Contract management services bpo

Updated: 4 June 2024
Contributors: Mark Scapicchio, Matthew Finio, Amanda Downie

Business process outsourcing (BPO) is the practice of hiring external service providers to handle noncore business functions or processes.

BPO entails contracting an external service provider to fulfill a business function or process. BPO is sometimes referred to as information technology-enabled services (ITES) because in the modern world, outsourced processes are often reliant on IT.

BPO was first used in the manufacturing industry, where firms gained efficiencies by outsourcing business tasks for supply chain management. Today, BPO services are used in healthcare, asset management, energy, pharmaceuticals, ecommerce, and other industries as companies use new and innovative ways to improve customer experience and gain competitive advantages.

Generally, companies outsource non-core business functions—tasks that, while essential to the business, are not part of its core value proposition—that are similar across companies and industries. These include back-office functions (internal business functions) like accounting, IT services, sourcing, procurement, quality assurance and human resources management. Front-office (customer-facing) roles like sales, marketing or customer support are included as well. These roles are also using newer technologies such as chatbots.

Traditionally, companies have outsourced functions mainly to cut costs, save time and improve performance. These benefits remain the primary drivers of the BPO market, but the trend toward digital transformation has more firms looking beyond cost-saving strategies. There is now an increased focus on access to technology and expertise that are not available in-house.

Explore the 2023 Gartner® Magic Quadrant™ for Finance and Accounting Business Process Outsourcing.

The proliferation of new technologies like Robotic Process Automation (RPA) and artificial intelligence (AI) has impacted BPO processes. These advancements have ushered in unparalleled levels of efficiency, accuracy and scalability, making BPO a competitive advantage for many organizations.

RPA automates repetitive and rule-based tasks traditionally performed by humans. By deploying software bots programmed to replicate human actions, RPA simplifies processes, enabling human workers to focus on more complex tasks. This streamlining of workflows reduces errors and accelerates process execution.

Integrated analytics, which connect data insights solutions to everyday workflows and applications, are enhancing business intelligence. Machine learning (ML), a subset of AI, is dedicated to using data and algorithms to mimic human learning processes. This continuous refinement of accuracy over time represents a significant leap forward in data processing and analytics. ML can extract valuable insights from vast amounts of structured and unstructured data, leading to better decision making.

Predictive analytics, another branch of AI, employs mathematical and statistical models to identify data patterns and generate predictions. Integrated analytics offer deeper visibility into operations and aid in identifying emerging trends. This empowers organizations to make informed, data-driven decisions to stay ahead.

With technology playing such a pivotal role in business success, organizations are looking for BPO partners with expertise in AI, automation and emerging technologies. These partners can bridge the technology gap and help organizations remain competitive within their industries.

Identifying the appropriate functions for BPO requires strong business process management and a complete understanding of organizational processes. Typically, the outsourcing of a function or process will involve the following steps:

Organizations base this decision on many factors, including company size and industry, market size and economic forces, and overall needs and goals. For example, startups or small businesses might decide to outsource any number of functions because they lack the in-house expertise or do not have the staff to do them. Larger organizations might decide to outsource because a third-party vendor can complete the task more efficiently or effectively.

The organization must choose the business functions best suited for outsourcing and consider the impact outsourcing will have on technology requirements and current processes. Organizations must evaluate how this new business model affects the company, from processes and workflows to finances and taxes to company culture.

Organizations must determine which vendors offer the best outsourcing services at reasonable rates and turnaround times. Depending on an organization’s needs and their assessment of service providers, an entire business operation might be contracted to one vendor. Alternatively, the operation might be divided among multiple vendors. Comparing vendor offers against requirements and expectations helps make this decision.

An organization must decide whether to offer a vendor a fixed-price contract or a time-and-materials contract. If the service provider agrees to a fixed-price contract, they are paid a fixed amount regardless of the amount of time and resources expended on the outsourced role. For a time-and-materials contract, the provider is paid based on the amount of time and resources used during the work.

Alternatively, the contract may be based on performance outcomes. Whatever the contract type, service-level agreements (SLAs) should be established to simplify the evaluation of the quality of service provided.

Develop and implement a plan for moving the workload to the vendor. Communication, both internally and with the vendor, is crucial for a smooth transition.

The organization should regularly assess the vendor’s performance against the objectives and goals outlined in the contract, usually on a quarterly or annual basis. This evaluation should include metrics to gauge aspects such as efficiency, accuracy and customer satisfaction. This helps the organization decide whether to renew, amend or terminate the contract.

Business process outsourcing offers valuable benefits for organizations and allows for greater focus on highly skilled and specialized roles essential to core objectives. These benefits include:

• Access to innovations. As specialists in the services they provide, BPO vendors often invest in the latest technology solutions available to maintain an advantage over competition and offer the greatest value for clients. This allows companies to access cutting-edge technology, like AI, advanced analytics or automation solutions that handle more complex processes, while minimizing costs.
  
• Efficient global presence. Outsourcing providers can deliver around the clock service to customers in multiple languages, eliminating the need for an organization to staff a local office. In addition, for organizations looking to expand, a partnership with a BPO vendor in the region can grant a better understanding of local markets and help streamline the expansion process.

• Improved efficiency and standardization. BPO providers are often specialists in non-core business operations, like payment processing, call centers or accounting. Thus, they can handle these operations with greater efficiency and expertise than if the services were handled in-house.
  
• Increased focus on core business competencies. By outsourcing non-core competencies, organizations free up resources. These can be redirected toward business differentiators that drive value and give the company a competitive advantage.
  
• Reduced cost. While overhead costs are unavoidable, by outsourcing various functions to third-party vendors, organizations can reduce in-house labor costs related to staffing and training. They can also take advantage of fee-for-service plans that are more cost effective than retaining full-time employees. Through offshore outsourcing, organizations can use lower-cost labor markets and tax advantages to improve the bottom line.

Business process outsourcing can be classified according to the location of the hired outsourcing company and the type of service rendered.

BPO based on location:

Near-shore outsourcing. Here, the contracted vendor operates in a neighboring country, like a firm in the United States of America outsourcing to Mexico.

BPO based on the type of service:

Knowledge process outsourcing (KPO). This is the outsourcing of core, information-related business activities to a third party, or to a different group within the same organization with expertise in that particular area. Examples of KPO services include research and development (R&D), data and technical analysis, and consulting services.

Choosing a BPO industry service provider to meet an organization’s outsourcing needs requires thorough planning. The goal is to choose an affordable vendor with the right mix of expertise and experience. The following are general steps to follow when evaluating and choosing a BPO provider:

• Define the requirements. All relevant stakeholders should be involved from the outset in choosing a vendor. Each department should outline requirements and expectations as they relate to the functions to be outsourced. The key objectives and foreseeable risks of outsourcing these functions should also be counted.
  
• Publish a request for proposal (RFP). An RFP is a document that describes a job and invites bids from qualified vendors. The expectations for the role and the contract terms are often stated in an RFP.
  
• Select a vendor. Evaluate the proposals. Assess the strengths and weaknesses of the shortlisted vendors and compare against stated requirements and objectives, weighing any value-adds offered by vendors.
  
• Negotiate the contract. Once a vendor has been selected, begin to finalize the contract. Because the contract terms have already been detailed in the RFP, most of the terms should already be agreed upon. Make sure that the service parameters and delivery timelines are clearly understood by all stakeholders.
  
• Transfer the workload and regularly evaluate performance. Follow the pre-established plan for the transition of services to the vendor. Communicate regularly with relevant in-house teams as well as with the external service provider to maintain efficient business operations and foster a collaborative relationship. Monitor and evaluate vendor performance against the key performance indicators (KPIs) outlined in the SLA, and use these evaluations to determine whether a contract should be renewed.

Though it offers many benefits, BPO exposes an organization to some risks as well. Outsourcing your organization’s business processes to an external service provider raises questions about work quality, data security and work culture compatibility, especially when the provider is located in a different part of the world. BPO can introduce the following risks:

Communication barriers. Language barriers can restrict business activities in offshore outsourcing, leading to poor communication and delays in service delivery.

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