Written by Allie Delos Santos
Market fluctuations and increasing competition have made outsourcing necessary for businesses. Companies can outsource certain business processes or partner with a managed services provider.
Established business process outsourcing (BPO) companies offer innovative solutions coupled with state-of-the-art technology.
This article covers the different types of BPO based on location, work areas, tasks, and supply chains. It also discusses the pros and cons of each type and provides actionable advice on choosing the right model for your business.
Types of BPO Based on Location
Before diving into its types, let us first answer: what is BPO? BPO involves delegating certain functions to a competent third-party vendor. The term was originally associated with manufacturing companies subcontracting supply chain portions.
There are five main types of BPO based on location: local, onshore, nearshore, offshore, and cloud-based.
With onshore outsourcing, you hire a BPO company in the same country where you run the business. For instance, you are running a Florida-based company that employs a Chicago-based service provider. Onshore BPO firms operate in the same time zone as their clients or with a slight, almost negligible time difference.
This is when the BPO company is located near your city or within driving distance. This model is ideal because you can meet the third-party team, assess their operations, and visit the site. But this approach is the most expensive option since you cannot leverage economies of scale.
Nearshore outsourcing is when a business hires a vendor located in nearby countries. A U.S.-based company outsources to a firm in Mexico or Central America where workers speak English as a second language or are already familiar with its culture. Nearshoring is less cost-effective than offshore outsourcing but has minor time zone differences similar to onshore firms.
This type of outsourcing—also usually shortened to “offshoring”— involves hiring a service provider located in a different country. For instance, an e-commerce company in the U.S. outsources customer support to a Philippine-based BPO company.
This is the most common and least expensive type of BPO. Offshore outsourcing helps save up to 70% of labor costs. Some caveats are the differences in culture, time zones, and accents.
A cloud is a new form of outsourcing that turns BPO into a business process as a service (BPaaS) model and transforms the industry from a service provider to a planner.
One example of cloud-based BPO is cloud contact centers that use an internet-based facility to handle customer communications. This facility is suitable for large enterprises requiring multiple communication platforms.
The cloud contact center uses voice-over-internet protocol (VoIP) technology for communication. The cloud contact center syncs data with customer relationship management (CRM) systems so that agents get all updates. Working with a cloud contact center means businesses must provide only a stable internet connection, a workstation, and a headset.
Types of BPO Based on Areas of Work
The types of BPO can also be based on the area of work. This can be either back-office or front-office outsourcing.
- Back-office BPO solutions are internal business functions that do not depend on customers. Simply put, customers and back-office workers do not interact with each other. Back-office outsourcing used to involve only administrative activities, but now it offers human resources (HR), payment processing, accounting, and digital marketing.
- Front-office BPO solutions refer to activities that require workers to handle current and potential clients. Call centers and customer-facing tech support are examples of front-office activities. Front-office workers must possess active listening skills and effective communication skills to successfully manage client interactions.
Types of BPO Based on Services
The categories of BPO services encompass both horizontal and vertical services, which can be classified as follows:
- Horizontal BPO refers to function-centric outsourcing. The service provider carries out particular areas of work across different industry domains. An example of horizontal BPO is outsourced HR, payroll processing, facilities management, procurement, and similar functions.
- Vertical BPO concentrates on offering different functional services in a limited industry vertical or domain. Financial services, retail, manufacturing solutions, and healthcare are examples of vertical business functions.
Here is a table to illustrate how this works:
|Identify customers||Identify vendors||Identify vacant positions|
|Process orders||Acquire product catalog||Look for candidates|
|Deliver products||Select vendors||Perform interviews|
|Receive payment||Process payment||Pick new hires|
BPO horizontals are function-specific and spread across various industry domains. Processing payments and managing the receipt of payments are examples of horizontal business processes.
Vertical BPO focuses on services within one industry domain, such as sales, procurement, or recruitment. For example, identifying vacant positions, looking for candidates, performing interviews, and selecting new hires fall under the recruitment domain.
Types of BPO Based on Function
Before choosing the right outsourcing model for your organization, let us look at the different types of BPO based on function.
- Legal process outsourcing (LPO) comprises legal research, patent services, and document review. It also includes drafting briefs and pleadings. It involves outsourcing low-skill tasks such as legal coding and high-value qualitative activities. The global LPO market is valued at $14.81 billion at a 26% compound annual growth rate (CAGR).
- Knowledge process outsourcing (KPO) is a subcategory of BPO that requires higher skills and expertise levels. For example, data entry is a BPO service. But when it involves tasks such as evaluation and analysis based on established business rules, the solution becomes part of KPO.
- Research process outsourcing (RPO) is when an external service provider manages a portion or all research and development duties of an organization. This type of BPO involves financial reporting and market analysis or research.
How To Find the Right BPO Model for You
Why is it important to choose between BPO options? How can you address the issues in your workflow? Here are four practical pieces of advice to help you answer these questions:
1. Identify Your Unique Goals and Needs
Each outsourcing service has unique benefits and risks. Ultimately, your goals and needs determine which outsourcing model is right for you. Ask yourself what you want to achieve. Is your plan short-term or long-term?
For example, offshoring and nearshoring are your best bets to cut your spending. Again, each model provides different solutions. Offshoring gives you access to a wider talent pool and the opportunity to operate 24/7. However, you should expect cultural and linguistic differences.
The advantages of nearshoring are almost the same, but it mitigates the problems with offshoring. Conversely, you might want to consider onshoring if you are not concerned about cost savings and want to only improve output quality. Due to fewer financial benefits, onshoring is quite uncommon.
2. Consider Your Budget
One key element in your decision-making is your budget, or how much you are willing to spend. Budgeting is crucial because the main point of outsourcing is to save money. In fact, 57% of companies outsource to save money.
Remember that this second piece of advice closely relates to the first: the answer depends on your organizational needs. Offshoring and nearshoring are ideal if you are budget-conscious.
3. Determine the Compromises You are Willing To Make
You might experience BPO challenges while outsourcing because each model comes with compromises. Identify which compromises you are willing to make based on your current workflow. Onshore outsourcing sacrifices budget and flexibility to keep output quality high.
With offshore outsourcing, you might encounter more language barriers and cultural differences while potentially compromising control over the function. The upside is that you get more value for your money and a bigger talent pool.
Lastly, nearshoring offers the best of both worlds with cost-efficient services that prevent major cultural and linguistic problems.
4. Optimize Your Workflow
After choosing a model that works for you, the next step is to optimize the workflow to get the most out of your outsourcing initiative. The goal behind outsourcing is for you to reap maximum benefits.
So if you partner with an onshore firm, keep communication lines open to fully leverage language and cultural compatibility. Conversely, try to design your workflow to be operational 24/7 when offshoring to maximize productivity.
The Bottom Line
Finding the right type of BPO depends on your unique needs. Therefore, it is crucial that you thoroughly assess your operation and set a timeline for when you plan to achieve your goals. Outsourcing is an incredible strategy, whether you want to solve an ongoing problem or work toward a goal.
If you want to maximize the value of your money and engage the biggest talent pool, then offshore outsourcing is for you! Unity Communications is one of the top offshore providers in the Philippines. Let’s connect to learn more about our services.
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About The Author
Allie Delos Santos is an experienced content writer who graduated cum laude with a degree in mass communications. She specializes in writing blog posts and feature articles. Her passion is making drab blog articles sparkle.
Allie is an avid reader—with a strong interest in magical realism and contemporary fiction. When she is not working, she enjoys yoga and cooking.