Business Process Outsourcing (BPO)

Business process outsourcing is a term which refers to a process of hiring other companies to do the set of business activities or a single function related to the company’s business.

Definition of Business process outsourcing (BPO)

Business process outsourcing is a term which refers to a process of hiring other companies to do the set of business activities or a single function related to the company’s business. It allows companies to save cost and focus on core activities.

When the company taking over responsibility for a function is located abroad a term ”offshoring” may be used.

Types of business process outsourcing

1. Back-office outsourcing: outsourcing of internal business functions like payroll, HR, etc.

2. Front-office outsourcing: outsourcing of customer related processes like technical support, maintenance etc.

Pros and cons of business process outsourcing

Pros:

1. Focus on core competency

2. Cost reduction

3. Business process efficiency increasement

4. Focused teams solving problems

Cons

1. Third party vendors dependance

2. Lack of complete knowledge of product/service

3. Less focus on quality due to lower cost offerings through outsourcing

How do you pay for outsources work?

When a company hires another company to handle part of their work, such as customer service, the payment structure can vary based on the agreement between the two parties. Common payment models in these outsourcing arrangements include:

Fixed Fee or Flat Rate: The outsourcing company is paid a set amount for the services provided. This fee is agreed upon in advance and is typically not dependent on the volume of work. This model is often used for services with predictable workloads.

Per-Hour Rate: Payment is based on the number of hours worked by the outsourcing company’s employees. This model can be preferred when the workload is variable and difficult to predict.

Per-Transaction or Per-Interaction Fee: In customer service, this model involves paying for each interaction handled by the outsourcing company (e.g., per call, per email, per chat session). This is common in environments where the volume of interactions can fluctuate significantly.

Performance-Based Pricing: Payment is tied to the achievement of specific performance metrics or outcomes, such as customer satisfaction ratings, resolution times, or sales targets. This can be done by defining specific OTEs. This model aligns the outsourcing company’s incentives with the client’s goals.

Retainer Model: The client pays a regular, recurring fee (monthly, quarterly, etc.) for a set package of services. This model can provide stability for both the client and the provider.

Combination Models: Often, a hybrid approach is used, combining elements of the above models. For example, a fixed fee might cover a base level of service, with additional costs for extra hours worked or bonuses for achieving performance targets.

The choice of payment model depends on various factors, such as the nature of the work, the predictability of the workload, the desired level of control over costs, and the importance of performance metrics. The agreement is usually detailed in a contract, which outlines the scope of services, payment terms, performance expectations, and other relevant conditions.