Business process outsourcing

Also called: BPO · Topic: Tertiary, Quaternary and Quinary Activities · NCERT: Class 12, Ch 6 "Tertiary and Quaternary Activities"

Meaning

Business process outsourcing (BPO) means a firm hands its routine, rule-based work to an outside firm, often in another country. This kind of work needs less skill. Examples are call centres, customer support, back-office work (billing, records) and data processing.

BPO is a key example of how tertiary (service) activities can move across the world. It is one of the main reasons India and the Philippines have become large service-export hubs.

Explanation

How BPO works (cause → process → result)

• Cause: firms want to save money and work better
• The outside agency is a specialist in that job, so it does the job more efficiently.

• It also does the job more cheaply than the firm could do it itself.

• Process: the work is contracted out

• Outsourcing (also called contracting out) answers who does the work: an outside firm.

• Offshoring answers where the work is done: in another country. Example: a US firm hands its customer calls to a company in India.

• Result: jobs move to places with cheap skilled labour

• New service jobs open wherever there is cheap skilled labour.
• The client firm saves on costs.

What kind of work counts as BPO

• Call centres and customer support.
• Back-office work: billing and record-keeping.
• Data processing: this is the easiest work to move. It is an IT service that needs only computers and a network link. So it can be done in Asian, East European and African countries.
• Other work that firms often outsource: information technology (IT), human resources (hiring, payroll) and, at times, manufacturing and engineering.
• BPO is a tertiary activity, because it delivers a service. It is not knowledge or decision work.

Conditions BPO needs (why work moves offshore)

• Cheaper skilled labour
• Many developing countries have staff who are IT-skilled and speak English.
• Their wages are lower than in the USA, UK or Japan.

• So the same task costs the client much less.

• Lower overheads (running costs)

• Office rent, electricity and other running costs are lower.

• This adds to the saving.

• Comparative advantage (the main reason, as NCERT says)

• Comparative advantage means a country does best when it specialises in the work it can do at a lower relative cost than others, and then trades.
• India and the Philippines have this edge in skilled, low-cost, English-speaking service work.

• So outsourcing keeps going even when there is political opposition.

• Time-zone advantage

• When it is night in the USA, it is daytime in India. India is about 9.5–10.5 hours ahead.
• Work sent in the US evening comes back finished by the next morning.

• This makes a 24-hour work cycle possible.

• Good telecom and network links, because the work travels as data.

Threats and the shift up the value chain

• AI and automation now threaten routine BPO tasks, such as answering standard calls and entering data.
• So Indian firms are moving up the value chain (towards higher-skill, higher-value work). They are moving from BPO to KPO and Global Capability Centres (GCCs). GCCs are offshore units fully owned by a multinational, which do its tech, R&D and analytics work in-house.

Where it occurs

• Leading BPO hubs in the world: India and the Philippines.
• Countries where call centres have opened (NCERT): India, China, Eastern Europe, Israel, the Philippines and Costa Rica (Central America).
• Indian hubs: Bengaluru (Karnataka), Hyderabad (Telangana), Chennai (Tamil Nadu), Pune and Mumbai (Maharashtra), the National Capital Region (Gurugram, Noida) and Kolkata (West Bengal).
• Philippines hubs: Manila and Cebu.
• NCERT example of offshored work: a firm in Hyderabad or Manila does a GIS project (Geographic Information System: digital mapping and analysis of spatial data) for a client in the USA or Japan. Even Botswana (southern Africa) takes such work.
• India's scale: in 2020-21, India's IT-BPM industry (Information Technology and Business Process Management, not counting hardware and e-commerce) earned US$ 149.1 billion from exports and US$ 28.9 billion from domestic sales [2][3].
• Main client countries (2020-21): the USA (US$ 92.1 billion, about 62% of IT-BPM exports) and the UK (US$ 25.2 billion, about 17%) [2][3].
• Jobs: the IT-BPM sector added 1.38 lakh employees in 2020-21 (provisional estimate) [2][3].

Don't confuse with

• Knowledge process outsourcing (KPO): BPO is routine work that needs less skill and adds less value. KPO is high-skill, knowledge-based work such as R&D, e-learning, business research, IP research, legal work and banking. KPO creates more business opportunities than BPO.
• Offshoring: BPO is about the type of work (routine processes). Offshoring is about where the work goes (another country). A BPO can be in the same country or abroad.
• Home-shoring: this is a new alternative to outsourcing. Employees work from home within the same country instead of the work being sent overseas.
• IT-BPM: this is a wider industry label. It covers both IT services and business process management, so its figures are not BPO alone.

Prelims Hooks

• Call centres, back office and data processing = BPO. R&D, e-learning, business research, IP research, legal work and banking = KPO.
• Trap (NCERT exercise 1(vi)): "BPOs have better business opportunities than KPOs" is FALSE. KPOs have better opportunities.
• NCERT names comparative advantage as the main reason outsourcing continues.
• Call-centre countries named by NCERT: India, China, Eastern Europe, Israel, the Philippines, Costa Rica.
• India's largest IT-BPM export market is the USA (~62%, 2020-21), followed by the UK (~17%) [2][3].
• Outsourcing may reduce emigration from labour-sending countries, but it meets resistance from job-seekers in client countries (mainly the USA and UK).

Mains Points

• Locational factors (GS-I, location of tertiary activities): BPOs go where there is IT-skilled, English-speaking labour on lower wages, lower overheads, a time-zone gap that allows 24-hour work, and good telecom links. Services like these are less tied to raw materials than industry, so they cluster in metro tech hubs such as Bengaluru, Hyderabad, Pune and the NCR.
• Effects on host and client countries:
• Host countries (India, the Philippines, Costa Rica) gain jobs and foreign exchange (US$ 149.1 bn IT-BPM exports in 2020-21 [2][3]), and may see less emigration.
• Client countries (USA, UK) save costs but face job-loss politics.

• India's heavy dependence on the USA and UK (about 79% of exports, 2020-21 [2][3]) leaves it exposed to their recessions and to visa or protectionist (home-job-protecting) policies.

• Future of BPO:

• Routine BPO jobs are at risk from AI and automation.
• India needs to move towards KPO and GCCs. This needs investment in higher education and digital infrastructure, and the spread of hubs to tier-II cities.
• After COVID-19, home-shoring and remote work can take jobs to smaller towns and to women who cannot travel to an office. But they depend on broadband reach, so they may widen the urban–rural digital divide.

Related concepts

• Outsourcing
• Offshoring
• Knowledge process outsourcing
• Home-shoring

Read more

• Outsourcing, offshoring, BPO, KPO and home-shoring