According to a study conducted by Grand View Research Inc., the global business process outsourcing market is expected to reach USD 405.6 billion by 2027 at a CAGR of 8%. North America accounted for the largest share of the industry in 2019 and is anticipated to grow substantially over the forecast period. For decades, outsourcing has been a popular organization management strategy for many businesses as it enables firms to focus on their core competencies and enhance their competitiveness. And it does work. A study by Awe, Kulangara, and Henderson (2018) confirms that outsourcing enhances firm performance, particularly financial, operational, and relational performance.
Why, then, does outsourcing have a bad reputation? It’s pretty common to see companies switch between BPO providers as they struggle to find the perfect fit. One trend that is also gaining momentum in the USA is the idea of “reshoring” or “insourcing” where firms bring back their globally outsourced functions locally.
In this article, we will explore the major criticisms about outsourcing, why companies are deciding to insource, and what the next phase could be for the outsourcing industry.
Benefits of Outsourcing
There are a number of studies about the various motivations that firms have for outsourcing certain functions. Economic, strategic, and environmental factors, as shown in Figure 1, all play a role in the decision to engage an BPO vendor.
|Economic Factors||Objectives or anticipated outcomes|
|Cost reduction||– To improve profitability|
– To improve operating efficiency
– To add value to the product
|Cost saving||– To improve cash flow|
– To increase efficiency
|Capital investment reduction||– To make capital funds more efficiently|
– To improve return on assets
|Strategic Factors||Objectives or anticipated outcomes|
|Acceleration of business process reengineering||– To improve performance|
– To achieve competitive advantage
|Focus on core competence||– To improve business focus|
– To increase competitive advantage
– To leverage the firm’s skills and resources
– To enhance customer satisfaction
|Flexibility enhancement||– To reduce the constraints of organisation’s own production capacity|
– To convert fixed costs to variable costs
– To increase responsiveness to market chance
– To reduce risks
|Environmental Factors||Objectives or anticipated outcomes|
|IT Development||– To meet increasing demand for new information systems and resources more efficiently and economically|
|Globalisation||– To help companies gain global competitive advantage|
|Capability of Supplier||– To enable partners to improve service quality and customer service and increase competitive advantage|
Source: Lau, C. & Zhang, J. (2006) Drivers and obstacles of outsourcing practices in China, International Journal of Physical Distribution and Logistic Management, Vol. 36, No. 10, 777
One factor may be more significant for firms. This largely depends on the level of outsourcing they require; there are three types according to Krstić and Kahrović (2015):
- Tactical outsourcing is used by companies who seek service providers to solve a specific problem. The main decision driver in this type of traditional outsourcing is cost control. Therefore, economic factors like cost savings, cost reductions, and etc. are its obvious objectives.
- Strategic outsourcing is used by companies who seek partnerships with long-term corporate or business strategies in mind. The main decision driver in this type of outsourcing is improving business performance and competitive position.
- Transformational outsourcing is an emerging practice wherein outsourcing partners provide a management team with proven expertise in a capability which the company needs help with. These long-term partnerships help firms to stimulate continuous business change by encouraging organisational change, implementing new strategies, or reshaping company boundaries.
It’s important to know the rationale behind the outsourcing decision because it sets the firm’s expectations as to what kind of relationship they want to have with their BPO provider. A relationship one sees as short-term will have different KPIs set, time commitment, and talent investments etc. from what would be expected in a long-term partnership.
Criticisms of Outsourcing
Outsourcing has both advantages and disadvantages. These are some of the major problems plaguing the industry:
- Risk of exposing Confidential Data and Technology
In 2017, one of the biggest outsourcing failures occurred when Sweden’s government accidentally leaked the personal information of its citizens in an outsourcing deal with IBM. Sharing confidential information or proprietary company data or knowledge to non-company employees will always carry the risk that this information could be compromised. Of course, this risk could be mitigated by a strict confidentiality clause in the contract. But the risk still exists. In the US, there are rules and regulations around IP and privacy. However, these may not be respected or followed if you employ people overseas.
- Difficulty of Communication and Coordination
Working with a remote team who doesn’t speak English as a first language, it is inevitable to encounter communication issues due to literal or metaphorical language differences, culture (corporate or national) or mindset. It takes time and effort to manage outsourced personnel. In fact, it may take 4 times longer to complete a task because of possible miscommunication or inaccuracies in implementation, etc. A problem that probably wouldn’t occur if the task had been done in-house where monitoring would be consistent and corrections could be made immediately.
- Lack of Customer Focus
BPO companies work with multiple companies and organisations at a time. Therefore, there may be issues around reduced service levels. Because outsourcing vendors are driven to make profits, they are not motivated to work by the same standards or values that one client may have. Since the contract will fix the price, the only way for vendors to increase profit is to decrease expenses which may sacrifice the quality of the service.
Moreover, outsourcing vendors who specialise in a certain function or industry may be able to use their client’s knowledge of process or product to assist its other clients (who may be competitors of the organisation). Perhaps even go into competition with their clients one day.
- Discomfort for In-House Staff
The company’s employees could see the act of outsourcing as a signal that their job is at risk and will be eliminated eventually because it will be given away to the outsourcing company. It’s possible for them to react (and retaliate) in a negative way. Some businesses also take advantage by keeping the function in-house but offering work at a rate that is lower than minimum. So outsourcing jobs could mean a higher domestic unemployment rate.
- Health Concerns
On the part of the outsourced personnel, there are numerous studies around the health issues that BPO workers have due to working in the high-stress environment of the industry. In the Philippines, a study showed that BPO employees often suffered from health problems such as headache, fatigue, eye strain, chest and back pain, and voice problems. Surveyed BPO employees cited harassment from irate clients as the main factor in their decision to leave. This may be why the BPO industry is notorious for its high employee attrition rates.
- Hidden Costs
Finally, unexpected price changes make outsourcing a headache. A contract only covers the details of the service provided. Anything not covered will incur additional charges. In 2010, the State of Queensland entered a AU$6.19 million contract with IBM Australia which ended up costing them AU$1.25 Billion due to hidden costs.
With all of the downsides in outsourcing, it is unsurprising that some companies believe that the risks outweigh the benefits. Let’s dive deeper into the alternative: keeping the task or function in-house.
Reshoring and Insourcing
In a research paper by Bals, Kirchoff & Foerstl (2016), they defined “Reshoring” as the relocation of value chain activities from offshore locations to geographically closer locations such as domestic or nearshore countries. Insourcing, on the other hand, is defined as the decision to reincorporate an outsourced activity within a company that had formerly been transferred to an external supplier. In both cases, the idea is to bring outsourced functions back to the company.
What could drive a company to make this strategic decision? Business scholars Hartman, Ogden, & Hazen (2016) say that the primary drivers for insourcing are the same as outsourcing: cost savings, enhancing business performance, etc. However, the decision is often made as a response to failure of the outsourcing option rather than in concert with long-term strategic goals. In other words, the cost-benefit analysis calculation ultimately worked out in favour of insourcing as the more economically sound option.
But the truth of the matter is, the way that outsourcing is currently built, managed, and incentivised doesn’t work for long-term. Outsourcing often reaps immediate, short-term, and transactional benefits. But because of high attrition rates in the industry, instead of the company scaling and the employee taking on higher value work, team members leave instead. This sets a cap for what the outsourcing team can deliver because they would need to spend time rehiring and retraining team members as opposed to expansion.
Attrition Rates in the Business Process Outsourcing Industry
Attrition rate, also called employee turnover rate or churn rate, is the rate at which employees voluntarily leave the firm. The outsourcing industry is notorious for its very high attrition rates. Let’s take a hard look at the numbers:
- The widely-accepted average attrition rate of the global outsourcing industry is 30-40% per year.
- Attrition happens within the first 120 days of hiring.
- Average turnover in voice-based processes is between 45-50% while non-voice operations is 15-20%.
- In India, one of the top destinations for outsourcing, research shows that attrition rates are estimated to be an average of 30-40% for BPM services and 15-18% for IT services.
- In the Philippines, another top destination, the annual industry turnover in 2009 was 38% and decreased to 19% in 2015 — which is still high.
- Empirical evidence by IBPAP shows that the turnover rate can vary significantly among companies and across years. One study resulted in a 19-47% churn rate, and another showed 20-30% churn rate.
- One company reported a monthly turnover of 50% for employees in leadership positions and 75% for analyst positions.
Can you imagine investing time and resources to recruit and train your remote personnel and then, every four months, doing it all over again? It is not sustainable, especially for high-velocity industries who depend on high caliber talent to innovate and to differentiate its services from competitors. Researchers estimate that it costs twice an employee’s salary to find and retain a replacement. Not to mention the negative effect on morale among the remaining employees.
The reason why the attrition rates are so high in the outsourcing industry is because of the transactional or tactical nature of the relationship between firms and their BPO vendors. Because it is very focused on cost-reduction and profit-maximisation, BPO vendors have no incentive to invest in their employees.
A Philippines study showed that employees leave BPO companies for a number of reasons, including: lack of competitive compensation, lack of professional growth, high stress level in the workplace, monotonous nature of jobs, loss of identity, demand-supply disparity, vague values and vision, lack of positive direction, wrong hiring policies, mismatched measures and rewards, overwork and burnout.
In India, a BPO job is widely perceived as a transitory job. It is seen by new workers (aged 18-25) as a short-term gig that they do while in uni. After they graduate, they can go on to a “proper job” that matches their qualifications.
It is clear then that working for a BPO is not seen as something that could be developed as a long-lasting career. It’s no wonder that the turnover rates are so high.
Next Phase of Outsourcing – Towards Social Responsibility
Historically, the BPO model has been exploitative in service of the client. Now, however, for the outsourcing industry to overcome the trend towards reshoring and insourcing, it needs to evolve. A paradigm shift is necessary to adapt to the changing business climate and attitudes. This shift requires a reset in how companies view its relationship to BPOs.
A “client-vendor” relationship is the traditional way that outsourcing connections are made and it’s inherently transactional and transient. The new paradigm ought to be a “client-partner” relationship which suggests a more intimate connection where the two parties treat each other as though they are part of one team, working together to reach long-term strategic goals.
In order to create more value for clients, BPO leaders should understand that commoditization of labour and having a profit-first mindset is harmful to the industry in the long run. Instead, it should focus its efforts on improving the most important asset in any organisation: human capital.
Related Read: Building a Global, Purpose-Driven Outsourcing Organization
Human-centric: Sustainable Outsourcing
Awe, Kulangara & Henderson (2018) define human capital as an organisation’s ability with regards to its workforce. It is the sum of team members’ experiences, qualifications, competencies, skills, tacit knowledge and capacities. It is the highest rated source of maintainable competitive advantage and businesses cannot create value without it.
However, human capital doesn’t exist in a vacuum. It must be combined with relational and structural organisation factors. That is, the organisation’s commitment to retain, develop, motivate, and satisfy employees. By focusing their efforts on creating an environment where people can really grow and thrive, BPOs can effectively respond to the most pressing concerns of the industry.
But what does this new model look like? Here are some characteristics of BPOs who focus on enriching their human capital:
- BPO and client relationship is a partnership based on shared values and commitment to long-term success
- Has a structured approach to evaluating and matching employee and manager behavioural and cognitive competencies to the process and tasks being outsourced
- Has extensive on-the-job training and upskilling for employees, especially in knowledge-intensive services
- Sets the right compensation and benefits, industry pay packages, flexible work schedules and bonus structures
- Maintains a high level of employee satisfaction through a well-managed work environment
- Builds mutual trust and respect between corporate employees and outsourced personnel through greater cultural awareness, i.e. encouraging a deeper knowledge of the BPO country’s history and culture
These characteristics are not totally unheard of in the industry. There are already outsourcing companies who are thinking holistically, focusing on their company, people, and communities.
Samasource, for example, is a pioneer in the field of impact sourcing. They deliver a leading technology platform as well as provide digital skills to clients. They do this by hiring and training team members from low income households and empowering them to move out of poverty.
Cloud Factory, on the other hand, is adapting to this new paradigm as well. They invest heavily on their workforce by emphasising personal development.
At Boldr, we strive to make a positive and measurable impact across 3 C’s: Company, Client, and Community. We invest in personal and professional development by conducting training courses to upskill our team members. Moreover, we partner with NGOs to make sure we are also giving back to our community. We believe these activities reflect our identity as an impact driven-company and our mission to help people grow. (Learn more about our Impact Work)
Evidently, this new human-centric, value-driven, and impact-focused type of outsourcing is not a passing trend. It is here to stay for rational as well as moral reasons. Shifting the focus from mere “task” to people will have a greater long-term impact on the quality, reliability, and strength of the Client-BPO partnership. And robust partnerships can create new opportunities to develop ideas, processes, technology, expand global areas, and so on.
To sum it all up…
Outsourcing is an explosively growing industry and it will always be there as a cost-saving option for many businesses. Although the decision is not always an easy one as it comes with advantages and disadvantages of its own. But despite the widespread use of outsourcing in many industries, a vast amount of BPO projects fail. It fails because traditional outsourcing is broken and many firms are turning to reshoring and insourcing as a result.
In this increasingly competitive space, BPO providers need to evolve from merely tactical vendors brought in to plug a hole to human-centric partners who are aligned with the firm’s values and long-term business goals. Being human-centric means focusing on making a positive impact on the most important capital of a business: people, and in the bigger picture, communities.