What a great question! Business Process Outsourcing (BPO) has generated a number of definitions. Before I tell you my definition, I want to describe the history of outsourcing to show how the term “business process outsourcing” came about.
Here’s my definition of outsourcing: It is when a buyer transfers the ownership of a non-core business process to a supplier.
What is a core process? A core competency forms the soul of a company. It is a process that differentiates the company from its competitors in the marketplace. It is a process that pays the rent and makes a big difference on the bottom line. It is the key process that demands most of your attention and capital.
Most businesspeople can’t grasp the intricacies of computers and networks. They don’t want to worry about software patches, network maintenance or helpdesk services. So they got their first taste of outsourcing by handing over their technology needs to a company who understood the technology far better than they.
About 10 years ago executives in the boardroom, pleased with their IT outsourcing, decided to experiment by outsourcing other corporate functions. If the idea worked with computers, why wouldn’t it work for accounting or real estate? Outsourcing other areas worked and worked well. In fact, outsourcing non-IT functions actually worked better than IT outsourcing.
What other processes can a company outsource? Any non-core process is a good candidate. Please note, non-core does not mean “not important.” Finance and accounting, for example, form the cornerstone of any business. But few companies make their mark in the marketplace because of their unique accounting skills. It is a perfect function to outsource to professionals who like number crunching all day.
What non-core processes lend themselves to successful BPO? In addition to finance and accounting, I’d add:
- Human Resources. Today one of business’ most difficult challenges is to attract and retain talent.
- Logistics. Let them organize the warehouse and do the shipping. Inbound and outbound goods become their responsbility.
- Contract manufacturing. Someone else builds the plant and operates it.
- Supply chain management. Web exchanges are changing the way corporations buy goods. Outsourcers are assembling the participants of these sites.
- Medical underwriting. Outsourcers have experience handling risk.
- Real estate management. Let them mow the grass and recharge the air conditioning.
Why do these processes produce as good or better results than IT outsourcing? Because they are whole processes that buyers can accurately describe and clearly measure. Also, companies tend to outsource the entire process; compare this to IT outsourcing where buyers tend to keep part of the IT process in-house. Outsourcing always works better when the buyer outsources the entire process, not just a piece of it. If nothing else, outsourcing the entire process prevents both parties from pointing angry fingers at each other when something doesn’t work instead of rolling up their sleeves and finding a fix.
Until recently, companies happy with their IT outsourcing were the one turning to BPO outsourcing to increase their profitability. Today, start up companies are outsourcing these non-core areas from the get-go.
Globalization Fuels BPO Growth
Today two economic trends are accelerating BPO’s rate of growth. The first is globalization. For the first time since the days of sailing ships, trade barriers are coming down. The Internet, of course, is enabling this trend. Doing business on the Web is easy and becoming easier. A Web site makes your products available to a customer around the corner as well as half way around the globe. Geographic boundaries disappear in a Web browser.
The Internet has made the world increasingly competitive, the second economic trend affecting corporations. Product cycle times that used to take months now can take hours. This frenetic pace is forcing companies to harness all their resources to concentrate on their core competencies. They can’t afford to because today’s competitive world is not as forgiving of mistakes. Outsourcing is becoming the only way to prosper and succeed in a world moving at Web speed.
What complicates business today is that successful companies must have even better core processes to just stay in the game. Outsourcing becomes the only way a company can concentrate its scarce resources of time and money on its core competencies and still get better performance for its non-core functions.
Suppliers Can Do It Better
Transferring the ownership of a process to a supplier allows a buyer to take advantage of the supplier’s leverage, economies of scale and expertise. In many cases, a seasoned supplier can perform the process cheaper and faster than your in-house team. Suppliers can give you a sustainable advantage, something every company needs today.
So, here’s my definition of BPO outsourcing: BPO outsourcing encompasses the transfer of ownership of any non-IT process to a capable supplier. And here’s my prediction. BPO outsourcing will grow exponentially as the Internet becomes an integral part of the way every corporation and consumer does business.
Lessons from the Outsourcing Primer:
- BPO outsourcing is the transferring of a non-core, non-IT business process to a supplier.
- The Internet has sparked two trends that are causing BPO to grow exponentially: the globalization of commerce and the compression of business cycles. These two trends are forcing companies to outsource their non-core processes just to stay competitive.
- Suppliers can complete the process faster, cheaper and better than buyers can do it in-house. This type of service also helps companies compete in a Web-based marketplace.