What is Business Process Outsourcing (BPO)?

How does BPO work?

When a company adopts business process outsourcing (BPO), they outsource some or all of their non-core business operations to third parties.

Non-core activities are those that are not central to producing a company’s product or service. At a chain of restaurants, for instance, that would be anything not directly related to preparing and serving food.

BPO began in the manufacturing industry. These types of firms have complex supply chains to manage, and it was too expensive for them to do so in-house, so they contracted with third-party vendors for those tasks instead.

Companies of all types and sizes use BPO, even small and one-person businesses. A small online web development business might not be big enough to require the owner to hire staff, but they might hire an accountant to do their bookkeeping and taxes.

What services do businesses outsource?

Tasks that companies outsource can be divided into back-office services and front-office services.

Back-office services are a company’s internal business operations – those the customer doesn’t see, like accounting, human resources, and information technology. All companies need someone to track revenue and expenses, and companies with more than a handful of employees need a human-resources function. These tasks typically require special expertise, and some companies might feel that having an internal department for these services isn’t the best use of their resources.

Front-office services are those visible to the public, such as customer support, marketing, and sales. Some companies, especially small companies, handle these matters themselves: A small local mechanic handles customer service himself anytime he communicates with his customers, so he probably isn’t going to outsource that task.

But outsourcing front-office services can be far more necessary for larger companies. A large retailer might start off doing customer service internally, and eventually they decide it’s no longer practical for the store clerk to be taking customer calls all day. Instead, they contract with a call center to handle that for them.

You can also break BPO services down into knowledge process outsourcing (KPO), legal process outsourcing (LPO), and research process outsourcing (RPO).

KPO refers to services that companies outsource because of the specific expertise required. For example, companies outsource their accounting services because of the specialized knowledge and skills needed in accounting.

LPO refers to the outsourcing of legal services. Rather than keeping their own attorney on staff, companies might instead choose to use an outside attorney for their legal needs, such as drafting legal documents.

RPO refers to the outsourcing of research and analysis tasks. A company might hire a third-party vendor to perform market research about a new product or service before the company introduces it.