Business process outsourcing (BPO) contains the transmission of processes along with the associated operational activities and responsibilities, to a third party with at least a guaranteed equal service level and where the client contains a firm grip over the vendor for mutual long term success. BPO is positively related to the search for more efficient organizational designs: cost reduction, productivity growth and innovative capabilities. Hence, a source for strategic advantage.
Traditionally, BPO is undertaken by manufacturing firms. For instance Coca Cola, where almost the entire supply chain is outsourced and the company is essentially becoming a marketing organization.[1] However, BPO is nowadays rapidly conquering the service oriented firms as well. A well-known example is provided by the Bank of America, who outsourced their entire HR function to Exult, one of the leading Human Resources BPO vendors.[2]
BPO is often divided into two categories: back office outsourcing, which includes internal business functions such as billing or purchasing, and front office outsourcing, which includes customer-related services such as marketing or tech support. The endless opportunities IT provides, stimulates (cross-border) BPO activities. BPO that is contracted outside a company's own country is sometimes called offshore outsourcing. BPO that is contracted to a company's neighboring country is sometimes called nearshore outsourcing.
One of the most important advantages of BPO is the way in which it helps to increase a company’s flexibility. However, several sources have different ways in which they perceive organizational flexibility. Therefore business process outsourcing enhances the flexibility of an organization in different ways.
Most services provided by BPO vendors are offered on a fee-for-service basis. This helps a company becoming more flexible by transforming fixed into variable costs. A variable cost structure helps a company responding to changes in required capacity and does not requisite a company in investing in assets and hereby making the company more flexible .
Another way in which BPO contributes to a company’s flexibility is that a company is able to focus on its core competencies, without being burdened by the demands of bureaucratic dictate . Key employees are herewith released from performing non-core or administrative processes and can invest more time and energy in building the firm’s core businesses. The key in this lies in knowing, which of the main value drivers to focus on – customer intimacy, product leadership, or operational excellence. Focusing on one of these drivers may help a company create a competitive edge.
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