Reasons for Business Process Outsourcing - Literature review Example

Business Process Outsourcing (BPO) Business Process Outsourcing (BPO) involves transferring the main operations of certain business functions to an external service provider. There are two categories of outsourcing which are back office and front office outsourcing. Back office BPO is contracting another service provide to perform human resource, finance and accounting business functions. Front office outsourcing involves transferring customer related services such as customer care services. BPO may also either be offshore or nearshore. Offshore outsourcing entails contracting a company outside the country of the outsourcing company. Nearshore outsourcing entails contracting a company in a nearby country. BPO mainly involves IT and sometimes referred to as ITES-BPO. This is because BPO is IT dependent and cannot operate without IT. Mehrotra (17) explains that until 2012, India had the largest BPO industry in the world. However, Philippines surpassed India as the largest BPO destination country in the world. The main reason why companies outsource certain business functions is to cut their costs (Duening, Thomas & Rick, 46). BPO enables companies to cut their expenditures such as labor and operating costs. Most businesses outsource certain business functions to countries with low labor and operations costs. For instance, with labor costs rising tremendously in developed countries such as the US, most companies prefer transferring their business functions to countries with low labor costs such as China, India, Philippines and Mexico. Therefore, BPO enables companies to increase their profits and have a competitive edge in the fierce global business environment. BPO enables companies to increase their efficiency and proficiency by focusing on business functions they are proficient at often referred as core-competency. Halvey, John, Barbara & Melby (98) explain that core-competencies are the business functions that a company can operate in most efficiently and in the least costs. BPO allows companies with limited resources to direct their labor, capital and energy to the most profitable functions. An example of outsourcing in this case would be a computer manufacturing company such as HP contracting companies in Brazil and China to manufacture certain computer parts such as screens and keyboards because of the cheap raw materials found in these countries. Alternatively, HP could outsource manufacturing of computer parts that requires less technical skills and manufacture. This way, HP would not have to hire and train additional staffs to manufacture these computer segments. Before outsourcing non-critical business functions, most businesses conduct trial periods with the outsourcers companies to ascertain whether these companies are proficient in performing the outsourced business functions. Conducting trial periods helps to reduce any potential risks involved and improve the quality of the work done. Another way to minimize risk is to transfer small work portions to an outsourcer. Some companies commit small portions of resources and waiting to ascertain whether the returns on investment realized are the projected returns. If the company contracted works satisfactorily in terms of quality and cost-effectiveness, the outsourcing company will likely to increase the amount of activities outsourced. Once an outsourcing company identifies a potential outsourcer, the companies then seal the agreement by signing a contract about the date of delivering the work and payment details. Nonetheless, outsourcing may not be that simple because it requires the contracting business to do some adjustments on its business structure and management style (Saxena & Sangeeta, 156) BPO enables companies to manufacture their products faster than if the products are manufactured in the outsourcing company. These companies contract potential outsourcers with the specific equipment required as well as the necessary expertise skills required to do the job. In fact, in most occasions outsourcing companies look for organizations with better equipment than theirs. As a result, the outsourcers are able to conduct the tasks faster and deliver better quality products. In this regard, BPO enables companies to reduce their delivery time and prevent any inventory accumulation since they can complete their products and tasks just in time when there are new orders. In case, a company wants to venture into a risky business, BPO allows these companies to share the risks involved. Manufacture of new products may be risky and may require risk mitigation measures to reduce the risks involved. By shifting certain responsibilities to the outsourced vendors, these companies are able to reduce the risks involved. This is because since most of the outsourced vendors are specialists in their fields, they are in a better position to reduce the risks involved and plan for mitigating factors. One disadvantage of BPO is the lack of confidentiality. BPO may expose private information and company secret to a third party. BPO requires shifting certain responsibilities as well as the required resources to complete the transferred tasks. When a company outsources certain business functions such as payroll structure and recruitment procedures, it not only exposes company confidentiality, but also risks the information being privy to other unauthorized persons. Even though BPO also entails confidentiality agreement between the outsourcing company and the outsourced vendor, there is no guarantee that the outsourced party will honor the confidentiality agreement. Duening, Thomas & Rick (107) argue that another problem of outsourcing involves synchronizing the assigned tasks. BPO may turn to be a nightmare in case the outsourcing company fails to choose the right company for outsourcing. This may lead to low quality of work delivered. Consequently, poor quality work or products lead to customer dissatisfaction and low sale revenues. Choosing incompetent outsourced vendors may also lead to increased delivery time further reducing customer satisfaction. It is difficult to regulate the quality and completion time of outsourced work with BPO especially with offshore outsourcing. Companies are able to check the quality of their work as well as the time frame of delivery if these companies perform these works rather than when outsourced abroad. Lack of focus by the outsourced companies may compromise the quality of the work delivered. There is a possibility of the outsourced companies may fail to work on the products delivered using the required focus and commitment. This is because the outsourced companies may be working for different companies at the same time. Performing various tasks for different organizations divides the attention of the outsourced companies thus, making them lack the focus of doing certain tasks perfectly as required by the outsourcing company. According to Saxena & Sangeeta (166), companies that outsource certain business functions often lose control of these functions. Lack of proper feedback and communication loops worsens the situation. Improper communications channels may result in a worse result than the anticipated products. This disadvantage stems from the inherent nature of BPO since business operations now rely on the outsourced company. BPO requires complete trust in the abilities of the outsourced company. This trust while necessary can be very risky. Outsourcers require that the outsourced companies will behave the same way that their own employees would while performing the specified tasks. While an outsourcer may require its employees to increase their efforts to polish further a product, this is not the case with BPO as the contract specifies the extent of the work that the outsourced company should do. In case of any additional work, the outsourced company will definitely request for additional payments. BPO contain hidden costs that contradicts its cost-effective advantage. BPO contains hidden costs that may be unknown at the beginning of the process. The hidden costs involved include the legal fees required to negotiate and sign the contract. Besides, signing a contract with an offshore company has inherent challenges such as being time- consuming. Signing a contract with a foreign country involve huge challenges such as cultural and legal differences in countries of operation. As a result, it may take unusually longer to sign these contracts. BPO is similar to the concept of comparative advantage that is useful in international trade (Halvey, John, Barbara & Melby, 189). Comparative advantage explains the way trade can be useful for two parties even though one party can produce all the goods at low costs and using less resources. Comparative advantage in trade requires that a country should not use all resources to make all the goods. Similarly, in BPO, a company should not produce all its products in house. Instead, the company should divert its resources to produce only the product with the highest investment return. Thus, outsourcing helps companies to minimize their opportunity costs. For instance, a company that has expertise in design and sales should outsource other functions to a vendor in order to minimize the opportunity costs involved. The effects of BPO to the American economy has elicited sharp divisions and resistance from the public. The impact of BPO on the American people has attracted two groups the protectionists, who are against BPO, and free-trade supporters who argue for outsourcing. Majority of the public believe that outsourcing is detrimental to the economy. In fact, Congress has adopted protectionist policies to curtail outsourcing by raising taxes for companies that outsource some of their business functions. In addition to the tax rules, Congress adopted restrictive immigration rules that limit companies from transferring their operations abroad. The main argument against outsourcing is that it leads to job losses domestically by transferring American jobs abroad. However, such arguments remain unclear, as there is insufficient evidence to back up these claims. Saxena & Sangeeta (156) point out that BPO does not result to job losses as commonly perceived by the public due to the Boomerang effect. It is true that BPO leads to the transfer of low-wage and labor intensive jobs to foreign countries. However, this may be beneficial to the US economy as there are more resources for technology and skill intensive jobs. The Boomerang effects explains how loosing low-wage jobs to countries like Mexico and China is beneficial to the American economy. The loss of low-wage jobs in America causes growth in countries of outsourced countries. As these countries develop economically and gain more prominence and influence in world economics, their Foreign Direct Investment (FDI) in the US increases. The US economy acts as the safe investment haven for these countries. High- wage jobs such as investment consultancy therefore increases in the US. According to Duening, Thomas & Rick (117), cultural difference plays a critical role in determining the trends of BPO. The emergence of Philippines over India as the leading outsourcing destination country is culturally- related. Philippines, being a US colony, has a culture that closely resembles the Western culture. Most Filipinos speak fluent English with accents that are close to Western accents. Cultural differences such as business regulations affect the nature and trends of BPO. For instance, there is a strict regulatory environment of food and pharmaceutical companies in the US. This is unlike China that does not have a stringent regulatory body of food and pharmaceutical companies. As a result, Chinese firms will have difficulties outsourcing their operations to the US. In contrast, American food companies will have no troubles venturing in the under-regulated Chinese markets. The shift of BPO from India to Philippine may not be solely because of the similarities between the Filipino and Western culture. The shift is due to the saturation of BPO in India (Mehrotra, 97). India’s labor market has progressed as it develops economically. India’s workforce has become competitive and technology and skill-intensive. India’s workforce now demands a higher wage than most BPO jobs can offer (Mehrotra, 137). Although Philippines offers the same business environment as India, labor costs are still low and yet to increase. The primary objectives why companies conduct BPO is to reduce their operational costs. In addition, BPO improves efficiency by allowing companies to focus on their core-competencies. BPO reduces the time of manufacture of products as well as enabling companies to share production risks. The global economy has increased the necessity of outsourcing to exploit the availability of cheap resources and low labor costs in other parts of the world. BPO activities are in different industries such as IT, manufacturing, food and pharmaceutical among others. The disadvantages of BPO entail hidden costs, lack of control, loss of confidentiality and low quality work. A proper communication and feedback channel between the outsourcing and outsourced companies is paramount (Halvey, John, Barbara & Melby, 189). Although BPO may result to a loss of low-wage jobs, the resultant increase in FDI will increase skill-intensive jobs in the economy, thus benefit the American economy. Works Cited Click, Rick & Thomas N. Duening. Business Process Outsourcing: The Competitive Advantage. Hoboken: John Wiley & Sons, 2004. Print. Duening, Thomas & Rick L. Click. Essentials of Business Process Outsourcing. Hoboken, N.J: John Wiley & Sons, 2005. Print. Halvey, John K & Barbara M. Melby. Business Process Outsourcing: Process, Strategies, and Contracts. Hoboken, N.J: John Wiley & Sons, 2007. Print. Mehrotra, Nitin. Business Process Outsourcing: The Indian Experience. Hyderabad: ICFAI University Press, 2005. Print. Saxena, K B. C, & Sangeeta S. Bharadwaj. Business Process Outsourcing: For Strategic Advantage. New Delhi: Excel Books, 2007. Print. Read More