6 Different Types of Business Process Outsourcing

Updated Oct 4, 2022.
Types of Business Process Outsourcing

The global market size of outsourced services (BPO Market) is increasing at a relatively high rate. Global services were valued at US$92.5 billion in 2019, which is constantly increasing.

Outsourcing business processes is commonly associated with every successful business. It is a cost-effective solution to the high cost of employing experts in certain fields and filling skill gaps within the organization to foster global expansion and provide flexibility.

This article will discuss the BPO industry, how it functions and operates, and the unique responsibilities of outsourcing firms.

What is Business Process Outsourcing?

Business Process Outsourcing (BPO) is also described as externalization or subcontracting. BPO involves an external service provider hired to execute an essential business function or task.

The manufacturing industry exclusively used BPO at the initial stage of its inception, but in recent times, various business processes have used it.

Business Process Outsourcing (BPO) is a kind of outsourcing where an organization employs a third-party service provider to execute certain business functions.

The third-party vendor employed is exclusively responsible for carrying out every function and activity in line with the business function and ensuring it comes out excellently as it is supposed to.

In simple terms, BPO employs another company to execute a business process your organization needs to operate.

In certain cases, Business Process Outsourcing may occur if an organization feels that another company is more specialized in handling the business task than they can.

BPO helps to improve customer satisfaction and reduce costs. On the other hand, some organizations outsource certain tasks if they are unwilling to employ staff to operate the business process to cut costs.

Advantages of Business Process Outsourcing

Here are some major benefits your company can derive from outsourcing their business operations to BPO providers within the same country or overseas.

Most important reasons for outsourcing
Source: YourDMS

1. Lower Cost

A major motivation for outsourcing by most organizations is cost reduction.

Instead of purchasing new information technology equipment or hiring and training more staff to carry out specific roles in a particular department, organizations can outsource these tasks to a skilled service provider who will execute the task excellently.

This approach helps the organization reduce or even eliminate the overhead cost incurred.

2. Higher Efficiency

BPO companies are skilled and experienced in various fields and can effectively perform given tasks at the highest level of functionality based on their skill set and specialization.

Additionally, while executing BPO jobs, these service providers use the latest technology and adopt best practices to ensure that the job is done excellently without any errors. This approach naturally results in greater productivity and higher efficiency.

3. Focus on Core Business Processes

Many organizations, mostly startups, experienced a tough time with ancillary business activities. The company’s inability to focus effectively on its core business functions will ultimately negatively affect every aspect of the business.

Transferring the non-core functions of the organization to a BPO company to give the company more time for its main business activities is a smart decision.

4. Global Expansion

A company may decide to expand its influence into other parts of the world and enter the overseas market. For the organization to achieve this goal, the company must have certain activities and measures to ensure its success.

You can outsource vital business activities that require national law expertise, local market knowledge, or fluency in a foreign language to a qualified BPO company. These activities are essential in enhancing the company’s efficiency and quicker expansion.

Disadvantages of Business Process Outsourcing

Here are some drawbacks of Business Process Outsourcing that may affect the organization negatively.

1. Security Issues

A major drawback of working with BPO companies is the possibility of a security breach regarding the transfer of sensitive files. Nobody should have access to the company’s files; some files carry classified information that must not leak to the public.

Since your company must share files with the hired BPO firm, there is a possibility that some sensitive files may be breached.

2. Over-Reliance on the BPO Company

The long-term effect of outsourcing may not always be beneficial to an organization. After outsourcing business functions to a BPO company for too long, the organization may get used to this approach of depending on the BPO company to execute the task.

Overdependence on a BPO company may result in the organization being overcharged more than the usual costs if demanded.

3. Communication Problems

If your organization is working with an offshore Business Process Outsourcing company, certain factors like language barriers may hinder the company’s efficiency.

Outsourcing certain tasks that are related to development or Information technology services that involve a lot of people can lead to costly mistakes as a result of miscommunication.

These errors and problems can be extremely costly to the organization and result in certain setbacks.

4. Unforeseen or Hidden Costs

Since the process of carrying out tasks in an organization is not black and white, the company may underestimate the volume of work, leading to higher costs than the estimated budget.

Working with a Business Process Outsourcing company can result in unexpected legal expenses in situations related to disputes or disagreements.

If a BPO company delays delivering given tasks as when due, the action can result in indirect costs to the organization.

Types of BPO by Supply Chain

When companies outsource some of their tasks to a BPO or choose a qualified BPO provider, the process is done in two separate categories: back-office outsourcing and front-office outsourcing.

These two have unique features and functions and offer different organizational benefits.

1. Back-Office BPO

Back-office Business Process Outsourcing involves outsourcing services to a third party to execute that does not have to deal with the organization’s customers directly.

This BPO type deals directly with issues and necessities related to matters within the business or internal business functions. Back-office tasks are vital to executing the core business processes.

Advantages of Back Office Support Outsourcing
Source: Trupp Global

Back-Office BPO Services

  • Information Technology
  • Accounting
  • Business Solutions
  • Quality Assurance
  • Payment Processing
  • Business Process Automation
  • Customer Care
  • Technical Services
  • Market Research
  • Human Resources
  • Payroll Services
  • Billing

BPO Subtypes

Certain subtypes of Business Process Outsourcing have emerged that a qualified BPO service provider can offer.

  • Information Technology Enabled Services (ITES) BPO: Involves an IT analyst, media analyst, search engine optimization, or software developer.
  • Legal Process Outsourcing (LPO): Involves legal services such as paralegals, legal research and writing, patent services, and data entry.
  • Knowledge Process Outsourcing (KPO): Involves outsourcing to an individual who understands the task and can implement/manage a specific program.
  • Research Process Outsourcing (RPO): Involves research and analysis functions. Organizations such as biotech companies, marketing agencies, and investment firms are among those companies that can require such BPO services.
  • Supply Chain Management (SCM): Involves outscouring a good or service's entire production chain from gathering raw materials down to the final delivery to the customer.

Outsourcing these tasks helps an organization to pay attention to its core mission and goals instead of getting involved in expensive, stressful, and time-consuming training and onboarding.

2. Front-Office BPO

Front-office Business Process Outsourcing involves contracting services to a third-party vendor that involves the organization’s customers. In other words, you are outsourcing customer-facing services to a third-party vendor.

These services include customer service, sales, tech support, and marketing. In most cases, such services are usually contracted because of the technical knowledge requirements, and these service providers can easily execute these tasks off-premises.

An organization can derive tangible benefits from specialized talent with unique knowledge and cut costs by outsourcing services such as web development, customer support lines, or any front office services.

3. Process Automation from Software-as-a-Services (SaaS) Companies

Process automation from Software-as-a-Services (SaaS) companies involves a company outsourcing its maintenance, software development, and other vital business processes to SaaS companies.

Most organizations go for this form of outsourcing because of its various benefits, including cutting overhead costs and ensuring business processes are carried out efficiently.

For example, an eCommerce business may be understaffed or not have the skilled workforce and resources required to manage its eCommerce platform effectively.

The company may outsource its web hosting, maintenance, software development, and customer service to SaaS companies, such as web hosting services and live chat software providers.

An accounting department can outsource its software development, regulatory compliance, and maintenance processes to an accounting software provider to cut its overhead costs.

Types of Business Process Outsourcing by Location

You can categorize the types of BPO companies based on their unique locations: Onshore, Offshore, or Nearshore BPO.

1. Offshore BPO

Offshoring happens when an organization contracts its services overseas to an offshore BPO company.

In other words, offshore outsourcing occurs when a company employs BPO service providers in a different country to execute certain business operations that they can not handle independently.

Offshore BPO is motivated by available resources, political stability, lower labor costs, and various tax savings. An example of offshoring is a company outsourcing its customer service departments by contracting with call center vendors worldwide.

The benefit of Offshore BPO is that companies can get qualified labor and services at a cheaper rate to reduce overhead costs and lower products or service prices for the end-user.

2. Nearshore BPO

Nearshore business process outsourcing involves contracting third-party vendors' services in geographically closer countries.

For business in Canada, these counties could include the US, Mexico, and Central America for business in Canada.

Nearshore outsourcing mostly happens when the required specialized skill is available at a lower rate in a nearby country that is easily accessible.

Certain factors, such as language proficiencies or time zones, can hinder the efficiency of this type of business process outsourcing.

A basic example is when a Silicon Valley firm outsources Coding and IT services to experts in Canada or a United States company outsources marketing services from a company in Canada.

3. Onshore/Domestic BPO

Onshore business process outsourcing involves an organization outsourcing and receiving services within a particular country's shores. Another name for this BPO type is domestic outsourcing.

The organization does not go beyond the country it is situated but outsources its business function to a qualified BPO service provider in the same country.

Outsourcing Type - Onshore - Nearshore - Offshore
Source: SketchBubble

Onshore outsourcing can be motivated by certain factors, such as the availability of specialized skills in certain regions or local differences in rates and costs.

Using an offshore BPO vendor (offshore outsourcing) is considered the most popular type of BPO based on being located among the three options on this list. Alternatively, you can use third-party outsourcing companies that are in locations closer to you.

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Martin Luenendonk

Editor at FounderJar

Martin loves entrepreneurship and has helped dozens of entrepreneurs by validating the business idea, finding scalable customer acquisition channels, and building a data-driven organization. During his time working in investment banking, tech startups, and industry-leading companies he gained extensive knowledge in using different software tools to optimize business processes.

This insights and his love for researching SaaS products enables him to provide in-depth, fact-based software reviews to enable software buyers make better decisions.