Modern business owners go to great lengths to make their operations more efficient. Despite nearly unlimited options to do so, Business Process Outsourcing (BPO) is one of the more impactful choices. Outsourcing in this sense affects everything that a business considers.
What is Business Process Outsourcing (BPO)?
Business Process Outsourcing means subcontracting your operations to third-party vendors. You’ll be paying another business to complete the tasks you need to deal with. Common reasons to outsource include:
- - Specialized manufacturing techniques would be too costly to do in-house.
- - Labor cost differences make one location less favorable
- - Raw material transport inefficiencies would make tariffs or logistics costs excessive
- - Etc.
Many wise business owners choose to utilize a combination of BPO techniques to maximize their operational efficiency. One example would be a small business that provides high-quality aerospace parts on a contract to the Department of Defense.
Let’s say they have certain quality requirements on their electroplated aluminum parts coating. If that business owner can’t find a way to ramp up their surface adhesion, without sanding the base aluminum down, they will have to outsource the task to a supplier who can provide that coating at the required specification.
A facility in Thailand provides this coating as a service to other manufacturers and they do so at an even greater level of perfection than the contract specifications ask for. The small business decides that they will happily pay $45 for 100 parts, since the contract only requires 1500 parts ($675 in total), rather than invest in a new electroplating platform for more than $2,500.
The Types of Business Process Outsourcing
There are three main types of BPO for businesses seeking assistance in getting their work done. Business process optimization can be carried out nationally, internationally, or on the same continent, but outside the country of residence.
Nearshore Outsourced BPO
Nearshoring, also called Nearshore BPO, means that a business has hired a vendor outside of their home country to take care of their business needs. The vendor must reside on the same continent as the original business in order to classify as nearshoring.
Nearshoring brings perks to the table for engineering and call center teams because cultural and language barriers are substantially lower than offshoring. Nearshoring is also beneficial thanks to the provider residing in the same time zone as their partners, or at least near to it. Businesses that trade in Canada and Mexico through NAFTA are nearshoring.
Offshore Outsourced BPO
Offshore Outsourcing, or Offshoring, means that a business is hiring an agency that resides on an entirely different continent to handle their affairs. When managing the outsourced business, companies are often inclined to spend heavily on training and monitoring.
If Quality Assurance and worker training aren’t managed well, mistakes can happen that will cost dollars, time, and even lives. As a result, offshoring has resulted in countless educational programs, healthcare incentives, and working condition revamps.
High-quality offshoring is a long-term investment that benefits their bottom line as well as the society they have partnered with.
Onshore Outsourced BPO
Onshoring, or outsourcing to other businesses in the same country of origin, means that companies are seeking vendors with roots in their country. Sometimes businesses do this to prevent trade secret leakage and industrial espionage. Other times, businesses do it because the raw materials they need are made right at home.
Some drop-shippers and suppliers may transition from offshore manufacturing to onshore manufacturing once they have attained enough working capital to secure their supply chain in-country.
This leap from drop-shipping to on-shore private labeling is common among merchandisers looking to monetize their celebrities.
When companies start onshoring, they’re choosing to invest in their home economy, to some degree. Bringing simple jobs into your country isn’t necessarily the most sustainable option, however. Some jobs like call center work and coal mining have been distributed across the world because, while currently necessary, they aren’t suited to a single nation’s population.
The Benefits of Business Process Outsourcing
BPO Benefits should be compared across BPO types, so we created this comparison to highlight from which areas your business can benefit to create the optimal solution for scaling, improving quality control, or otherwise improving operational efficiency.
Flexibility: Onshoring provides reasonably high levels of flexibility, but may limit overall business flexibility as a result of higher up-front costs when compared to offshoring and nearshoring. There may be some circumstances where this is the most efficient option.
Competitive Edge: Expect to reap the benefits of drastically lower logistics and delivery costs, potentially reduced R&D costs, lower import costs (if any), and potentially greater access to technology and Quality Assurance.
Expansiveness: Scalability is often limited when compared to offshoring and nearshoring. This won’t always prove true, but generally does.
Cost-effectiveness: This is normally the least cost-effective option, but other benefits may make it the most cost-efficient option.
Cost Impact: There’s a lot of variability with onshoring. It depends on factors such as import/export taxes, VAT, cost of labor differences, and more. Many businesses hire a professional to evaluate the benefits and the drawbacks before onshoring.
Flexibility: Offshoring provides incredibly high levels of flexibility, but may limit overall R&D flexibility as a result of limited technology or infrastructure, compared to onshoring and nearshoring. This is generally a winner for companies who are looking to outsource simple tasks and/or repetitive labor.
Competitive Edge: Expect to benefit from substantially lower labor costs (on average), potentially reduced R&D costs, and potentially greater access to skilled labor through unionized or specialized task groups.
Expansiveness: Scalability is often near-to-unlimited when compared to onshoring and nearshoring. Limitations with scaling are usually rooted in training and licensing bottlenecks. Drawbacks may include equipment costs and tariffs.
Cost-effectiveness: This is normally the most cost-effective option upfront, but other benefits may make it the least cost-efficient option overall.
Cost Impact: The cost impact of offshoring can account for hundreds of millions of dollars per year. Offshoring one factory from the US at an hourly rate of $12.50/hr to another country at $3.10/hr for 1,000 plant workers would save up to $77 million per year if the plant runs three shifts and achieves 92% efficiency.
Flexibility: Nearshoring provides middle-of-the-road flexibility, but results in fewer overall R&D and cost compromises as compared to onshoring and nearshoring. This is generally utilized for companies who have higher-quality products and aren’t willing or equipped to meet the training requirements for effective offshoring.
Competitive Edge: Generally expect lower labor costs (on average), when compared against onshoring, but potentially increased R&D costs. You will likely have ready-made access to skilled labor through unionized or specialized task groups when nearshoring.
Expansiveness: Scalability is often near-to-unlimited, though at a greater cost than offshoring. Limitations with scaling are usually rooted in cost and R&D bottlenecks. Drawbacks may include equipment costs and tariffs.
Cost-effectiveness: This is the median option for cost-efficiency in general, as well as cost-effectiveness. Businesses should evaluate this based on their risk tolerance (are they willing to go offshore?) and their cost tolerance (can they afford the higher labor costs?)
Cost Impact: This is the least cost-impactful option of the three, but it provides a balance of the best aspects of both offshoring and onshoring as a result.
The Risks of BPO
Business Process Outsourcing carries several risks that business owners must mitigate in order to maintain stable operations.
Corporate espionage, facility security, and international politics are all key risks that businesses should evaluate when looking to take operations anywhere. Generally speaking, businesses that aren’t located in at least two countries lack fault tolerance. If something were to happen to the only site a business has, then the business may have lost access to critical data and/or resources.
Businesses want to avoid relying on a single supplier to create the core of their business model. One example might be cell phone parts. When Samsung halted production of the computing cores that Qualcomm needed for their Snapdragon 865+ processors, Qualcomm would have been in a horrible spot, if TSCM hadn’t been another supplier.
Clear communication is vital to success in business. During an offshore meeting, if a plant manager who is still somewhat new to English were to misinterpret “liquidate 10,000 units of motherboards” to mean “meltdown 10,000 units of motherboards” without questioning their orders, a company could be placed at a massive deficit.
Compliance includes all things that are regulated—this means data handling procedures, data routing channels, user acquisition target locations, production safety requirements, working condition safety requirements, pay requirements, even simple things like password change requirements and “never buzz in your colleague” rules.
International business is constantly in flux. If your teams aren’t up to date on the latest changes to import and export compliance, your business can face huge fines and even product delivery delays—which can be devastating if they result in delays on the consumer-side.
Keys to Success with BPO
The three keys to success with BPO are simple, yet impactful for businesses of all sizes.
Know what your customers care about
If partnerships move your business in a direction that your customers don’t like, then BPO hasn’t benefitted your bottom line. Even if you’re able to sell at one-tenth of the cost, your customers have to be willing to buy at least one more unit. A common example is cruelty-free makeup.
Many brands could cut costs with animal testing, but buyers have begun cutting businesses that carry out animal testing out of their regimen, entirely.
Know what your business values most
Your business has its own values and needs. When seeking BPO partners, you must align these unique needs in order to ensure both you and the new partner would reap benefits that justify the time to form and adapt to each of your requirements.
Really work to figure out how potential partners align with your actual business
If your partners are promising boundless benefits, but your customers don’t care about how precise your manufacturing is, striking a new manufacturing BPO deal may prove to harm your business as a result of any cost increases. If they are cost-conscious, however, and a new machining partnership would decrease costs AND improve precision, then customers would likely begin to favor your product(s) more.
BPO is vital to cost-effective success in the modern B2B landscape. Our experts are shaping the way business processes are followed to completion.
Schedule a consultation to see how they can help optimize your business, so you can spend your efforts on the most effective areas possible.