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Business process outsourcing (BPO) types

11 Comments · Business outsourcing

Business process outsourcing has usually been discussed in terms of the international relocation of jobs and workplace functions. In reality, there are three types of BPO: offshore, onshore, and nearshore. The table below illustrates how these types are differentiated.

Organizations are prone to use any or all of these types, depending on their needs and the BPO initiative being implemented. In some cases, firms use a combination of types to achieve their objectives. The following sections look at each BPO type in more detail.

Offshore
Offshore BPO is the most challenging type of this relatively new approach to conducting business but potentially the most rewarding.

It began with movement of factory jobs to overseas locations and has been made both famous and infamous with stories of suddenly prosperous geographic regions mixed with stories of exploitative labor practices.

The so-called sweatshops identified in Vietnam, India, China, and elsewhere have stirred criticism for American companies, including Nike, Wal-Mart, and Walt Disney Company.

Despite the criticism leveled at some companies that outsource processes and functions to international labor markets, the advantages of doing so continue to outweigh the disadvantages.

By taking advantage of lower wages overseas, U.S. managers can cut their overall costs by 25 to 40 percent while building a more secure, more focused workforce in the United States.

The complexity of business functions being moved offshore continues to increase. As such, organizations using the offshore approach have developed a variety of different models to ensure continuity.

Some have utilized a model known as offshore insourcing. Under this model, the organization establishes a wholly owned subsidiary in the international market and hires local labor.

An extension of this model is the so-called build-operate-transfer (BOT) model. Organizations build offshore companies (usually with a local joint-venture partner) specializing in a business process, operate them jointly for a year or so, and then transfer the firm to internal control (insource).

It is important to note that there is no one-size-fits-all approach to offshore BPO. With the growing list of companies outsourcing at least some business functions to offshore vendors, the range of possible approaches will grow as well.

This makes it increasingly likely that the next adopter of offshore BPO will find a model suitable to its needs. The Case Study describes how GE Capital and Microsoft have utilized outsourcing for value-added services at low costs.

Two Giants Take the Offshore BPO Lead
GE Capital’s International Services unit, which provides everything from risk calculation to IT services and actuarial analysis for GE worldwide, has grown from 634 employees to 17,000 during the past five years.

More than half of those workers are in India, and they are not being used for mindless data entry – in India every employee has a college degree, and more than 1,200 have Master’s degrees in Business Administration (MBAs).

Microsoft has about 200 employees developing software in Bangalore, where it opened its first non-U.S.-based product development center five years ago.

Microsoft will increase its staff in India in the coming years, as the country continues to turn out tens of thousands of English-speaking engineers each year.

Sources: Adapted from Reed Stevenson and Anshuman Daga, “Microsoft Shifting Development, Support to India,” Reuters News Service (July 2, 2003); and Nelson D. Schwartz, “Down and Out in White Collar America,” Fortune (June 23, 2003), p. 82.

Onshore
It would be a mistake to conceive of BPO only as an international business phenomenon. Many U.S. businesses are outsourcing back-office functions to firms based in America.

One of the more prominent examples of this is payroll outsourcing, which is managed by several large U.S. companies.

Automatic Data Processing (ADP) provides a range of payroll administration services, time sheets, and tax filing and reporting services.

The firm has more than 40,000 employees and, as an indication perhaps of the future potential of the firm, has seen Warren Buffett steadily increasing his company’s position in its stock.

There are many reasons that a firm will use BPO. The cost savings that result from moving back-office processes to low-wage environments is the most oft-cited one.

Nevertheless, firms can also use BPO to transfer service functions to best-in-class performers to gain competitive advantage.

A firm that outsources customer service functions to a firm that specializes in and provides world-class support in that area will perform at a higher level in that function than its competitors.

Moving to a best-in-class provider may actually increase costs in the short run in the interest of developing competitive advantage.

Under this rationale, BPO is a strategic investment that is designed to upgrade service levels at a cost, with the intent of increasing revenues through enhanced competitiveness.

What matters most is the acquisition of partners that provide market-shifting capabilities for the firm doing the outsourcing.

Many U.S.-based outsourcing firms use the world-class provider strategy to acquire business.

Staked to a head start over their low-cost international rivals, U.S.-based outsourcing firms must continuously innovate and seek new ways to provide value to remain in front.

They are worth considering for services, even if their costs are higher, if strategic advantage is the goal of an organization’s BPO initiative.

Nearshore
Nearshore outsourcing is a relatively new term that is used to refer to the practice of outsourcing on the North American continent.

International issues will arise when American firms outsource to Mexico, Canada, or Central America, but they are likely to be less complex than those that attend outsourcing arrangements in, say, India or China.

Nearshore outsourcing allows companies to test the BPO waters without the level of risk associated with going offshore.

Firms that go with a nearshore strategy are often seeking cost savings, but they are also occasionally able to find best-in-class providers of the services they need.

For example, Mortgage Electronic Registration Systems, an organization created by the mortgage banking industry to develop systems for mortgage tracking, is moving its customer relationship management (CRM) function Michigan to Nova Scotia.

The move is expected to save the group 15 percent annually on CRM costs. The firm could have saved even more by outsourcing with firms in India, but it wanted to keep its CRM operations close to home.

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