Business Process Outsourcing (BPO) is the process of hiring a third party to perform specific business functions or processes for a company. BPO is a common and growing business practice often thrown into five categories: onshore, nearshore, offshore, front office, and back office. Onshore, nearshore, and offshore outsourcing are types of BPO by geographic location.
Onshore outsourcing is outsourcing to a vendor that resides within the same country of the operating business. Onshore is desirable because of its close proximity, allowing the company to monitor the work and receive quick responses. Most instances of outsourcing are onshore due to the ease of implementation and management, not to mention the positive public perception of creating jobs within the home country. The only drawback is a perceived high cost.
Nearshore outsourcing is outsourcing to a vendor in a nearby country. For example, Mexico and Canada are nearby outsource countries to the United States. The major benefits here is time zone and a potential for lower labor costs. In terms of cost, nearshore is perceived to be less expensive than onshore but still not considered cost effective.
Offshore outsourcing is outsourcing to a vendor in a foreign country, most commonly India, China, or the Philippines. The lower labor cost countries house the most offshore outsourced companies because of the density of educated, multi-lingual personnel and low cost. The language and cultural difference makes offshore outsourcing difficult for many companies and customers, and quality issues tend to be more pervasive. Also, the perceived costs are lower. Many companies tend to only see the visible labor savings of offshoring and don't account for the hidden costs, like time zone conflicts, language barriers, and high staff turnover.
Now for the remaining two categories. Let’s discuss the different types of outsourcing based upon what part of the company is being outsourced. The back office takes responsibility for supporting the company and performing work that does not directly generate revenue or interact with the customers. Examples include: Accounting, Information Technology, Internal Audit, and HR. The front office includes the customer or client-facing departments, typically the revenue-generating areas of the company. This includes Sales, Manufacturing, and Customer Service.
The back office function can be outsourced in part or in full. For example, a business can only outsource invoice processing for accounts payable, or they could outsource the entire human resources department. In either case, it is important to have a manager responsible for communication between the business and the outsource vendor to ensure tasks are completed timely and accurately.
The front office function can be further categorized as service and manufacturing outsourcing, not to be confused with the service and manufacturing industries. Front office service outsourcing is a service provided to a customer or client by a non-disclosed entity. In other words, it is a business providing a service to a customer through an outside company. Customer service call centers is a prime example. Answering agents are employed by the BPO, not the actual company whose brand name is on the product. A customer may think they are calling one company when they are actually routed to an outsourced vendor.
Front office manufacturing outsourcing refers to a manufacturer that assists in the full or partial production of an item then sells the item under the brand of the product. Manufacturing outsourcing is common in the grocery business. The grocery store's private brand products are likely manufactured by another company, not the grocery store.
Coca-Cola was one of the first and is now one of the largest companies outsourcing many areas of their business.
After failing in several business ventures, John Stith Pemberton created a product that would infiltrate world markets—a Bordeaux wine with coca leaf drink, better known as Coca-Cola. Although Pemberton’s product continued to grow in popularity, he struggled with the debts of his past business failures. He decided to outsource the bottling function of his supply chain process to an outsource manufacturer who could bottle products more efficiently. It also reduced the company’s involvement, saving time and resources. Still today, Coke’s bottling partner manufactures, packages, merchandises, and distributes the final beverage. Coke was one of the first businesses to use BPO and continues to outsource many functions throughout the company.
Many organizations believe outsourcing is a simple way to reduce overhead expenses. Not necessarily. Organizations often find outsourcing costs to be higher than performing the work internally.
Companies deciding to outsource for competitive reasons (private branding of groceries), for risk reduction, or to eliminate a time-consuming service (customer support) often have a more successful outsourcing experience. Companies who outsource for the sole purpose of cost savings usually end the outsourcing relationship.
Next time you want to eliminate a frustration in your life or company, think of BPO.
This article has been adapted from a chapter from Trenegy’s book, Jar(gone).
Trenegy is a non-traditional consulting firm dedicated to helping companies clarify the latest business jargon, putting it into useful terms and solutions that benefit your company. Find out more by contacting us at info@trenegy.com.
