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What is so revolutionary about business process outsourcing (BPO)?

11 Comments · Business outsourcing

We ought not be over anxious to encourage innovation, in case of doubtful improvement, for an old system must ever have two advantages over a new one; it is established and it is understood.

The Internet bubble bursts, and the world keeps on turning. Terrorists attack the World Trade Center, and the world keeps on turning.

The global economy reels in the throes of a major recession, and the world keeps on turning.

Despite their unpredictable – and sometimes despicable – natures, humans are nothing if not innovators and perpetual optimists. In the face of doubt, ambiguity, and even terror they continue to strive to build a better world. We are fortunate to be so resilient.

And so, as our hopes for an easy peace and “new economy” prosperity in the twenty-first century were dashed within months of its arrival, humans have continued to strive to create a better world.

Part of that striving is based on the technological breakthroughs that seemed to arrive breathtakingly fast during the 1990s.

Standing on the shoulders of those innovators, a new generation of visionaries has created compelling new business opportunities.

Among the vast array of novelties introduced in the past few years, none is more important than the creation of the global communications and information infrastructure that has now burrowed into nearly every city, village, hamlet, and encampment around the world. Fiber-optic cable spans oceans and continents.

Low-earth-orbit satellites provide streaming images, data, and voice to the most remote locations.

Tragedy and joy each mark the onset of this communications revolution. A doomed climber places a phone call from the top of Mount Everest to say goodbye to loved ones as the succumbs to the elements in that unpredictable environment.

A Russian astronaut staffing the orbiting international space station is joined in marriage to a terrestrial-based bride.

No place on earth, or in near-earth, is now beyond the reach of the information and data nervous system that was constructed over the past few decades.

This is revolutionary, and this nearly universal telecommunications infrastructure is a major part of what gives life to the business innovation called business process outsourcing.

Business process outsourcing (BPO) is defined simply as the movement of business processes from inside the organization to external service providers.

With the global telecommunications infrastructure now well-established and consistently reliable, BPO initiatives often include shifting work to international providers.

Five BPO international hot spots have emerged around the globe, although firms from many other countries are specializing in various business processes and exporting services:

1. India. Engineering and Technical
2. China. Manufacturing and Technical
3. Mexico. Manufacturing
4. United States. Analysis and Creative
5. Philippines. Administrative

Each of these countries has complex economies that span the range of business activity, but from a BPO perspective they have comparative advantages in the specific functions cited.

Because of the job shift that accompanies the quest to employ the highest-value talent, BPO has been both hailed and vilified from different quarters.

Business executives and owners hail BPO as a means of eliminating business processes that are not part of the core competence of their organizations.

Back-office functions such as payroll and benefits administration, customer service, call center, and technical support are just a few of the processes that organizations of all sizes have been able to outsource to others who specialize in those areas.

Removing back-office functions from their internal operations enables organizations to reduce payroll and other overhead costs.

In an era when executives have been admonished from a wide range of business commentators and analysts to focus on core competence, BPO offers them an opportunity to finally achieve that goal in a dramatic new way.

Like appliance manufacturers that moved production from the Midwest to Mexican maquiladoras or apparel firms that moved production to the Far East, businesses of all types and sizes are now shifting back-office jobs to international locations such as China, India, and the Philippines where the labor is inexpensive and highly skilled.

In the past several years, companies have turned to these regions for increasingly sophisticated tasks: financial analysis, software design, tax preparation, and even the creation of content-rich products such as newsletters, PowerPoint presentations, and sales kits.

With the increasing education levels around the world, BPO is no longer confined to routine manufacturing jobs or boiler-room telemarketing centers.

Today’s outsourcing involves complex work that requires extensive preparation and training.

For instance, Indian radiologists now analyze computed tomography (CT) scans and chest X-rays for American patients out of an office park in Bangalore.

In the United States, radiologists are among the highest-paid medical specialists, often earning more than $300,000 per year to evaluate magnetic resonance imaging (MRI), CT scans, and X-rays.

In Bangalore, radiologists work for less than half that. Not far from the radiology lab in Bangalore, Ernst & Young has 200 accountants processing U.S. tax returns. Starting pay for an American accountant ranges from $40,000 to $50,000, whereas in Bangalore accountants are paid less than half that amount.

In the next 15 years, Forrester Research predicts that 3.3 million service jobs will move to countries such as India, Russia, China, and the Philippines.

That is the equivalent of 7.5 percent of all jobs in the United States right now. Shows that the number of back-office jobs being outsourced will escalate rapidly in the coming years.

The 2015 bar includes a breakdown of the projected numbers of jobs going overseas in common work categories.

Gartner also estimates that one in ten jobs at specialty information technology (IT) firms in the United States will move abroad by 2005, along with one in twenty IT jobs at general businesses – a loss of about 560,000 positions.

Gartner also predicts that BPO will reach $178 billion on revenues worldwide by 2005, representing a compound annual growth rate of 9.2 percent for the five-year forecast period.

Market research firm IDC predicts that finance and accounting outsourcing will grow to nearly $65 billion by 2006, up from $36 billion in 2002. Two-thirds of U.S. banks already outsource one or more functions.

BPO has caught on as well with the venture capital community. In 2002, venture capital firms in North America poured nearly $3 billion into BPO firms and another almost $1 billion by June 2003.

Some BPO providers currently enjoy operating profit margins as high as 40 to 50 percent. Even though margins are expected to level out to between 20 and 25 percent as the market matures, these returns are greater than are currently being experienced in nearly any other industry.

Despite this increasing global adoption and capital inflow, BPO is not without its critics and naysayer.

There is no doubt that the history of outsourcing in manufacturing has been black-marked by the many American workers who lost their jobs and cannot find new ones in the traditional manufacturing sector.

Today, everything from electronics to home furnishings is being manufactured by low-cost labor in places such as Shanghai and Monterrey.

American workers were told that free-trade agreements such as the North American Free Trade Agreement (NAFTA) would create a “giant sucking sound: as jobs moved to low-wage labor environments.

That prediction has rung true for many U.S. workers. Factories across the country, including steel mills, paper mills, and other staple industries of America’s industrial past, have gone silent – apparently for good.

Families and towns have been broken apart, as workers have had to pack up and seek alternative work far from home. The Ethics and Governance insert addresses the issue of how outsourcing relates to the U.S. unemployment rate.

No doubt, such wrenching change at the level of individual human lives is painful and unsettling. As the same time, the resilience of the American worker to find new ways to create value in a global economy shows few limits.

As the nineteenth century’s Agrarian Age came to an end and workers moved from farms to factories, they adapted and built some of the greatest cities in the world.

At the end of the twentieth century, the Industrial Age gave way to the Information Age, and workers were moving out of factory jobs into information-rich occupations and built some of the greatest technologies in the world.

Today we are faced with adapting yet again to a world that is only partly of our creation. There is no question that we funded and built the enabling technologies that make the BPO revolution possible, but we did not necessarily do so intentionally.

We, however, are hopeful that BPO will help create a more tightly integrated business world that will lead to a more tightly integrated cultural and economic world.

BPO has the potential to create new prosperity for workers everywhere through participation in a BPO-based business super-culture that spans the globe.


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