BPO Terminology: Organizing the Chaos

Learning the appropriate terminology is important in any undertaking. This section is a comprehensive glossary of terms used within BPO circles, each explained concisely.

Business Application Outsourcing
Company A (vendor) rents applications to Company B (user). Increasingly corporations are renting applications like enterprise resource planning, customer relationship management, messaging and collaboration, and e-business. The outsourcer provides the mission-critical enterprise application hosting and management. The goal is to relieve the corporation from day-to-day management and lower the total cost of ownership (TCO). The outsourcer hosts the software solution ensuring a preset level of performance and reliability. This is also termed application service provider (ASP) service.

Business Process Outsourcing
Business process outsourcing means examining the processes that compose the business and its functional units, and then working with focused service providers to both re-engineer and outsource these at the same time. BPO involves the full transfer of responsibility for functions such as transaction processing, policy servicing, claims management, HR, finance, and compliance to the outsourcing company. The outsourcing provider then administers these functions on their own systems to agreed service standards and at a guaranteed cost. Some of the BPO contracts call for performance-based payouts, tying vendor payments to business performance or overall cost savings.

Business Process Offshoring
Business process offshoring is the transfer of business tasks (medical transcription) or business processes (call centers) to a low-cost country like India or the Philippines. The interaction is conducted over telecom networks and the Internet. Offshoring typically include tasks like transaction or accounts processing, credit card processing, call centers, translation, and transcription. Most of this work can be sent without the need for in-person interaction. The offshoring of support functions is still relatively new. The offshoring wave began with IT/software services in the 1980s and accelerated in the 1990s with the Y2K hysteria. With the global economic slowdown, offshoring has vaulted to the forefront as an effective cost-cutting technique that takes advantage of labor price differentials and favorable skill/performance ratios.

Business Transformation Outsourcing
Business transformation outsourcing (BTO) is a natural extension of the more tactical BPO model and involves the transfer of responsibility for all back-office functions, as well as a comprehensive business change management process to an external vendor. The objective is to maximize the long-term benefits of the BPO operations, resulting in a comprehensive business transformation (or overhaul). Transformation outsourcing is not a tactical issue but a forward-looking strategic tool for change. The logic: big gains in performance only come about through business transformation.

Multisourcing
Multisourcing is the management and distribution of different business processes among multiple BPO vendors. For instance, HR processes are outsourced to one best-of-breed vendor. Logistics are outsourced to another. IT development and maintenance to another vendor. Risk mitigation is a primary driver behind multisourcing. One aspect of multisourcing is to use multiple suppliers to eliminate lock-in and achieve so-called best-of-breed advantages. This is especially true for U.S. and European firms, which often like to spread offshore development to a variety of vendors and locations. Multisourcing also covers the different delivery models. These include:

• Onshoring - outsourcing to another company within the United States
• Nearshoring - outsourcing to Mexico or Canada
• Offshoring - outsourcing to another country such as Ireland or India

The figure below captures the differences.

Shared Services (or Insourcing)
Shared services, a form of "internal outsourcing," enables corporations to achieve economies of scale by creating a separate internal entity within the company to perform specific services, such as payroll, accounts payable, travel and expense processing. A typical shared services initiative takes advantage of enterprise applications and other technological developments, enabling the company to achieve further improvements to quality in processes, such as finance, accounting, procurement, IT, and human resources. At the core of shared services is the idea that new technologies offer businesses the opportunity to 1) make better use of scarce skills, 2) provide information and services more efficiently, and 3) reduce the cost of administration.

The bottom line: The modern firm sits at the centre of a network of suppliers. Gone are the big in-house departments and in their place are complex chains of external partners that are meant to deliver better services for less cost. All these signify a greater reliance on partners for non-core activities and resources. The advent of the Internet and the increasing sophistication of enterprise applications open up new opportunities for companies to share a wider range of services across a greater number of business units, departments, or vendors.