Business Process Outsourcing (BPO) Definition - Investopedia

What Is Business Process Outsourcing (BPO)?

Business process outsourcing (BPO) is a method of subcontracting various business-related operations to third-party vendors.

Originally used in manufacturing to manage supply chains, BPO now spans various industries, including healthcare, asset management, energy, pharmaceuticals, e-commerce, and others, to enhance efficiency, reduce costs, and leverage specialized expertise and advanced technology.

Key Takeaways

• Business process outsourcing (BPO) involves using third-party vendors to handle specific business operations.
• Initially used by large manufacturing companies for supply chain management, BPO now spans various sectors, including services.
• BPO vendors invest in the latest technology, such as AI and advanced analytics, allowing companies to use cutting-edge solutions and improve processes while saving costs.
• BPO is considered "offshore outsourcing" when vendors are located in different countries, such as for customer support.
• BPO has evolved into a standalone industry, with specialized companies providing outsourcing services globally.

Understanding Business Process Outsourcing (BPO)

Many businesses, from small startups to large companies, opt to outsource various processes due to the availability of innovative services in today's highly competitive and dynamic business environment.

Broadly speaking, companies adopt BPO practices in the two main areas of back-office and front-office operations. Back-office BPO involves contracting its core business support operations, such as accounting, payment processing, IT services, human resources, regulatory compliance, and quality assurance, to outside professionals who ensure smooth business operations. This approach may see the business leverage technological trends like cloud computing and AI, which improve efficiency and quality while reducing costs.

By contrast, front-office BPO tasks commonly include customer-related services such as tech support, sales, and marketing. These services help businesses improve customer experience and maintain a competitive edge in the market.

The global business process outsourcing market was valued at $281 billion in 2023 and is projected to grow at a compounded annual growth rate of 9.6% from 202 to 2030.

Special Considerations

A business's range of BPO options depends on whether it contracts its operations domestically or internationally.

BPO is considered"offshore outsourcing" when the contract is sent to another country that offers political stability, lower labor costs, or tax savings. One example is a U.S. company using an offshore BPO vendor in Singapore.

"Nearshore outsourcing" refers to contracting work to a neighboring country. For example, a U.S. company partnering with a BPO vendor in Canada falls under this category.

A third option, "onshore outsourcing" or "domestic sourcing," occurs when BPO is contracted within the company’s country, even if the vendor is in a different city or state.

BPO is often called information technology-enabled services (ITES) because it relies on technology and infrastructure that enables external companies to perform their roles efficiently.

The Attraction of BPO

Companies are often drawn to BPO for its ability to provide greater operational flexibility. By outsourcing non-core and administrative functions, businesses can reallocate time and resources to core competencies like customer relations and product innovation, gaining an edge over competitors in their industry.

BPO also grants access to cutting-edge technological resources that might otherwise be out of reach. BPO partners continuously adopt the latest technologies and practices to improve their processes.

The U.S. corporate income tax is one of the highest in the developed world and could rise further with Biden’s proposal to increase the federal corporate income tax rate from 21% to 28%. Consequently, outsourcing to countries with lower taxes and labor costs becomes an effective cost-reduction strategy for American companies.

BPO also offers companies the benefits of quick and accurate reporting, improved productivity, and the ability to swiftly reassign its resources when necessary.

Biden’s proposal to raise the federal corporate income tax rate from 21% to 28% would increase the United States’ combined state and federal corporate tax rate to 32%. This change would make the U.S. corporate tax rate nearly 50% higher than the OECD average. Consequently, outsourcing operations to countries with lower taxes and labor costs would become a more attractive cost-reduction strategy for businesses.

Some Disadvantages of BPO

While BPO offers many advantages, it also has drawbacks. A business that outsources its business processes may be prone to data breaches or communication issues that delay project completion. Additionally, businesses often underestimate the ongoing costs of BPO providers.

Another potential downside is customer backlash if outsourcing is perceived as compromising quality or negatively impacting domestic employment.

BPO is a highly lucrative field: The estimated total pay for a Business Process Outsourcing professional in the United States is $205,756 per year, with an average salary of $125,808 per year.

What Is the Goal of BPO and What Are Its Types?

BPO is the abbreviation for business process outsourcing, which refers to when companies outsource business processes to a third-party (external) company. The primary goal is to cut costs, free up time, and focus on core aspects of the business. Two types of BPO are front-office and back-office. Back-office BPO entails the internal aspects of a business, such as payroll, inventory purchasing, and billing. Front-office BPO focuses on activities external to the company, such as marketing and customer service.

What Are the Advantages of BPO?

There are numerous advantages to BPO. One of the primary advantages is that it lowers costs. Performing a certain job function internally costs a specific amount. BPO can reduce these costs by outsourcing this job to an external party, often in a less cost-intensive country, reducing the overall cost of performing that job function.

Other advantages include allowing a company to focus on core business functions that are critical to its success rather than administrative tasks or other aspects of running a company that are not critical. BPO also helps with growth, particularly in global expansion. If a company is interested in opening an overseas branch or operating overseas, utilizing a BPO company that has experience in the local industry and speaks the language is extremely beneficial.

What Are the Types of BPO Companies?

There are three primary types of BPO companies. These are local outsourcing, offshore outsourcing, and nearshore outsourcing. Local outsourcing is a company in the same country as your business. Offshore outsourcing is a company that's in another country, and nearshore outsourcing is a company that's in a country not too far from your own.

What Is a BPO Call Center?

A BPO call center manages incoming and outgoing customer calls for other businesses. It employs agents who can handle customer complaints or inquiries for multiple companies, often within a specific industry. For example, a call center agent may provide tech support for different vendors or manufacturers.

The Bottom Line

Business process outsourcing (BPO) utilizes third-party specialists to carry out some part of a business process or operation (as opposed to outsourcing the entire production). BPO can lower a company's costs, increase efficiency, and provide flexibility. At the same time, the BPO industry is rapidly growing, which means that in our increasingly global economy, process outsourcing isn't going anywhere.