain activities to outsource provider then the foreign company can make use its internal resources for some other activities. Thereby no wastage of time and expenditure towards unimportant activities can be avoided. Thus there will be an optimum utilization of resources and assets on its core activities.
Focus on innovation and core competencies
The company lays greater emphasis and stress upon the core competence with an aim to achieve and fulfill the core business objectives, as the non-core activities are already been outsourced.
Greater flexibility and competitiveness
If a company starts concentrating upon the most important and specific functions with high specialization then, it helps in increasing the company’s potential and can achieve its desired goals and needs in an effective manner.
Lack of functional experts and domain knowledge
Practically it is impossible for a company to have employees with excellent and domain knowledge in each and every activity. For example, the cosmetic company desires to operate and perform in an efficient manner with the use of improved technology but, its area of expertise is not IT. Under such circumstances, a cosmetic company can outsource its IT and business process service to an outside company who are expertise in that particular field.
Best Global Practices
Outsourcing helps in providing services worldwide. It is easier to learn and gain expertise in the best practices implemented by top most companies in the world.
Various Activities involved in the process of Outsourcing
Decision to Outsource
For taking a decision to outsource, the client firm should determine what needs to be outsourced and prepare a business plan which explains the reasons for outsourcing. This decision is taken at the strategic level and needs the board’s approval. Once the scope of services to be outsourced is determined and then the next step is to select an outsourcing provider.
Proposal to Supplier
After short listing the suppliers, a ‘Request For Proposal’ (RFP) is issued to these suppliers, which includes the request for proposal and price.
Rating the Suppliers
The competition is held among the suppliers wherein, the clients rate the suppliers’ proposal. This process may incorporate certain meetings for explaining the client requirements and the suppliers’ response. After this, only a few suppliers will be left. At last, the suppliers submit a ‘Best and Final Offer’ (BAFO) for the client to finalize the selective decision to one supplier.
The process of negotiation considers all the documents submitted by the suppliers that are the original Request for Proposal, the supplier’s proposal, Best and Final Offer submission and transfers them into the contractual agreement between the client and the supplier. The final documentation and the pricing structure are decided during this stage.
Finalization of Contract
The essence of an outsourcing deal is the contractual agreement which states clearly how the client and the supplier work together. The outsourcing is a legally binding document which relies mainly on the relationship between the client and the supplier. The outsourcing deal contains three important dates in which each party signs up that is the contract signature date, the effective date at which the contract terms and conditions become active and the service commencement date from when the supplier commences the services.
Transition process starts from the effective date and continues till four months of service commencement date. This process is especially meant for the staff transfer and the take-on of services.
Transformation deals with the implementation of the set of projects to execute the service level management to minimize the total cost of the ownership or to perform new services. The main focus on transformation is towards standardization and centralization.
Ongoing services Delivery and Termination or Renewal
This is the final step of agreement in which the contract is executed. The client firm at the end of the contract term must decide whether to terminate or renew the contract. The process of termination may either deal with the taking back the services (in sourcing) or transfer the service to the other supplier (outside provider).
Key trends in BPO industry
Extreme cutting of unavoidable costs by vendors
Large companies hold the capability of obstructing the foreign exchange convertibility but they cannot stop the danger of lower competitiveness in the long run. Companies not only concentrates on optimizing cost heads but they also focus on optimizing administrative or marketing cost and earlier management used to emphasize only on growth, but at present quality of growth is also taken into consideration.
Greater emphasis on mid-market opportunity
Initially, the mid-market segments were poorly served due to various reasons like the absence of knowledge regarding off shoring, displeasing sizes of the deals for the premium vendors etc. the increase in maturity of early buyers among the midmarket companies are motivating them to behave in a particular way and adopt costly services of large vendors. Whereas increased global competition motivates the large vendors to go beyond the fortune lists.
Advantages of outsourcing
- Cost savings
- Enhancing operations and service
- Emphasizing on core competencies
- Acquiring outside technology
- Improved services
- Possible to introduce new technology
- Increased transportation costs
- Loss of control
- Creating future competition
- Negative influence on employees
- Longer-term impact
- Innovations and knowledge may disappear
- Firm may become dependent