The idea that businesses should focus on what they do best and outsource non-core functions has been a trend for the past 5 years. Non-core processes cost about 7 to 11% of a company’s revenue. However, businesses have realized that maximizing efficiency in every single department is a costly endeavor. The company may lack the capabilities to become an expert because may need to invest time and effort that the organization may not always be able to spare. For example, investing in the manufacturing department would involve purchasing equipment, hiring employees, or even buying land. All of these would involve an exorbitant tax burden.
To invest in every single department to improve capabilities is ideal but ultimately inefficient. Take the example of an advertising agency seeking to develop specialized software for their company or an application for the business. It would not make sense for the agency to use up a significant portion of its resources in the IT department. Hence, most organizations entrust most, if not all of their non-core processes to outsourcing companies. According to Investopedia, the global business process outsourcing market was worth 88.9 billion dollars in 2017.
What is Business Process Outsourcing?
It is the process of turning over certain business activities or a portion of businesses processes that do not belong to the core of the business. This is not just a practice small or medium-sized companies select to enhance their capabilities. Large corporations such as MasterCard choose to outsource their customer service support to various countries. Business process outsourcing is classified based on location, type of service, and back-office and front office.
It refers to the place where the business process outsourcing company is located. It includes three types onshore, nearshore, and offshore vendors.
Onshore vendors include companies that are located within the country but in a different state or city. If a business in New York City outsources its customer support to an outsourcing company in Nashville.
Nearshore vendors include vendors that are located in nearby countries. For example, for the United Kingdom, Poland would be a nearshore country. Similarly, for the United States, a nearshore vendor would include businesses in Mexico or Canada.
Offshore vendors would consist of companies that are located far away from the company. An example of this would be an American company outsourcing its offshore application development to a vendor in Pakistan.
Back office vs Front office
The second category consists of back office and front office. The back office is primarily concerned with the internal functions of the company such as accounting, finance, IT services. A bookkeeper keeping track of their client’s expenses, an accountant consolidating data into financial statements, and an external team of IT specialists making a custom application would be examples of back-office outsourcing.
Front office work on the other hand revolves around the operations of the business. Often, it involves interacting with customers. A customer relationship management organization keeping track of a large company’s customer support services, and an advertising agency devising the digital marketing campaign of a Software House are examples of some front office work that is outsourced.
Types of service
The third category divides outsourcing based on the type of service that they provide. Every outsourcing firm specializes in providing services to a specific industry.
Knowledge Process Outsourcing involves providing business expertise in addition to process expertise through the use of off-the-shelf analytical software to provide analysis or research the market. Sometimes, they may have permission to make business decisions for their client.
Research Process Outsourcing is fairly common in the pharmaceutical and biotechnological industries. They make market research reports, pharmaceutical reports, financial reports depending on their expertise.
Legal Process Outsourcing in which experts help companies draft complex legal documents such as agreements, patent applications, etc. they also research legal issues their clients face and provide advice.
Why is a business process outsourcing popular?
During the ’80s manufacturing industry began taking flight in developing countries such as China. The appeal of low labor cost and tax appealed to large Corporations in developed countries such as the U.S, U.K, Australia, and Canada. They began shifting their manufacturing factories to labor-cheap countries such as China, India, the Philippines.
As of 2020, it has become apparent that Business Process Outsourcing organizations have decided to take it one step further by relocating front office or back-office functions such as human resource of payroll services reducing a significant portion of overhead costs. By hiring labor in other countries allows companies to prevent the cost of relocating labor. Small to Medium-sized businesses are increasingly taking advantage and relegating their non-core processes to companies that specialize in them.
Benefits of Business Process Outsourcing
Focus on core business functions
Much of a manager’s time is spent handling the details of non-core functions. By outsourcing the function, management can focus their time on the bigger picture. This is especially true if a certain process will be either outsourced in the future anyways or is not key to the business’s functions. For example, instead of worrying about organizing data or payroll, the company can focus on strategies to improve the numbers. At the same time, it will provide world-class capabilities in non-core functions.
Reduce direct and additional costs
Organizations can reduce direct costs because outsourcing companies work in foreign countries where the cost of hiring is cheaper. Furthermore, there is ample government incentive to set up a business. Additionally, taxation in foreign countries is lower, whereas taxation in the U.S is 21% which is amongst the highest in the developed world. Furthermore, additional costs such as office space, materials, equipment are eliminated by hiring a outsourcing company.
Outsourcing companies have dedicated teams of specialists to handle tasks. This means that hiring outsourcing companies gives access to highly qualified companies that deal with the process daily. This means they are more capable than in-house staff to deal with the nuances of the non-core function. Furthermore, they keep up with the latest developments within that specific area as their survival in the market depends upon their skill.
Scale up or down without incurring the risk
It is an alternative to hiring staff when the organization wishes to test the waters before hiring full-time employees. For example, if an organization is thinking of scaling up or down certain processes, then the outsourcing company will give a clear picture of how it would affect the organization since there would be ample data. Furthermore, since the outsourcing company has the specialized staff it would not disturb the organization’s day to day work.
Acquire new skills at a lower cost
Training in-house staff can be a time-consuming process which may be a hindrance if the process or project must be completed urgently. Hiring new talent can be too expensive or beyond the scope of the organization’s existing budget and again, it may take time for the new employee to adapt to the organization. Instead, hiring a company that specializes in the business process brings experienced and well-trained staff that is up to date with current trends in the industry at a fraction of the cost and time it would cost to acquire and hire in-house talent.
Remove unnecessary risk
Investing in facilities, equipment or hiring employees will not guarantee that the outcome will be successful. Business process outsourcing is a smart way of delegating the risk to a third party. For example, if application development is outsourced then it developing, prototyping and testing would become the responsibility of the outsourcing company. Hence, the process of releasing a new application would become much smoother.
When organizations can outsource their processes, they observe growth in their non-core areas. However, they also obtain the ability to take action more quickly. It can accelerate the rate at which new ideas are introduced, developed, and implemented across organizations. This is because outsourcing helps organizations understand what reality looks like when implementing a new idea. There is a great chance that potential errors or areas of improvement become clear when processes are outsourced. Since the company’s resources are not being used, there is greater flexibility when it comes to decision making.
How to choose the right Business Process Outsourcing company?
Obtain support across all departments
Many organizations choose to outsource without having everyone on board with the decision. To ensure that the process of approving the decision, negotiating the contract with the outsourcing company, and finally, overturning of duties is as smooth as possible to the business process outsourcing organization is as smooth as possible it is important to ensure the approval of the decision within the organization.
The department whose process is being outsourced approves of the decision as they are the most important stakeholder. They will have to work closely with the outsourcing company supervising and correcting the outsourcing company’s work. Similarly, senior management or (in the case of a larger company) obtaining support from the board. This prevents the project from receiving a negative reaction or being rejected entirely which would defeat the process of outsourcing.
Lay out clear guidelines for both parties
Before searching for an outsourcing company it is essential to establish the objectives that are meant to be accomplished by the outsourcing team. These will allow the organization and the outsourcing company to have a map of how objectives must be carried out. In the end, it will help when both parties have to evaluate whether targets were met or not.
At the same time, there should be guidelines that the organization should follow to deal with the outsourcing company like a specific set of procedures to communicate with confidentiality. Practices would include marking documents as confidential. It will also prevent potential misunderstandings and confusion arising because of unclear goals objectives.
Assess the organization
There are three internal factors that any organization must consider before choosing to outsource. The first one is understanding the organization’s current strengths and weaknesses. Outsourcing is often chosen as a means to save costs and to increase efficiency. However, outsourcing can also be a means to cover up the weaknesses. It can also be used to assist the organization in areas where it lacks expertise but does not have the capital to invest in specialized staff to handle the process. Hence, selecting an outsourcing company that specializes in the area where the organization is lacking can allow the organization to overcome its weakness.
Next, it is important to assess the organization’s budget to find out how much capital is being spent and how will the outsourcing company will be helping the company save. It would make no sense to outsource a process if it will reduce the cost incurred by the current budget. The third one would be is the organization relying on an outsourcing organization to support a process within the department. If so, should the new business process outsourcing company also undertake those duties as well?
Businesses of all sizes want to reduce their costs and increase their efficiency in non-core business functions without disturbing their focus on their core business functions. Hence, organizations choose to outsource their work. There are three classifications of business process outsourcing: location, service type, and finally, back office and front office. Besides, to focus on their core capabilities business process outsourcing companies organizations reduce direct and additional costs, boost efficiency, scale up or down without incurring the risk, acquire new skills at a lower cost, remove unnecessary risk and finally, increase flexibility. To ensure that the process is successful organizations must get approval across all departments, lay out clear guidelines for both parties, and assess internal factors within the organization.
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