Business process outsourcing (BPO) strategy. A conceptual approach

Essay, 2016

29 Pages



1.1 Abstract
1.2 History of Outsourcing


3.1 Strategy-driven outsourcing
3.2 Cost driven outsourcing
3.3 Politically-driven outsourcing

4.1 Selecting Outsourcing Providers/Vendors
4.2 Important considerations when selecting an Outsourcing Partner



7.1 Outsourcing Benefits
7.2 Outsourcing Risks & Pitfalls

8.1 History of Off-shoring
8.2 Similarities between off-shoring & outsourcing
8.3 Benefits of offshore outsourcing

9.1 Misunderstanding the Requirements
9.2 Quality Assurance
9.3 Intellectual Property Protection
9.4 Differing Internal Processes
9.5 Other Barriers
9.6 Outsourcing best practices


11.1 Annex 1: List of outsourcing service providers
11.2 Annex 2: List of firms that outsource their processes
11.3 Annex 3: Top 100 Outsourcing Destinations – 2014. Source Tholons:



1.1 Abstract

Although Outsourcing is relatively a new business phenomenon, it has really evolved from application development to “ITO (Information Technology Outsourcing) to BPO (Business Process Outsourcing) to KPO (Knowledge Process Outsourcing)”. Thispaper seeks to make the case for the Business Process Outsourcing Strategy (BPO) as the new dawn in the business world underpinned by cost minimization. This paper examines the history of Business Process Outsourcing, the drivers of this strategy, the decision making process, the critical success factors and the BPObenefits and risks that Managers are likely to encounter in embracing BPO as strategy that gives the business the much needed impetus against competitors and mitigation mechanisms of these risks.

Key words: Business Process Outsourcing, serviceseeking firm, service provider, vendor, non-core, processes.

1.2 History of Outsourcing

With the advent of globalization, Business Process Outsourcing (BPO) emerged in the business circles in the 1980s. As companies expanded, the need for more specialized skill became more evident. Service seeking firms realized that outsourcing service providers often delivered timely and efficiently on expected output as a result of their superior skills. This led to the spurof the outsourcing phenomenon. Service seeking firms outsourced processes that required specialized skills to external providers. GE (General Electric) was among the pioneers of Outsourcing.

Outsourcing can either be Strategic or Tactical. Strategic outsourcing involves outsourcing essential tasks that would normally be managed by in-house personnel thus allowing firms to organize the use of its assets maximally, providing it with the opportunity to achieve its goals. Consequently, Tactical Outsourcing is where the management needs help with certain processes for short durations which could be;when it has a limited availability of specific resources and skills to complete a project, when it needs to meet a deadline and bringing of a project back on track. According to Murphy (2004), the driver for tactical outsourcing is minimization of operational costs.

Amega Group (2003) asserts thatsome of the outsourcing types include:Information Technology Outsourcing, Manufacturing Outsourcing and Business Process Outsourcing which is the latest kind of outsourcing.The two diagrams below encapsulate the leading areas of outsourcing and the leading industries in outsourcing of processes respectively.

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Diagram: Leading Areas of outsourcing. Source: Paragon Innovation (1999-2015)

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Diagram: Leading Industries in Outsourcing. Source: Paragon Innovation (1999-2015)


The definition of Business Process Outsourcing differs from one business Scholar to the other and they are varied as can be. Click and Duening (2005), put forth the definition of Business Process Outsourcing as being the movement of a business processes from within the organization to external service providers who are specialized in the requisite field hereto known as, service providers with outsourcing seeking firm known as service seeking firm. Service provider firm offers its services to a service seeking firm for tasks and processes that could be done in-house. This trend has become common in information technology, manufacturing and service industries. Outsourcing can range from large contracts like IBM which is a multi-national corporation managing IT services for Xerox to a small firm hiring short-term contractors to enable it meet a veryimportant target. Many companies are therefore, turning to outsourcing as a way to grow their businesses while minimizing overhead costs and staying competitive.

Khong (2005) put forth another definition; Business Process Outsourcing is the act of transferring some of an organization’s repeated non-core and core business processes to an outside service provider so as to achieve cost reduction while improving the business service quality. It is also a strategic use of external resources to perform jobs that are usually handled internally by the organization.

A lot of empirical research on BPO undertaken by industry experts and academicians exist. Among these is a research carried out by Price-Waterhouse-Coopers (PWC) team in 1999 whose finding showed that over 60 percent of firms in Europe and US have outsourced their processes. According to Purcel and Mathews (2004), the processes included in the BPO strategy are defined into two broad categories namely back and front office process with front office consisting of activities such as customer services for instance a call center, help desk activities and outbound sales or telemarketing. The back office processes include human resources management, accounting services, Information Technology Enables Services (ITES) among others. Beaumont and Sohal et al. (2004) stated that the main driver for BPO was the need for firms to focus of their core activities. Subsequently, Goolsby (2002) supported this assertion and opined that firms that outsource their processes do so to make them more agile.

On the onset of outsourcing,most firms onlyoutsourced those processes that it considered non-core with the aim of reducing operation costs as a result improving efficiency levels. This has since evolved and according to Linder (2004), firms are now outsourcing those processes that are non-core but still critical to the business. These include financial and accounting processes, human resources and customer support. The decision to outsource is a game changer for most firms in their bid to remain competitive, to focus on their strategic intent and to continue to meet the business clientele needs.

In a country like Kenya for instance, most firms and institutions have outsourced their cleaning services to external firms in a bid to minimize costs associated with full time employment of auxiliary staff. Parapet Kenya Limited, a household name in Kenya cleaning services industry is in charge of cleaning services in most establishments.


The three drivers for outsourcing include: strategy, cost and politics, with cost and strategy driving the private sector outsourcing. Kakabadse and Kakabadse(2002a) buttress that political agendas are often the drivers for public organizations outsourcing.

3.1 Strategy-driven outsourcing

According to (DiRomualdo and Gurbaxani, 1998; Elmuti and Kathawala, 2000; Harris and Giunipero, 1998; Lankford and Parsa, 1999; Meckbach, 1998; Muscato, 1998; Mullin, 1996; Quinn, 1999; Roberts, V. 2001; Wright, 2001), outsourcing drivers seem to be shifting from cost to strategic issues focusing on an organizations’ core competence and flexibility giving it the much needed impetusto direct its resources and concentrate on its core functions.

3.2 Cost driven outsourcing

Bers and Harler assert that firms are driven to outsource their process whenvalue chain activities such as suppliers’ costs are low enough and may not affect the business bottom (Bers, 1992; Harler, 2000). The need to minimize indirect costs may drive a business to outsource.

3.3 Politically-driven outsourcing

The outsourcing driver for a public organization differs from those of a private firm. The performance of services offered by a laboratory serving the public are driven by the need for the government to control the process in the interest of its Citizens interest and not by market forces such as demand. The factors driving the outsourcing decisions for the public sector therefore is; the wellbeing of its citizens, the agenda of elected officials for such organizations, the public opinion and the national and international trends.

Rapid technological change, business expansion, desired efficiency, evolving customers’ tastes and the need to spread organizational risks also drive outsourcing. For most FDI inflows to developing economies, the driver is mostlyfactor endowment according to “Porter’s” (1990) Diamond of National Competitive Advantage.


According to Douglas and Scott (2005), the outsourcing decision making process can be very demanding. They propose considerations to be adhered to which includes setting strategic direction, identifying firms core competence through its strategic objectives, generating the list of the business value chain activity players and putting together a team for outsourcing and governance process.

Click and Duening (2005) has recommended that business undertake the steps below in the BPO decision making process:

1. Establish a BPO Analyzer Team; this team brainstorms on all pros and cons of potential service providers, undertake a SWOT analysis and interview providers’of business portfolios among other activities.
2. Survey the current state of business processes; this is done in a bid to identify activities that can be outsourced, establish the intellectual properties that needs to be patented to safeguarding the outsourcing partnership among others.
3. Discover BPO Opportunities; by carrying out surveys of Industry trends,a firm discovers business processes being outsourced and to which destinations.
4. The modelling of the BPO hard and soft results prior to implementation; this enables the firm to be abreast of the pros and cons involved and may plan for these. In cases of risks, contingency plans can be put in place to mitigate such.
5. The Development and presentation of the BPO business plan; aftergathering information, a firm formulates an outsourcing strategy, presents the same to top management to get their buy in and “fine tunes” the same based on recommendations before implementation.

Most of the reviewed outsourcing decision making models emphasize on the analysis ofBPO strategic effect on the business while focusing on the core functions as well as competencies.

4.1 Selecting Outsourcing Providers/Vendors

When selecting the BPO service provider, Ivanka and Gerard (2008) proposethat the provider identified should demonstrate staff competency, industry’s track recordof quality service delivery, experience and certifications among others.

Relationship dynamics such as the cultural fit of the service provider and the firm, their vision and strategy should also be considered. It is important to know their quality control systems, risk management and overall capabilities in terms of resources, financial strength and management system among others.


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Business process outsourcing (BPO) strategy. A conceptual approach
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James Wanyama (Author), 2016, Business process outsourcing (BPO) strategy. A conceptual approach, Munich, GRIN Verlag,


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