What is business process outsourcing (BPO)?

What is business process outsourcing used for?

Organizations engage in business process outsourcing for two main areas of work: back- and front-office functions.

Back-office outsourcing refers to internal business functions, such as accounting, IT services, HR, quality assurance and payment processing.

Front-office functions are processes and business operations that serve or relate to existing and potential customers, such as customer relation services, marketing and sales.

Some organizations outsource an entire function, such as the HR department, to a single vendor. Other companies outsource only specific processes within a functional area, such as payroll processing, while having their own team perform all other HR processes.

Commonly outsourced processes include the following:

• Payroll and accounting.
• Administration.
• Customer support.
• IT management and services.
• Manufacturing.
• Marketing.
• Research.
• Sales.
• Shipping and logistics.

Some companies also outsource strategic tasks, such as data mining and data analytics, both of which have become essential elements for maintaining a competitive advantage in a digital economy.

Why companies adopt business process outsourcing

Enterprise executives opt to outsource a business process for a variety of reasons. Those reasons vary based on the type, age and size of the organization, as well as market forces and economic conditions.

Startup companies, for example, often need to outsource back-office and front-office functions as they do not have the in-house resources to perform them.

An established company might opt to outsource a task that it had been performing after determining that a third-party service provider could do the job better or cheaper. Management experts advise enterprise executives to identify functions that can be outsourced and then determine if shifting that task to an outsourcing provider makes sense.

If so, the organization must go through the process of not only identifying the best vendor for the work, but also shifting the work from in-house to the external provider. This requires a significant amount of change management, as the move to an outsourced provider generally affects staff, established processes and existing workflows.

The shift to an outsourced provider also affects the organization's finances -- not only in terms of shifting costs from the internal function to the outsourced providers, but often in terms of corporate taxes and reporting requirements.

The organization may also need to invest in new technology to enable the smooth flow of work to the outsourced provider. The extent and cost of that technology depend on the scope of the function being outsourced and the maturity of the technology infrastructure in place at both enterprises.

Business process outsourcing typically starts with enterprise leaders identifying specific functions or business processes to outsource as a way to save money, gain flexibility, improve performance and redirect resources to core business capabilities.

Business leaders then consider whether one vendor should handle all the work being outsourced or whether contracting multiple providers for the various tasks delivers the best value. For example, a company could decide to outsource most of its HR functions and then either contract for a single provider to perform all the outsourced processes or hire one for payroll and another for benefits administration.

To help with this decision, it's advised to follow these steps:

• Do a self-assessment of the organization's needs.
• Assess service providers and their offerings.
• Compare the offerings of different vendors.

Those considerations should lead to a list of requirements and a detailed scope of work for outsourcing. Organizations use those to shape a request for proposal (RFP) to share with vendors that determine whether they can meet the requirements, at what price and with what value-adds. Comparing the offers of various vendors against the requirements can aid in selecting the right vendor (or vendors) for the outsourcing engagement.

Once an organization has selected the provider or providers it wants to hire, it must determine the type of contract. Such contracts generally fall into one of the following categories:

1. Time and materials contracts. The business pays the provider for the time worked and the materials used.
2. Fixed-price contracts. Parties set an upfront price for the specified work.

Additionally, organizations must, with their vendors, draft the service-level agreement (SLA) detailing the quality of the provided services and the metrics for evaluating vendor performance for determining a successful engagement.

Depending on the needs and nature of the outsourced work, some organizations also negotiate with providers on whether to have the following:

• Specific workers on teams dedicated to their outsourced work.
• Workers located only onshore or, conversely, globally distributed.
• Workers available 24/7 or only during set hours.

When both parties agree to its terms, the SLA is finalized. The client company then moves the workloads for the outsourced process to the vendor in a systematic and planned manner. The BPO strategy for enterprises should also clarify how the organization and vendor will communicate during the transition. Ideally, both parties should communicate frequently to minimize hiccups and ensure a smooth work handover.

Once the transition is complete, the vendor starts managing the outsourced processes. The best vendors use the latest technologies and assign skilled personnel to work on the client's tasks. On transferring processes and roles to the vendor, the client organization's in-house resources can be freed up and reassigned to other processes as needed. The firm can regularly evaluate the vendor's performance against the SLA and other terms outlined in the contract. These evaluations enable organizations to decide whether to renew or terminate the contract. Organizations might also choose to amend the contract (with the vendor's agreement).

To increase BPO value, it can be useful to set up an outsourcing governance framework. This framework should include the practices and processes the organization will use to manage its vendor relationships, minimize risk and maximize the value of the partnership.

In summary, here's how business process outsourcing works:

• Identify outsourcing candidates. Identify the specific functions or business processes that can be outsourced to reduce costs or improve organizational performance.
• Decide on outsourcing scope. Consider whether to outsource to one vendor or multiple vendors, depending on the organization's needs and vendor offerings.
• Request vendors for proposals. Create and send out an RFP to vendors to help with vendor selection.
• Determine the contract type. After selecting the vendor, decide whether the contract will be a time and materials contract or a fixed-price contract.
• Draft and finalize the SLA. Clearly state the organization's expectations and the metrics that will be used to gauge vendor performance.
• Move workloads to the vendor. Plan for the transition and communicate frequently with the vendor to minimize transition hiccups and avoid business disruptions.
• Evaluate vendor performance. Assess the vendor's performance against the SLA on a quarterly or half-yearly basis, and decide whether to renew, modify, or terminate the outsourcing contract.

What are the benefits of business process outsourcing (BPO)?

Benefits of BPO typically cited by proponents include the following:

• Financial benefits. BPO providers can often perform a business process at lower costs or save the company money in other ways, such as in tax savings.
• Improved flexibility. BPO contracts can offer the ability to modify how an outsourced business process is done, enabling companies to react more nimbly to changing market dynamics.
• Increased competitive advantage. BPO enables an organization to focus more of its resources on operations that distinguish it in the marketplace.
• Higher quality and better performance. Because business processes are their core business, BPO providers are well positioned to complete the work with greater accuracy, efficiency and speed.
• Access to innovations in the business process. BPO providers are more likely to know about advances in the process areas they specialize in. That means they are more likely to invest in new technologies, such as automation, that can improve the speed, cost and quality of the work.
• Expanded coverage. Organizations that need 24/7 call center operations can often quickly gain that capability by contracting with a BPO company with around-the-clock capabilities and multiple geographic locations, enabling a follow-the-sun business model.

What are the risks of business process outsourcing?

BPO risks include the following:

• Security breaches. The technology connection between the hiring company and the BPO provider creates another point of entry for bad actors, as organizations often need to share sensitive and regulated data with their service providers.
• Regulatory compliance requirements. An organization's regulatory requirements extend even to outsourced work, so it must ensure that the vendors it hires align with the laws the organization must follow. It must also ensure that the vendors adhere to the rules that govern the organization's outsourced work.
• Unanticipated or higher costs. Organizations can underestimate the amount of work that needs to be done, which can lead to higher-than-anticipated costs.
• Relationship challenges. Organizations can face communication problems with their outsourced providers, or they might find that there are cultural barriers.
• Overdependence on the external provider. An organization that outsources a function or service is tethered to the partner that performs the work. The organization must manage that relationship to ensure key objectives are met at the agreed-upon cost. If not, the organization may find it difficult to bring the operation back in-house or even move the contract to another outsourced provider.
• Increased potential for disruption. An organization must monitor for issues that could interrupt or permanently end the relationship with an outsourced provider. These include financial or workplace problems at the outsourced provider, geopolitical instability, natural disasters or changes in economic circumstances. Organizations must consider such risks and devise strategies on how to cope, which, in turn, adds complexity to their business continuity and disaster recovery.
• Public backlash. The public perception of an organization might negatively change if the public views that an organization is sacrificing domestic jobs for a better bottom line.

What are the different types of BPO?

BPO is often divided into the following types based on the service provider's location:

1. Offshore outsourcing. It occurs when an organization contracts for services provided by a company in a foreign country. Often, the decision to adopt offshore outsourcing is driven by cost considerations. One example is a large retailer in the U.S. outsourcing its call center operations to India.
2. Onshore outsourcing. Also known as domestic outsourcing, onshore outsourcing happens when an organization contracts for services provided by a company that operates in the same country as the hiring organization. Onshore outsourcing might not offer the same cost benefits as offshore outsourcing. However, there are many reasons organizations choose this outsourcing model:

• • Cultural and time-zone alignment ease communication between the client's and vendor's personnel.
  • Proximity between client and vendor teams enhances oversight and quality control, and accelerates problem-solving.
  • Data remains within national borders, making it easier to protect from leaks and breaches.
  • Vendors' knowledge of local laws and regulations eases the client's regulatory compliance burden.

3. Nearshore outsourcing. When an organization contracts for services provided by companies based in neighboring countries, this is referred to as nearshore outsourcing. This type of outsourcing also offers a cost benefit, although it might be muted compared to offshore outsourcing. Additionally, organizations that opt for this model can gain the advantages offered by onshore outsourcing, such as proximity to the vendor, time-zone alignment, cultural alignment (or at least similarities), and the ability to engage in real-time or near-real-time collaboration and problem-solving.

Another way to categorize BPO is as either horizontal BPO or vertical BPO. This approach, suggested by Gartner, differentiates BPO providers on the basis of their offerings: whether these offerings can be applied across industries or are industry-specific.

Horizontal BPO offerings are functions that are used across multiple industries, i.e., they have cross-industry applications. Examples include customer support, HR, finance, accounting and facilities management.

In contrast, vertical-specific offerings are industry-specific. To offer these services, the vendor must have specific knowledge about the industry. For example, a vendor that offers ATM outsourcing to banks must have deep knowledge about the banking sector, in addition to knowledge about installing, replenishing, security, compliance and general management of ATMs.

Similarly, a service provider that specializes in healthcare outsourcing processes like medical billing or patient data management must have domain-specific skills to manage these processes. They must also understand the various constraints and regulations that healthcare organizations operate in. The vendor might also be required to implement controls to comply with healthcare regulations concerned with patient privacy and data security (e.g., the Health Insurance Portability and Accountability Act).

Regardless of which BPO model they choose, organizations usually garner tangible benefits from it. In addition to cost savings and efficiency gains, outsourcing enables organizations to access skilled talent who can handle their workloads easily and consistently provide high-quality output.

KPO, LPO and RPO

Business process outsourcing is sometimes categorized by the types of services being provided; the following three categories are commonly cited:

• Knowledge process outsourcing. KPO is when the outsourced service provider is hired not only for its capacity to perform a particular business process or function, but also to provide expertise around it. KPO is ideal for receiving high-quality work that is quick and efficient.
• Legal process outsourcing. LPO is a type of KPO that is specific to legal services; these range from drafting legal documents and performing legal research to offering advice.
• Research process outsourcing. RPO -- another type of KPO -- refers to outsourcing research and analysis functions. Biotech companies, investment firms and marketing agencies are among the types of organizations that engage in RPO for services.

RPO can also refer to recruitment process outsourcing, which outsources an organization's recruitment process, including sourcing, screening, interviewing and finalizing offers.

Business process outsourcing examples

One example of an organization using BPO might be if it's struggling to maintain its HR department, say, due to labor shortages or an inability to keep up with rising salaries of HR specialists. In the first situation, skilled HR workers may be needed to keep this business function going. In the second scenario, the priority might be to lower the cost of the HR function.

In both scenarios, the organization can partner with a BPO provider that specializes in HR and offers HR services, including the following:

• Payroll and benefits management.
• Payroll tax administration.
• Talent acquisition and onboarding.
• Employee time, attendance, and leave tracking.
• Data management.
• HR helpdesk.
• General HR administration.
• HR reporting.
• Compliance reporting.
• Terminations and exit interviews.

When these tasks are outsourced, it frees up the company's HR team to focus on more strategic initiatives related to employee engagement, learning and development, and experience management.

Another example is a business that hires a BPO provider for customer support services. A small business might not be able to dedicate the time or resources needed to set up and manage a contact center (particularly, a multichannel or omnichannel contact center). It can, instead, invest in a BPO provider that specializes in providing customer support services. The provider can handle tasks like order processing, customer support, appointment setting and helpdesk. Some providers offer multichannel support, which enables client organizations to elevate customer engagement while also reducing the costs of meeting their customers' demands.

A third example of BPO is IT outsourcing. Many companies outsource parts of their IT operations to BPO providers to reduce costs and improve IT outcomes. The IT tasks that are commonly outsourced include the following:

• Software development.
• Cybersecurity.
• IT infrastructure management.
• IT helpdesk.
• Data center management.
• Data backup.
• Disaster recovery.

How to choose a business process outsourcing provider

Enterprise executives should select BPO providers that can support their business objectives, as well as help them be more flexible, innovative and competitive. As such, organizations should consider more than just the price of a BPO contract when choosing a provider. They must also consider how well the provider can deliver on those other points, evaluating each provider to determine whether it has the following:

• An adequate understanding of the organization's business and industry.
• The capacity to meet current requirements, as well as to scale to meet future needs.
• An understanding and ability to meet compliance and regulatory requirements, as well as data privacy needs.
• Reporting metrics to demonstrate it is delivering on contractual standards.
• The geographical locations to meet business needs and regulatory requirements.

Organizations should conduct their own needs assessment to identify business processes that would benefit from outsourcing. They should then get in contact with different BPO providers to determine which one best suits their needs and which creates the best RFP. After it picks one and agrees to the terms of the RFP, the organization should begin the transition process of shifting agreed-upon processes.

Business process outsourcing market size

The widely known benefits of BPO explain why the global BPO market is consistently growing. Research firms predict that the market will continue to grow through the coming decade.

For example, per Grand View Research, the size of the BPO market was approximately $302.62 billion in 2024. By 2030, the firm predicts that the size will grow to $525.23 billion, representing a CAGR of 9.8% from 2025 to 2030.

Research firm Statista also maintains a positive outlook toward the BPO market. It predicts that the market volume will grow steadily at a CAGR of 3.39% (2025-2030) to reach $491.15 billion by 2030. Statista also forecasts that the market will generate revenues of $415.73 billion worldwide in 2025. Most of this revenue ($159.75 billion) will come from the U.S. Also, BPO providers in India will continue to dominate the market over the coming decade, according to Statista.

The growth of the BPO market is driven by an increasing demand for outsourcing various business functions, like HR, customer services, data entry and other core competencies.

Current trends and future directions of the BPO industry

The BPO industry is seeing numerous trends that highlight the industry's positive outlook. Key trends include the following:

• Cloud-based BPO offerings. BPO vendors are increasingly offering cloud-based services that save on cost when compared to traditional BPO models that relied on expensive, proprietary on-premises systems. The cloud model also offers benefits such as flexibility and elasticity to meet demand spikes, real-time reporting and access to advanced technologies like AI that can improve business productivity and efficiency.
• Hybrid working models. BPO vendors that provide traditionally outsourced business processes, such as call centers, are now able to work remotely. This minimizes business disruptions and keeps the outsourced processes running smoothly. Also, the provider can access a bigger talent pool to build a more competent team.
• Nearshoring operations becoming more popular. Technologies, such as video conferencing, AI-enabled tools and robotic process automation (RPA) are driving down BPO costs, enabling vendors that nearshore business processes to offer more cost-effective services, almost on par with offshore vendors.
• Focus on data privacy and security. The evolving regulatory environment coupled with the expanding cyberthreat landscape are forcing companies to revisit their data privacy and security controls. To protect sensitive data, they are implementing stringent measures -- and expecting their BPO vendors to do the same. Contracts and SLAs might include specific terms around data protection that providers must comply with.

In general, the BPO industry continues to evolve, with more vendors emerging to offer specialized services or catering to specific sectors. Where previously only large companies opted to outsource some non-core processes, smaller businesses are also taking the BPO plunge, mainly to save money, tap into a global talent pool, and garner the benefits of cutting-edge technologies (without having to invest in those technologies).

Also, BPO is no longer restricted to non-core processes and activities. Many companies outsource some strategic activities as well, in areas like finance, HR, sales, marketing, infrastructure management, software development and cybersecurity. Typically, these firms lack in-house skills to manage these tasks and acknowledge that outsourcing may be the right strategy to improve operational efficiency and ensure higher-quality outcomes.

BPO vendors are contending with disruptions by taking advantage of the increased demand for their services. Many acknowledge that the practice of business process outsourcing could be at least partially displaced in upcoming years by technology. For example, RPA and AI can handle some frequently outsourced functions at lower costs and higher speeds, minimizing the need for organizations to invest in long-term BPO engagements.

On the plus side, technology could also improve the efficiency and quality of BPO offerings. For example, AI intelligence tools and machine learning models are facilitating smart automation and providing actionable insights that enable vendors to add new offerings to their service portfolio, improve existing offerings and offer greater value to clients. These advantages could convince more organizations that BPO is the optimal strategy to reduce costs and improve business efficiency.

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