Outsourcing

Not to be confused with Offshoring.

Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity that is or could be done internally.

It often involves the contracting of a business process (e.g., payroll processing, claims processing), operational, and/or non-core functions, such as manufacturing, facility management, call center support). The term "outsourcing" came from "outside resourcing" and dates back to at least 1981. Outsourcing sometimes involves transferring employees and assets from one firm to another.

Outsourcing is also the practice of handing over control of public services to private enterprises.

Outsourcing includes both foreign and domestic contracting, and sometimes includes offshoring (relocating a business function to a distant country) or nearshoring (transferring a business process to a nearby country).

Offshoring and outsourcing are not mutually inclusive: there can be one without the other. They can be intertwined (Offshore outsourcing), and can be individually or jointly, partially or completely reversed, involving terms such as reshoring, inshoring, and insourcing.

Terminology

• Offshoring is moving the work to a distant country. If the distance workplace is owned by the company, then the offshore operation is a captive.
• Insourcing entails bringing processes handled by third-party firms in-house, and is sometimes accomplished via vertical integration.
• An Intermediary is when a business provides a contract service to another organization while contracting out that same service.

Overview

Motivations

Global labor arbitrage can provide major financial savings from lower international labor rates can provide a major motivation for offshoring. Cost savings from Economies of scale and specialization can motivate outsourcing.

Another motivation is speed to market; to make this work, a new process was developed: "outsource the outsourcing process." Details of managing DuPont's CIO Cinda Hallman's $4 billion 10-year ourtsourcing contract with Computer Sciences Corporation and Anderson Consulting were outsourced, thus avoiding "inventing a process if we'd done it in-house." A subsequently developed term to describe this is midsourcing.

Outsourcing can offer greater budget flexibility and control by allowing organizations to pay for the services and business functions they need, when they need them. It also reduces the need to hire and train specialized staff, makes available specialized expertise, and can reduce capital, operating expenses, and risk.

"Do what you do best and outsource the rest" has become an internationally recognized business tagline first "coined and developed" in the 1990s by the "legendary management consultant" Peter Drucker. The slogan was primarily used to advocate outsourcing as a viable business strategy. Drucker began explaining the concept of "Outsourcing" as early as 1989 in his Wall Street Journal article entitled "Sell the Mailroom."

Agreements

Two organizations may enter into a contractual agreement involving an exchange of services, expertise, and payments. Outsourcing is said to help firms to perform well in their core competencies, fuel innovation, and mitigate a shortage of skill or expertise in the areas where they want to outsource.

History

20th century

Following the adding of management layers in the 1950s and 1960 to support expansion for the sake of economy of scale, corporations found that agility and added profits could be obtained by focusing on core strengths; the 1970s and 1980s were the beginnings of what later was named outsourcing. Kodak's 1989 "outsourcing most of its information technology systems" was followed by others during the 1990s.

Early 21st century

In the early 21st century, businesses increasingly outsourced to suppliers outside their own country, sometimes referred to as offshoring or offshore outsourcing. Other options subsequently emerged: nearshoring, crowdsourcing, multisourcing, strategic alliances/strategic partnerships, strategic outsourcing., and vested outsourcing.

From Drucker's perspective, a company should only seek to subcontract in those areas in which it demonstrated no special ability. The business strategy outlined by his slogan recommended that companies should take advantage of a specialist provider's knowledge and economies of scale to improve performance and achieve the service needed.

In 2009 by way of recognition, Peter Drucker posthumously received a significant honor, when he was inducted into the Outsourcing Hall of Fame for his outstanding work in the field.

Growth of white-collar outsourcing

Although offshoring initially focused on manufacturing, white-collar offshoring/outsourcing has grown rapidly since the early 21st century. The digital workforce of countries like India and China are only paid a fraction of what would be minimum wage in the US. On average, software engineers are getting paid between 250,000 and 1,500,000 rupees (US$4,000 to US$23,000) in India as opposed to $40,000–$100,000 in countries such as the US and Canada. Closer to the USA, Costa Rica has become a big source for the advantages of a highly educated labor force, a large bilingual population, stable democratic government, and similar time zones with the United States. It takes only a few hours to travel between Costa Rica and the US. Companies such as Intel, Procter & Gamble, HP, Gensler, Amazon and Bank of America have big operations in Costa Rica.

Unlike outsourced manufacturing, outsourced white collar workers are offered the flexibility to choose their working hours, and which companies to work for. Clients benefit from telecommuting, and clients do not need to allocate additional funds for setting up of office space, management salary, and employee benefits as these individuals are contracted workers.

However, ending a government oursourcing arrangement has its difficulties too.

Reasons for outsourcing

While U.S. companies do not outsource to reduce high top level executive or managerial costs, they primarily outsource to reduce peripheral and "non-core" business expenses. Further reasons are higher taxes, high energy costs, and excessive government regulation or mandates.

Mandated benefits like social security, Medicare, and safety protection (OSHA regulations) are also motivator. By contrast, executive pay in the United States in 2007, which could exceed 400 times more than average workers — a gap 20 times bigger than it was in 1965. is not a factor.

Other reasons include:

• Reducing and controlling operating costs.
• Improving company focus.
• Gaining access to world-class capabilities.
• Freeing internal resources for other purposes.
• Streamlining or increasing efficiency for time-consuming functions.
• Maximizing use of external resources.

Outsourcing models

There are many outsourcing models, and they've varied by country, year and industry.

Another approach is to differentiate between tactical and strategic outsourcing models. Tactical models include

• staff augmentation
• project-based
• to gain expertise not available in-house.

Strategic consultancy includes for Business process improvement.

Co-sourcing

Co-sourcing is a hybrid of internal staff supplemented by an external service provider. Co-sourcing can minimize sourcing risks, increase transparency, clarity and lend toward better control than fully outsourced.

Co-sourcing services can supplement internal audit staff with specialized skills such as information risk management or integrity services, or help during peak periods, or similarly for other areas such as software development or human resources.

Identity management co-sourcing

Identity management co-sourcing is when on-site hardware interacts with outside identity services.

This contrasts with an "all in-the-cloud" service scenario, where the identity service is built, hosted and operated by the service provider in an externally hosted, cloud computing infrastructure.

Implications

For business

Management processes

Globalization and complex supply chains, along with greater physical distance between higher management and the production-floor employees often requires a change in management methodologies, as inspection and feedback may not be as direct and frequent as in internal processes. This often requires the assimilation of new communication methods such as voice over IP, instant messaging, and Issue tracking systems, new time management methods such as time tracking software, and new cost- and schedule-assessment tools such as cost estimation software.

Communications and customer service

In the area of call center outsourcing, especially when combined with offshoring, agents may speak with different linguistic features such as accents, word use and phraseology, which may impede comprehension.

Governance

In 1979, Nobel laureate Oliver E. Williamson wrote that the governance structure is the "framework within which the integrity of a transaction is decided." Adding further that "because contracts are varied and complex, governance structures vary with the nature of the transaction." University of Tennessee researchers have been studying complex outsourcing relationships since 2003. Emerging thinking regarding strategic outsourcing is focusing on creating a contract structure in which the parties have a vested interest in managing what are often highly complex business arrangements in a more collaborative, aligned, flexible, and credible way. (Also see relational contract, governance, Vested outsourcing.)

Security

Reduced security, sometimes related to lower loyalty may occur, even when "outsourced" staff change their legal status but not their desk. While security and compliance issues are supposed to be addressed through the contract between the client and the suppliers, fraud cases have been reported.

In April 2005, a high-profile case involved the theft of $350,000 from four Citibank customers when call-center workers acquired the passwords to customer accounts and transferred the money to their own accounts opened under fictitious names. Citibank did not find out about the problem until the American customers noticed discrepancies with their accounts and notified the bank.

Information Technology

Richard Baldwin's 2006 The Great Unbundling work was followed in 2012 by Globalization's Second Acceleration (the Second Unbundling) and in 2016 by The Great Convergence: Information Technology and the New Globalization. It is here, rather than in manufacturing, that the bits economy can advance in ways that the economy of atoms and things can't: an early 1990s Newsweek had a half page cartoon showing someone who had just ordered a pizza online, and was seeking help to download it.

Issues and reversals

Demonstrating need to ensure outsourcing gains are realised and losses avoided at a summit in London in 2009

A number of outsourcings and offshorings that were deemed failures led to reversals signaled by use of terms such as Insourcing and reshoring. The New York Times reported in 2017 that IBM "plans to hire 25,000 more workers in the United States over the next four years," overlapping India-based Infosys's "10,000 workers in the United States over the next two years." A clue to a tipping point having been reached was a short essay titled "Maybe You Shouldn’t Outsource Everything After All" and the longer "That Job Sent to India May Now Go to Indiana."

Among problems encountered were supply-and-demand induced raises in salaries and lost benefits of similar-time-zone. Other issues were differences in language and culture. Another reason for a decrease in outsourcing is that many jobs that were subcontracted abroad have been replaced by technological advances.

According to a Deloitte Consulting survey carried out in 2005, a quarter of the companies which had outsourced tasks reversed their strategy. Many big companies like Lenovo considered turning around outsourcing strategies of outsourcing.

These reversals, however, didn't undo the damage. New factories often:

• were in different locations
• needed different skill sets
• used more automation

Public opinion in the US and other Western powers opposing outsourcing was particularly strengthened by the drastic increase in unemployment as a result of the 2007–2008 financial crisis. From 2000 to 2010, the US experienced a net loss of 687,000 jobs due to outsourcing, primarily in the computers and electronics sector. Public disenchantment with outsourcing has not only stirred political responses, as seen in the 2012 US presidential campaigns, but it has also made companies more reluctant to outsource or offshore jobs.

A counterswing depicted by a 2016 Deloitte survey suggested that companies are no longer reluctant to outsource. Deloitte's survey identified three trends:

• Companies are broadening their approach to outsourcing as they begin to view it as more than a simple cost-cutting play
• Organizations are "redefining the ways they enter into outsourcing relationships and manage the ensuing risks."
• Organizations are changing the way they are managing their relationships with outsourcing providers to "maximize the value of those relationships."

Insourcing

Insourcing is the process of reversing an outsourcing, possibly using help from those not currently part of the inhouse staff.

Outsourcing has gone through many iterations and reinventions, and some outsourcing contracts have been partially or fully reversed. Often the reason is to maintain control of critical production or competencies, and insourcing is used to reduce costs of taxes, labor and transportation.

Regional insourcing, a related term, is when a company assigns work to a subsidiary that is within the same country. This differs from onshoring and reshoring: these may be either inside or outside the company.

To those who are concerned that nations may be losing a net number of jobs due to outsourcing, some point out that insourcing also occurs. According to a study by Mary Amiti and Shang-Jin Wei, in the United States, the United Kingdom, and many other industrialized countries more jobs are insourced than outsourced. They found that out of all the countries in the world they studied, the United States and the United Kingdom actually have the largest net trade surpluses in business services. Countries with a net deficit in business services include Indonesia, Germany and Ireland.

The fluctuation of prefixes and names give rise to many more "cross-breeds" of insourcing. For example, "offshore insourcing" is "when companies set up their own "captive" process centers overseas, taking advantage of their cheaper surroundings while maintaining control of their back-office work and business processes." "Remote insourcing" refers to hiring developers to work in-house from virtual (remote) facilities.

In the United States

A 2012 series of articles in Atlantic Magazine highlighted a turning of the tide for parts of the USA's manufacturing industry. Specific causes identified include rising third-world wages, recognition of hidden off-shoring costs, innovations in design/manufacture/assembly/time-to-market, increasing fuel and transportation costs, falling energy costs in the US, increasing US labor productivity, and union flexibility. Hiring at GE’s giant Appliance Park in Louisville increased 90% during 2012.

Standpoint of labor

From the standpoint of labor, outsourcing may represent a new threat, contributing to worker insecurity, and is reflective of the general process of globalization and economic polarization.

On June 26, 2009, Jeff Immelt, the CEO of General Electric, called for the United States to increase its manufacturing base employment to 20% of the workforce, commenting that the U.S. has outsourced too much and can no longer rely on consumer spending to drive demand.

Standpoint of government

Western governments may attempt to compensate workers affected by outsourcing through various forms of legislation. In Europe, the Acquired Rights Directive attempts to address the issue. The Directive is implemented differently in different nations. In the United States, the Trade Adjustment Assistance Act is meant to provide compensation for workers directly affected by international trade agreements. Whether or not these policies provide the security and fair compensation they promise is debatable.

Policy-making strategy

A main feature of outsourcing influencing policy-making is the unpredictability it generates regarding the future of any particular sector or skill-group. The uncertainty of future conditions influences governance approaches to different aspects of long-term policies.

In particular, distinction is needed between

• cyclical unemployment – for which pump it up solutions have worked in the past, and
• structural unemployment – when "businesses and industries that employed them no longer exist, and their skills no longer have the value they once did."

Competitiveness

A governance that attempts adapting to the changing environment will facilitate growth and a stable transition to new economic structures until the economic structures become detrimental to the social, political and cultural structures.

Automation increases output and allows for reduced cost per item. When these changes are not well synronized, unemployment or underemployment is a likely result. When transportation costs remain unchanged, the negative effect may be permanent; jobs in protected sectors may no longer exist.

USA outsourcing's effect on Mexico, studies suggest, is that for every 10% increase in US wages, north Mexico cities along the border experienced wage rises of 2.5%, about 0.69% higher than in inner cities.

By contrast, higher rates of saving and investment in Asian countries, along with rising levels of education, studies suggest, fueled the ‘Asian miracle’ rather than improvements in productivity and industrial efficiency. There was also an increase in patenting and research and development expenditures.

Industrial policy

Outsourcing results from an internationalization of labor markets as more tasks become tradable. According to leading economist Greg Mankiw, the labour market functions under the same forces as the market of goods, with the underlying implication that the greater the number of tasks available to being moved, the better for efficiency under the gains from trade. With technological progress, more tasks can be offshored at different stages of the overall corporate process.

The tradeoffs are not always balanced, and a 2004 viewer of the situation said "the total number of jobs realized in the United States from insourcing is far less than those lost through outsourcing."

Environmental policy

Import competition has caused a de facto ‘race-to-the-bottom’ where countries lower environmental regulations to secure a competitive edge for their industries relative to other countries.

As Mexico competes with China over Canadian and American markets, its national Commission for Environmental Cooperation has not been active in enacting or enforcing regulations to prevent environmental damage from increasingly industrialized Export Processing Zones. Similarly, since the signing of NAFTA, heavy industries have increasingly moved to the US which has a comparative advantage due to its abundant presence of capital and well-developed technology. A further example of environmental de-regulation with the objective of protecting trade incentives have been the numerous exemptions to carbon taxes in European countries during the 1990s.

Although outsourcing can influence environmental de-regulatory trends, the added cost of preventing pollution does not majorly determine trade flows or industrialization.

Globalization and socio-economic implications

Main article: Globalization

Industrialization

Outsourcing has contributed to further levelling of global inequalities as it has led to general trends of industrialization in the Global South and deindustrialization in the Global North.

The rise in industrial efficiency which characterized development in developed countries has occurred as a result of labor-saving technological improvements. Although these improvements do not directly reduce employment levels but rather increase output per unit of work, they can indirectly diminish the amount of labor required for fixed levels of output.

Growth and income

It has been suggested that "workers require more education and different skills, working with software rather than drill presses" rather than rely on limited growth labor requirements for non-tradable services.

Migration

The level of migration has remained relatively low, particularly compared to the mass migratory trends which characterized the Industrial Revolution roughly between 1850 and 1914., probably because labor markets are not free now. Countries now have discrimination labor laws, only allow people with citizenship cards live and work free in their territories, even getting a citizenship card is difficult for some one not born in their territory. Free labor markets, discrimination based with a person skills would help reduce outsourcing problems, letting people freely follow their jobs in other countries.

By location

United States

Protection of some data involved in outsourcing, such as about patients (HIPPA) is one of the few federal protections.

"Outsourcing" is a continuing political issue in the United States, having been conflated with offshoring during the 2004 U.S. presidential election. The political debate centered on outsourcing's consequences for the domestic U.S. workforce. Democratic U.S. presidential candidate John Kerry called U.S. firms that outsource jobs abroad or that incorporate overseas in tax havens to avoid paying their "fair share" of U.S. taxes "Benedict Arnold corporations".

A Zogby International August 2004 poll found that 71% of American voters believed "outsourcing jobs overseas" hurt the economy while another 62% believed that the U.S. government should impose some legislative action against these companies, possibly in the form of increased taxes. President Obama promoted the 'Bring Jobs Home Act' to help reshore jobs by using tax cuts and credits for moving operations back to the USA. The same bill was reintroduced in the 113th United States Congress as the Bring Jobs Home Act (S. 2569; 113th Congress).

While labor advocates claim union busting as one possible cause of outsourcing, another claim is high corporate income tax rate in the U.S. relative to other OECD nations, and the practice of taxing revenues earned outside of U.S. jurisdiction, a very uncommon practice. Some counterclaim that the actual taxes paid by US corporations may be considerably lower than "official" rates due to the use of tax loopholes, tax havens, and "gaming the system".

Sarbanes-Oxley has also been cited as a factor.

See also: Disney litigation

European Union

Council Directive 77/187 of 14 February 1977 protects employees' rights in the event of transfers of undertakings, businesses or parts of businesses (as amended 29 June 1998, Directive 98/50/EC & 12 March 2001's Directive 2001/23).

Rights acquired by employees with the former employer are to be safeguarded when they, together with the undertaking in which they are employed, are transferred to another employer, i.e., the contractor.

Case subsequent to the European Court of Justice's Christel Schmidt v. Spar- und Leihkasse der früheren Ämter Bordesholm, Kiel und Cronshagen, Case C-392/92 [1994] have disputed whether a particular contracting-out exercise constituted a transfer of an undertaking (see, for example, Ayse Süzen v. Zehnacker Gebäudereinigung GmbH Krankenhausservice, Case C-13/95 [1997]). In principle, employees may benefit from the protection offered by the directive.

Many Western European firms have been transferring tech projects eastward. Deutsche Bank has some of its software developed in Ukraine, Siemens possesses an R&D center in Romania.

The outsourcing services market continued to flourish in Central and Eastern European during 2007–2009. In Poland alone, during 2009, despite a global economic downturn, approximately 10,000 jobs were created in business process outsourcing (BPO).

Asia

Countries that have been the focus of outsourcing include India, and the Philippines for American and European companies, and China and Vietnam for Japanese companies.

The Asian IT service market is still in its infancy, but in 2008 industry think tank Nasscom-McKinsey predicted a $17 billion IT service industry in India alone.

Nearshoring

Nearshoring, or Nearshore, is the outsourcing of business processes, especially information technology processes, to companies in a nearby country, often sharing a border with the target country. Commonalities usually include: geographic, temporal (time zone), cultural, social, linguistic, economic, political, or historical linkages.

It can also be a reversal, by contracting with a development partner in a different country but in close proximity (same or nearby time zone), facilitating communication and allowing frequent visits.

Near-sourcing interim

Near-sourcing

Near-sourcing also known as near-sourced or near-source, is a business strategically placing some or all of its operations close to where its products are sold. Typically, this is contrasted with the trend to outsource low-wage manufacturing operations to developing nations (offshoring), and reflects a reversal of that trend. Businesses can near-source everything from product production to customer and IT services. It is a form of outsourcing, in that the work is done by an outside contracted company rather than internally (insourcing), but unlike offshore outsourcing, the work is done in fairly close proximity to either the company headquarters or its target market.

Near-sourcing can save companies time and money, but it does not always mean bringing operations back to the home country where the firm is located. It could mean relocating or locating operations in a nearby country (nearshoring).

Overview

Outsourcing, insourcing, and near-sourcing are three ways businesses may deal with product manufacturing, customer and IT services. As consumers become more demanding, the importance of customer and IT services, as well as the ratings associated with customer and IT service performance becomes more relevant and plays a larger part in consumer choice. For many businesses the question is not so much whether to near-source, but how, to what extent, and which parts of the business might be suitable. Services that can be near-sourced are manufacturing and production, customer service representatives, and IT services.

Reasons to near-source

Cost

In cases of near-sourcing, the business firm is often responding to rising costs in supply chains as well as rising costs associated with sourcing labor (of any kind) in developing nations. Near-sourcing services can reduce the overall cost of the employee to the company, by requiring payment only for work rendered and eliminating extra costs such as insurance and paid time off.

Companies may save millions of dollars on shipping costs by manufacturing products closer to their headquarters. For instance, importers have historically spent 15 percent of their shipping costs on fuel; therefore, the foreign imports of goods makes the end product more expensive for the company and their customer compared to domestically produced goods.

Culture

Cultural alignment with the business is often more readily achieved through near-sourcing due to there being similarities between the cultures in which the business is located and in which services are sub-contracted, including for example proficiency with the language used in that culture.

Communication

Communication on business projects between management and the project team is often of particular concern. Constraints imposed by time zones can make communication a labor intense process, so near-sourcing provides a solution for facilitating the communication process through eliminating or reducing time zone constraints. Proximity also facilitates communication by allowing various actors within the business to meet on a regular basis when required. Traveling from the United States to Canada only takes a few hours depending on the location, but traveling to China or Europe often entails a much longer flight time.

References

Overview

Nearshoring is a derivative of the business term offshoring.

In Europe, nearshoring relationships are between clients in larger European economies and various providers in smaller European nations. Major centers are in Spain, Czech Republic, Hungary, Portugal, Poland, Slovakia, Romania, Bulgaria, Belarus and the Baltic. There are also nearshore centers in larger markets, such as Russia and Ukraine. These destinations are attractive because they are low-cost, have skilled labor forces, and a less stringent regulatory environment, but crucially they allow for more day to day physical oversight. They also have strong cultural ties to the major economic centers in Europe. For example, Bulgaria is now considered to be a viable outsourcing destination for such companies as German software company SAP, where labor costs are low, and the skills available, but which is also closer to home. In 2009, the Central-Eastern European Outsourcing Association (CEEOA) published research estimating that the Eastern European region has over 95,000 IT specialists involved in the industry, working for close to 5000 companies.

In the USA, American clients nearshore to Canada and Mexico, or both, as well as to many nations in Central and South America.

Software development nearshoring is mainly due to available low cost skilled developers. The nearshoring of call centers, shared services centers, and (Business Process Outsourcing) rose as offshore outsourcing was seen to be relatively less valuable.

The complexities of offshoring stem from language and cultural differences, travel distances, workday/time zone mismatches, and greater effort for needed for establishing trust and long-term relationships. Many nearshore providers attempted to circumvent communication and project management barriers by developing new ways to align organizations. As a result, concepts such as remote insourcing were created to give clients more control in managing their own projects. Nearshoring still hasn't overcome all barriers, but proximity allows more flexibility to align organizations.

English language skills are the cornerstone of Nearshore BPO and IT services. Collaboration by universities, industry, and government has slowly produced improvements.

Examples

• In 2003 Procter & Gamble outsourced their facilities' management support, but it did not involve offshoring.

Print and mail outsourcing

Print and mail outsourcing is the outsourcing of document printing and distribution.

The Print Services & Distribution Association was formed in 1946, and its members provide services that today might involve the word outsource. Similarly, members of the Direct Mail Marketing Association were the "outsourcers" for advertising agencies and others doing mailings. DMMA celebrated their 100th anniversary in 2017.

The term "outsourcing" became very common in the print and mail business during the 1990s, and later expanded to be very broad and inclusive of most any process by the year 2000. Today, there are web based print to mail solutions for small to mid-size companies which allow the user to send one to thousands of documents into the mail stream, directly from a desktop or web interface.

Marketing outsourcing

The term outsource marketing has been used in Britain to mean the outsourcing of the marketing function. The motivation for this has been:

• cost reduction.
• specialized expertise.
• speed of execution
• short term staff augmentation

While much of this work is the "bread and butter" of specialized departments within advertising agencies, sometimes specialist are used, such as when the Guardian newspaper outsourced most of their marketing design in May 2010.

Business process outsourcing

Business process outsourcing (BPO) is a subset of outsourcing that involves the contracting of the operations and responsibilities of a specific business process to a third-party service provider. Originally, this was associated with manufacturing firms, such as Coca-Cola that outsourced large segments of its supply chain.

BPO is typically categorized into back office and front office outsourcing.

BPO can be offshore outsourcing or to a neighbouring (or nearby) country: nearshore outsourcing. Information Technology Enabled Service (ITES-BPO), Knowledge process outsourcing (KPO) and Legal process outsourcing (LPO) are some of the sub-segments of BPO.

Although BPO began as a cost-reducer, changes (specifically the move to more service-based rather than product-based contracts), companies now choose to outsource their back-office increasingly for time flexibility and direct quality control. Business process outsourcing enhances the flexibility of an organization in different ways:

BPO vendor charges are project-based or fee-for-service, using business models such as Remote In-Sourcing or similar software development and outsourcing models. This can help a company to become more flexible by transforming fixed into variable costs. A variable cost structure helps a company responding to changes in required capacity and does not require a company to invest in assets, thereby making the company more flexible.

BPO also permits focusing on a company's core competencies.

Supply chain management with effective use of supply chain partners and business process outsourcing can increase the speed of several business processes.

BPO caveats

Failure to meet service levels, unclear contractual issues, changing requirements and unforeseen charges, and a dependence on the BPO which reduces flexibility. The latter is called lock-in; flexibility may be lost due to penalty clauses and other contract terms. Also, the selection criteria may seem vague and undifferentiated

Security risks can arise regarding both from physical communication and from a privacy perspective. Employee attitude may change, and the company risks losing independence.

Risks and threats of outsourcing must therefore be managed, to achieve any benefits. In order to manage outsourcing in a structured way, maximising positive outcome, minimising risks and avoiding any threats, a business continuity management (BCM) model is set up. BCM consists of a set of steps, to successfully identify, manage and control the business processes that are, or can be outsourced.

Analytical hierarchy process (AHP) is a framework of BPO focused on identifying potential outsourceable information systems. L. Willcocks, M. Lacity and G. Fitzgerald identify several contracting problems companies face, ranging from unclear contract formatting, to a lack of understanding of technical IT processes.

Technological pressures

Industry analysts have identified robotic process automation (RPA) software as a potential threat to the industry and speculate as to the likely long term impact. In the short term, however, there is likely to be little impact as existing contracts run their course: it is only reasonable to expect demand for cost efficiency and innovation to result in transformative changes at the point of contract renewals. With the average length of a BPO contract being 5 years or more – and many contracts being longer – this hypothesis will take some time to play out.

On the other hand, an academic study by the London School of Economics was at pains to counter the so-called "myth" that RPA will bring back many jobs from offshore. One possible argument behind such an assertion is that new technology provides new opportunities for increased quality, reliability, scalability and cost control, thus enabling BPO providers to increasingly compete on an outcomes-based model rather than competing on cost alone. With the core offering potentially changing from a "lift and shift" approach based on fixed costs to a more qualitative, service based and outcomes-based model, there is perhaps a new opportunity to grow the BPO industry with a new offering.

Industry size

One estimate of the worldwide BPO market from the BPO Services Global Industry Almanac 2017, puts the size of the industry in 2016 at about US$140 billion.

India, China and the Philippines are major powerhouses in the industry. In 2017, in India, the BPO industry generated US$30 billion in revenue according to the national industry association. The BPO industry is a small segment of the total outsourcing industry in India. The BPO industry workforce in India is expected to shrink by 14% in 2021.

The BPO industry and IT services industry in combination are worth a total of US$154 billion in revenue in 2017. The BPO industry in the Philippines generated $22.9 billion in revenues in 2016, while around 700 thousand medium and high skill jobs would be created by 2022.

In 2015, official statistics put the size of the total outsourcing industry in China, including not only the BPO industry but also IT outsourcing services, at $130.9 billion.

See also

• A. Aneesh (Algoracy)
• Banking BPO services
• BPO security
• Business process outsourcing to India
• Business process outsourcing in the Philippines
• Business process outsourcing in China
• Call center industry in the Philippines
• Call center industry in Bangladesh
• Captive service
• Comparative advantage
• Contact centre (business)
• Contingent workforce
• Crowdsourcing
• Facilities management
• Farmshoring
• Freelance marketplace
• Globality
• Global sourcing
• Globalization
• Homeshoring
• Impact sourcing
• Inshoring
• Knowledge process outsourcing (KPO)
• Legal process outsourcing (LPO)
• List of call centre companies
• List of management topics
• Nearshoring
• Offshore programming
• Offshore software development
• Offshoring
• Offshoring Research Network
• Outsourced document processing
• Professional Employer Organization
• Programmers Guild
• Recruitment
• Recruitment process outsourcing (RPO)
• Regional insourcing
• Selfsourcing
• Software testing outsourcing
• Supply chain
• Telecentre
• Telecommuting
• Third-party logistics (3PL)
• Transition methodology
• Verifiable computing
• Vertical integration
• Vested outsourcing
• Virtual assistance

Further reading

• Outsourcing and Insourcing Jobs in the U.S. Economy: Evidence Based on Foreign Investment Data Jackson, J. K. (2008). Outsourcing and insourcing jobs in the U.S. economy: Evidence based on foreign investment data (RL32461). Washington, DC: Congressional Research Service.
• Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues Manuel, K.M. and Maskell, J. (2013). (RL41810) Washington, DC: Congressional Research Service

• The dictionary definition of outsourcing at Wiktionary
• Quotations related to Outsourcing at Wikiquote