Outsourcing emerged during the 1950s when manufacturers hired subcontractors to help them with the distribution and supply change. During the 1980s, a different segment of outsourcing pop-out.
This is the so-called business process outsourcing (BPO). BPO means hiring third party vendors to perform business-related operations and services. Around 80% of logistics leaders globally use BPO services. Let’s dig deeper into what is business process outsourcing.
What are the Three Divisions of Business Process Outsourcing?
There are three divisions of business process outsourcing based on the vendor’s location. These are nearshore, offshore, and onshore.
- Nearshore means that the 3rd party service providers are located in the neighbouring countries of a contracting company. For example, some U.S. companies outsource in Mexico.
- Offshore means that the 3rd party service providers are located from a different continent. Most U.S. companies outsource in India and the Philippines.
- Onshore means that the 3rd party service providers are located in the same country where the contracting company is located.
Nearshore and offshore BPOs serve as an alternative to labour migration. The labour force of business process outsourcing contributes their skills abroad without the need to leave their home country.
What are the Front Offices and Back Offices in BPO?
Business process outsourcing means contracting specific work processes to external service providers. These typically include accounting, content creation, customer support, data management, social media management, and telemarketing. BPO fills supplementary business functions under two categories – the front offices and back offices.
A BPO’s front offices involve a company’s customer-facing functions. Some examples are collections, customer service, sales, tech support, and ticket handling. While back offices involve administrative and support functions like accounting, data entry, data processing, payroll, and software development.
Why Do Businesses Outsource Processes?
Most people believe that companies engage in business process outsourcing for tax break purposes. But this isn’t true. Every country has fixed tax codes in place even for BPO categories. This means zero chances of loopholes or tax breaks.
In a way, companies can have tax benefits through business process outsourcing, in a legal way. Most developed countries like Australia, the U.K., and the U.S. have high corporate taxes. If they outsourced from developing countries in Asia, they can take advantage of the lower corporate taxes in those countries.
But there are many reasons why global companies choose business process outsourcing. Through business process outsourcing, they can cut down their in-house labour and operational costs. Labour cost is much lower in developing countries than in developed countries.
Companies from developed countries can hire a team from developing countries at half the cost. They can also save from office spaces and facilities. Business process outsourcing is also a flexible option for most companies.
If they have seasonal needs for manpower, they can hire a 3rd party service provider during the period of demand. Because the employee-employer relationship is different from the regular hiring scheme, they are not bound by labour laws to retain or compensate the employee once their services are no longer needed.
Business process outsourcing is a great way to scale up global companies. They provide a cheaper, fast, and more efficient way to run a business.