Outsourcing

Selected theoretical aspects of
business process outsourcing
Jan Zika
Research Paper
August 2004
ECON S-1620
E-mail: janzika@gmail.com Faculty of Arts and Sciences
WWW: http://www.janzika.com Harvard University

Selected theoretical aspects of BPO Jan Zika
2
1 Introduction
Outsourcing is quickly evolving beyond simply reducing costs or offloading non-core activities.1
Companies increasingly partner with outsourcing service providers “to gain access to competitive
skills, improve service levels and increase their ability to respond to changing business needs.”
(Linder et al., 2002, p.23)
The worldwide spending for outsourcing is expected to grow dramatically through 2008 (Crane,
2004), and business process outsourcing (BPO) is “the hottest growth area in the outsourcing
space” (InformationWeek, 2004).2
BPO includes a broad spectrum of back-office and customer
facing functions, e.g. data processing, accounts receivable, customer analytics, tax processing,
equity research, etc.3
This year, BPO is considered a priority by 20 to 35 percent of small,
medium and large enterprises.4
The term “outsourcing” is often used to refer to different kinds of arrangements, and further
ambiguity arises from the changing meaning of the word over time. In the very broad sense,
Chandra (1999) defines outsourcing as an organization’s purchase of any service activity from an
external source. The firm buying the service is the outsourcer or client. The firm supplying the
service is the outsourcee, outsourcing vendor or outsourcing service provider.
The term BPO usually indicates an outsourcing arrangement that concerns an entire business unit,
as opposed to a narrow activity, such as IT or facility management. Accenture defines BPO as
“contracting with an external organization to take primary responsibility for providing a business
process or function” (United Nations, 2003).5
Crane (2004) states, the BPO market is expected to grow annually by around 11% over the next
five years, reaching $200 billion in annual spending by 2008. BPO benefits both the client and
the service provider. For the client, the benefits can be significantly greater than the cost savings
1
Explained in Section 4.
2
Some of the largest BPO service providers are Affiliated Computer Services, Computer Sciences Corporation,
Accenture, Electronic Data Services, Automatic Data Processing, Ceridian, Hewitt Associates, Hewlett-Packard,
IBM (Crane, 2004).
3
InformationWeek (2004). A list of typically outsourced processes can be found in the Appendix B.
4
InformationWeek (2004). Based on a survey of 333 business-technology executives.
5
Examples of frequently outsourced processes could be customer care and technical support (remote call centers) or
software application development and management services. More examples can be found in Appendix B.

3
from the pure information technology (IT) outsourcing frequently deployed in the past. BPO
allows some outsourcers to pass savings of between 15 and 85 percent to their end customers.
But as with anything else, BPO also has downsides. Therefore, a deeper understanding of both
practical and theoretical aspects is beneficial. This paper discusses some of the important
problems that arise when making the transition from simple IT outsourcing to the more complex
BPO.
The discussion is mostly theoretical and focuses on outsourcing from the client’s perspective. It
examines outsourcing models, their implications and the systemic and organizational aspects of
outsourcing. It does not examine the execution and management of the outsourcing process.
This paper touches on three important questions of outsourcing: “Why outsource?”, “What to
outsource?” and “What are the implications and potential problems of outsourcing?” It presents
and overview of the literature and summarizes several interesting viewpoints.
Links to a more detailed and practical treatment of the subject are provided throughout the text.
Macroeconomic considerations and suggestions for outsourcing service providers can be found in
United Nations (2003). The role of control in an outsourcing relationship is addressed in Linder
and Sawyer (2003).
2 Historical overview
Although Kakabadse and Kakabadse (2003) trace the presence of outsourcing back to eighteenth
century England,6
modern outsourcing reaches back to the 1980s when US companies whose
core business was not directly related to IT sought to contract out their IT functions (United
Nations, 2003).7
Their primary motivation was to reduce costs and improve the quality of service. Specialized IT
providers were able to react flexibly and quickly to rapidly changing technology and business
needs, and were able to achieve larger economies of scale. Originally, services were provided at a
client’s site. Later on, advances in technology enabled remote IT service management.
6
Kakabadse and Kakabadse (2003) also provide interesting examples of some of the famous deals in modern
outsourcing.
7
Hodges (2003) suggests a categorization of BPO trends into four waves including the near future projection. See
Appendix C.

4
The ability to provide outsourced services from a remote location started the trend of offshore
outsourcing, i.e. outsourcing outside the original residence of the client. Outsourcing to
developing countries has its origins in early 1990s. The primary motivation behind such activities
is rather obvious: the cost of skilled labor in some developing countries is up to 80% lower
compared to the developed countries (United Nations, 2003).
Developments in information and communication technology also increased the complexity of
the outsourced functions, and the initial IT outsourcing, once a “commodity” service, has evolved
into BPO.
3 Why outsource?
Fundamentally, the past experience may suggest that businesses outsource to cut costs, or to gain
strategic advantage through improved processes. These two points are apparently the two
extremes. In reality, the reasons are likely to combine various aspects of these to two incentives.
This section examines the essential theoretical background of the mentioned motivation factors.
3.1 Cost reduction
Chandra (1999), similarly to others, starts the discussion of outsourcing by considering the
broader aspects of the “make-or-buy” decision. He identifies three main determinants of the
vertical integration:8
technological economies,9
transactional economies,10
and market
imperfections.
One of the first significant attempts to explain sourcing and production decisions was made by
Coase (1937). Coase’s ideas became the foundation of institutional economics.11
He introduced
the notion of costs related to the usage of the price mechanism. Later, transaction costs (TC)
theory was further developed to explain the organizations of businesses and their supply chains.
8
Vertical integration could be thought of as the opposite activity to outsourcing. More detailed discussion of vertical
integration in the perspective of transaction cost analysis is presented by Hobbs (1996). A technical (mathematical)
treatment can be found in Levy (2003).
9
Technological economies stem from the potential of physical integration of certain procedures to reduce the
required amounts of inputs for the same output.
10
Transactional economies come from internalizing the market exchange and thus reducing the market frictions as
described by transaction costs theory.
11
Previously, the prevalent neoclassical economic theory essentially treated a firm as a production function.
Provided some other assumptions like the homogeneous product exchanged on separate markets or the perfect
information freely available to all market participants, the neoclassical economics did not give a very useful
framework for analyzing real-life organizational behavior including the outsourcing strategy.

5
Hobbs (1996) adopts a further division of TC into information, negotiation and monitoring
costs12
and identifies four key concepts of TC analysis: bounded rationality,13
opportunism,14
information asymmetry,15
and asset specificity.
Asset specificity refers to the degree of customization. In other words, a transaction is
characterized by the amount of specific resources invested to it by (at least) one of the parties.
Such an investment may provide an incentive for opportunistic behavior. Williamson (1979)
distinguishes three categories of transactions from the perspective of asset specificity:16
1) non-specific, i.e. transactions that are standardized (do not need to be tailored to a
particular buyer);
2) idiosyncratic, i.e. transactions requiring specialized equipment or knowledge; and
3) mixed, i.e. transactions that combine some characteristics of previous both types.
An asset specificity dimension is used by Williamson (1979) in conjunction with the frequency of
transactions (transactions can be occasional or recurrent) to determine an appropriate sourcing
option. This framework is grounded in a general division of costs to create an outcome into
production costs and coordination costs (or alternatively TC). Outsourcing service providers are
usually assumed to have lower production costs due to the economies of scale. This benefit is,
however, not necessarily transferable to their clients. For example, if a high level of
customization is required, vertical integration may be more advantageous as it removes the need
to specify a complex contract, and eliminates the threat of opportunistic action of the
counterparty etc.
12
Information costs are incurred while searching the markets for information about a product or service that is to be
the subject of a potential transaction. Negotiation costs are related to the negotiation of the contract. Finally,
monitoring costs arise from the enforcement of the pre-agreed terms of the contract (Hobbs, 1996).
13
Bounded rationality refers to the fact that human capacity to correctly evaluate all possible decision alternatives is
limited.
14
Opportunism is defined by Williamson (1979) as “self-interest seeking with guile” (p. 233).
15
Information asymmetry relates to the relaxation of the neoclassical assumption of perfect information. Within the
TC theory framework, markets are characterized by incomplete, imperfect and asymmetrical information.
Information asymmetries may result adverse selection and moral hazard.
16
Or, one could say that there are three types of investment arrangements that influence the character of the
subsequent transaction.

6
3.2 Feasibility of the cost reduction as an explanatory factor
So far, the main reason for outsourcing discussed here was the cost reduction. However, The
Antidote (1997) presents Yvonne Frost’s argument that achieving cost savings can be
problematic, thus not feasible as a complete explanation.17
Kakabadse and Kakabadse (2000) claim that there are two main drivers of outsourcing that can
be identified in the literature and in practice: scale economies and strategic sourcing.
They argue that until the 1990s, the major reason for outsourcing was the growth of overhead
cost related to the companies’ non-core activities. Costs-effective access to specialized and
infrequently used IT equipment and software development skills was the primary purpose of IT
outsourcing. During the 1990s, global competitive pressures increased the need for strict market
discipline that focused on a narrow product range and led to the disintegration of vertical
production chains. Greater specialization enabled companies to focus on new elements of a
dynamic business environment.18
Interestingly, Alexander and Young (1996b) question whether the greater economies of scale
supposedly achieved by outsourcing service providers explain the increasing trend to
outsourcing. For many vendors, they argue, the effective scale is no different from that of their
clients. As an alternative explanation, Alexander and Young (1996b) offer experience curve
effects stemming from the service provider’s focus on activities that might have been neglected
due to their marginal role in the primary business of the client.19
3.3 Strategic advantage
In contrast to the cost reduction incentives, Kakabadse and Kakabadse (2000) present an
approach which views outsourcing as an integral part of the firm’s overall strategy. This
strategic sourcing perspective suggests that the main driver behind outsourcing has changed from
17
For example, the outsourcer may not know the actual cost of the alternative in-house production. Outsourcer can
also experience significant monitoring costs. In case an internal department is an end-user of the outsourced product
or service, this department may resign on political and/or financial negotiations, which lowers the outsourcer’s
bargaining power. Finally, management may not feel comfortable with a decreased ability to “pool” the costs. (It is
harder to hide the cost of a particular process if an actual invoice for that process is available.) Some other problems
are discussed in Section 5.
18
e.g. the use of Internet as a distribution channel
19
Alexander and Young (1996b) suggest that some outsourcing benefits could be theoretically achieved in-house
provided a significant shift in attitudes and perceptions (of the management and employees). That is, however, a
strong assumption.

7
cost reduction to strategic re-positioning, core competence improvement, higher value creation
and better integration the of value chain.
Linder et al. (2002) suggest that some of the management’s usual expectations associated with
outsourcing20
are the improvement in enterprise-level performance (measured by an increase in
the stock price), reduced time necessary to launch new business activities, increased innovation
through access to world-class skills, resources and industry knowledge, improved core
capabilities, strengthened competitive positioning and risk sharing.
4 What to outsource? 21
Unlike traditional IT outsourcing where the primary goals may have been to control costs and
improve the quality of services, the modern BPO centers around achieving strategic business
goals.
Alexander and Young (1996) describe the perceptions of strategic and non-strategic outsourcing
among managers, and how the two categories have different roles within an organization. The
two major features of strategic outsourcing are the existence of a strategic policy and the
willingness to outsource processes involved in core activities.
Initially, managers are reluctant to pursue this approach and that is consistent with a theoretical
view of Kakabadse and Kakabadse (2003) who suggest keeping core activities in-house. Linder
et al. (2002), however, argue that the outsourcing of non-core activities (primarily for the purpose
of cost reduction) is increasingly replaced by the more sophisticated BPO.
As with BPO in general, there are different viewpoints on what qualifies as a core activity.
Kakabadse and Kakabadse (2003) separate activities into four categories based on competitive
advantage analysis:
1) “Key activities that provide the enterprise with a sustainable competitive advantage in the
marketplace;
20
Linder et al. (2002) talk about “business transformation” outsourcing. Nevertheless, the identified factors apply to
BPO as well.
21
Practical guidelines suggesting what business processes a firm should outsource can be found in Embleton and
Wright (1998), McIvor (2000), Blumberg (1998), Franceschini et al. (2004) and Lonsdale (1999).

8
2) Emerging activities that have the potential to become sources of sustainable competitive
advantage;
3) Basic activities that are needed in order to be a player in the enterprise’s business field
and are not significant sources of competitive advantage; and
4) Commodity activities that are readily available in the marketplace and are not sources of
competitive advantage.” (p. 62)
They suggest that the core activities are represented by the first category. Other literature often
include the future potential or applicability of a particular competence underlying the core
activity to alternative uses in the notion of core activity. However, it can be argued that
Kakabadse and Kakabadse (2003) incorporate this aspect in the “sustainable competitive
advantage” they refer to. The activities of the second category do not constitute the core as they
are not currently convincing sources of sustainable competitive advantage, but merely may turn
into them in the future.
Alexander and Young (1996) took a different approach and examined the perception of core
activities among managers. They found four different interpretations.
First, are the activities traditionally performed internally. Typically there is a perceived threat of
outsourcing these because of the difficult and ambiguous quantification of the “real” net effect of
the switch to the external supplier. Other obstacles can be the management’s high opportunity
costs related to a potential revision of sourcing, which prevent any changes of the status quo
unless there is no other option.
Second, are the activities critical to business performance. Activities that directly influence the
business outcome are considered very sensitive and tend not to be outsourced even when other
factors, e.g. costs, would suggest so. Major concerns are the lack of control over quality and the
potential overwhelming power of the service provider. If companies settle for outsourcing in this
case, they attempt to find strong and reputable partners.
Third, are the activities that create a current or potential competitive advantage. Unwillingness to
outsource the factors of competitive differentiation is understandable. However, a counter-
argument is that the specification of the “core” is often too broad and includes activities where

9
companies often do not have actual prospects of outperforming competitors. Where this is the
case, a greater focus on fewer activities would be beneficial. An extreme argument against the
protection of the core says that a good and evolving management of supplier relationships and the
integration of various external services can per se become a sustainable competitive advantage.
Finally, are the activities that drive future growth and renewal. Outsourcing of these activities
may diminish the opportunity to learn. Here, the opponents would argue that identifying the
sources of the future learning is impossible in advance.
Core activities could be understood as activities leveraging the “core competencies”.
McIvor (2000) refers to the influential article by Hamel and Prahalad (1990) while pointing out
that core competencies are never physical assets, because those can be easily imitated regardless
of their technological innovativeness at any particular point of time. Rather, core competencies
involve the management’s unique abilities to consolidate skills, knowledge and technologies
available to the organization and involved in the organization’s functions.22
5 Problems related to the outsourcing decision
Power et al. (2004) discuss some of the specific outsourcing “traps”, such as the lack of
management commitment and understanding of the long term strategy, lack of communications
plans, lack of expertise in outsourcing methodologies, and failure to evaluate relevant business
risks. Other traps include not dedicating the best individuals who understand various aspects of
the organization to the outsourcing decision-making process, and rushing through the decision
and contract preparation without careful analysis. Most of these issues are related to some aspects
of several key problem areas associated with the outsourcing decision-making process.
McIvor (2000) provides a valuable summary of them.
5.1 Absence of formal outsourcing process
McIvor (2000) argues that there is no comprehensive basis for evaluating the make-or-buy
decision. Most of the times the decision is based on an intention to reduce headcount and costs.
The sourcing alternatives that will save most overhead cost tend to be preferred to those that
22
According to Hamel and Prahalad (1990), core competencies provide potential access to numerous different
markets (even beyond their current deployment), make a considerable contribution to perceived customer value, and
are difficult to imitate.

10
would make most business sense in the long term. Companies also fail to evaluate their own
capabilities relative to a potential outsourcing vendor. Another problem emerges when companies
fail to integrate the outsourcing decision into their overall business strategy. As a result, they
might experience an increase in cost and a greater dependence on a large number of suppliers.
5.2 Limitations of cost analysis
Ideally, a cost analysis of an outsourcing decision is based on the comparison of the total cost of
in-house and over-the-market production. However, this may not be trivial. McIvor (2000) refers
to studies that indicate many companies use inadequate cost calculation and accounting systems
that hinder the provision of realistic and updated cost estimates.23
Qualitative measures (such as various strategic implications), thus seem to provide a better
guidance for the outsourcing decision.
5.3 Misunderstanding of the core business
McIvor (2000) states that some companies fail to understand the core competencies as key links
of the value chain of their particular business. Instead they may consider core competencies the
organizational skills involved in activities that they are seemingly most efficient in. Efficiency in
pursuing a particular procedure and the strategic importance of this procedure are, however, not
necessarily related.
Some of the perceptions of core activities identified by Alexander and Young (1996) presented
above could be also seen as examples of the core business misspecification, particularly the first
two (the activities traditionally performed internally and the crucial activities).
6 Implications, problems and risks to the outsourcer
This section reviews some implications of BPO. First, the often quoted problems are mentioned.
Next, the danger of dependency is discussed in a greater detail followed by brief notes examining
other outsourcing implications.
Kakabadse and Kakabadse (2003) identify the downsides of outsourcing such as the loss of core
competencies if their definition is not well understood by contractual parties, the interruption of
supply, the poor quality of supply, the reduction in employee morale stemming from increased
23
e.g. direct use of labor hours for allocating overheads in automated procedures

11
uncertainty, and the loss of intellectual property. Most of these problems and many others have a
common denominator: an increased dependency on a supplier and the resulting threat of
opportunistic behavior.
6.1 Danger of dependency
Lonsdale (1999) recognizes several ways in which an inadequate dependency on a service
provider can emerge. Companies can make a mistake of outsourcing into a limited supply market.
Neoclassical economic theory assumes a homogenous product and many small suppliers, which,
however is not the case of the market of BPO vendors. On the contrary these markets can be
often monopolized if viewed in the dimensions of required quality, scheduling, cost, volume or
geographical area characteristics. The outsourcer might find itself being leveraged by a supplier
after it realizes that no other suppliers are capable of delivering the service to the required
standards.
Another cause of an undesirable dependency could be the managers’ premature choice of
supplier leaving little space for consequent negotiations, and thus reducing the outsourcer’s
bargaining power.
The last potential cause of dependency identified by Lonsdale (1999) is probably the most
important one. It relates to the re-negotiation of an expired BPO contract.
At the time of the first decision to outsource certain process, a company may find a fairly
competitive market and acquire a good deal. Throughout the duration of the contract, the
company enjoys the provided service, but at the same time, the vendor learns specific information
about the service and the aligned production systems and learns how to optimize the
performance.
When the contract expires, the outsourcer is unlikely to find a competitive offer that could
outweigh the original service provider’s new and specifically tailored proposition and all the
investment made already on the way. Thus, the incumbent supplier gains an advantageous

12
bargaining position for the contract renegotiation. The quality then tends to fall while the costs to
the client increase.24
6.2 Implications for human resource development
Kakabadse and Kakabadse (2003) mention that businesses seek to cut costs by reducing the
number of employees as part of outsourcing plan. They suggest that the reason lies in the
management’s better ability to predict future costs, rather than revenues. Therefore, the focus is
on the adjustment of the expense part of the income statement.
Downsizing may have positive effects but it can also generate fears and resistance among
employees and negligence of the staff issues can seriously affect the results. One solution that can
be used to avoid redundancies, negative publicity and employee rights prosecutions is to transfer
the staff to the service provider. This, however, raises the cost of contract as it presents a burden
for the service provider.25
Moreover, staff transfer itself is not flawless, because employees may
feel that they were “sold-out” (often together with the physical assets).
6.3 Erosion of social contact
Kakabadse and Kakabadse (2003) provide an interesting overview of the “genius loci”26
role of
organizations. Besides the creation of outcome, organizations deliver important social functions.
They provide employees with safety, a sense of belonging, appreciation, rules, freedom,
responsibility, support, control, power and membership.
In an attempt to boost labor flexibility, companies increasingly practice employment
externalization through part-time, temporary, casual and fixed-term contractual arrangements.
Outsourcing tends to further strengthen this trend.27
As a result, the “implicit psychological
contract” concerning the job security in exchange for the employee loyalty is changing.
24
Lonsdale (1999) mentions that the new costs could be even higher than the original in-house costs. However, it is
not clear to what extent any such comparison could be feasible and/or indicative.
25
at least in the short term
26
Could be translated as “spirit of place”.
27
Externalized workforce is not necessarily just unskilled or clerical, but may consist of many professionals (e.g.
accountant, IT specialists etc.).

13
6.4 Disintegration of organizational culture
Organizational culture refers to the framework of formal and informal institutions that develop
through social interactions within organizations. Summarizing other research, Kakabadse and
Kakabadse (2003) claim that the organizational culture has a strong impact on productivity.
Outsourcing has a potential to significantly change both implicit and explicit internal contracts. It
can negatively impact substantive terms and conditions. Eventually, it could disrupt the whole
value system of an organization.
Although the outsourcing may bring short term improvements of efficiency, it may obstruct
employee motivation in the long run. Consequently, some of the long term goals related to
sustainable performance may be difficult (if not impossible) to achieve.
7 Conclusion
This paper reviewed some theoretical aspects that relate to recent trends towards complex
sourcing solutions. Three fundamental questions related to the BPO strategy where discussed:
“why outsource”, “what to outsource” and “what are the pitfalls”.
The traditional approaches to the measurement of the added value are based on various cost
comparisons. However, many authors question whether cost savings are a primary explanation
for the increasing trend towards outsourcing.
Modern BPO seems to go beyond the simple cost reduction. It serves as an important tool to
restructure costs (to switch from fixed into variable), to enhance flexibility, to reach a
competitive advantage (e.g., through a narrow specialization) and even to redistribute the
bargaining power of various stakeholders to the organization.
In other words, modern BPO aims at achieving strategic business goals. Strategic outsourcing is
characterized by managers’ willingness to outsource processes involved in core activities.
There are various problems when it comes to the outsourcing decision. Companies may fail to
evaluate their own capabilities, or fail to integrate the decision into their overall business strategy.
Because of various accounting issues and the difficulty of calculating the transaction costs, a
comparison of the total cost of in-house and over-the-market production may be also extremely

14
difficult. Finally, management may not clearly understand what forms the core competencies of
their company.
BPO has many implications on the business and institutional environment of an organization.
Some of them represent new risks to the outsourcer. BPO may increase a company’s dependency
on its suppliers/partners, it may disrupt staff motivation and morale, and may even cause erosion
of the intra-organizational social contract and corporate culture.
Despite the challenges, BPO also provides great new opportunities for businesses, and promises
greater scope, lower price and better quality of products and services for consumers. In its “off-
shore” form BPO has an important impact on the global economic trends. Whether perceived as
good or bad, the proliferation of BPO seems inevitable.

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9 Appendix A: Offshore BPO
One of the significant trends in outsourcing is offshore BPO.
9.1 Recent trends
Tas and Sunder (2004) view offshore outsourcing as a logical extension of more traditional
outsourcing practices. Some of the factors enabling this trend are the progress in information and
telecommunications technology, the deregulation of the telecommunications industry and the
standardization of business processes. Offshore BPO vendors increasingly supply services
requiring highly skilled resources, and often provide both IT and BPO services to the same client.
Hodges (2003) writes that a fundamental change under way is the migration of transactional,
technology and administrative processes offshore over the next decade. According to
PricewaterhouseCoopers’ study, private-equity investments in BPO grew from $1.1 billion in
1997 to $24.2 billion in 2002 and over half of outsourcing providers have operations in India.
Hodges (2003) recognizes two major drivers of offshore BPO: the wage differences and the trend
towards knowledge workforce in developed countries.28
9.2 Organizational models
Kalakota and Robinson (2004) distinguish five existing models of offshore BPO: global delivery,
hybrid delivery, global shared services, build-operate-transfer (BOT) and offshore
multisourcing.29
The global delivery model (also “blended outsourcing”) combines onsite, offsite-onshore and
offshore resources. The objective is to distribute and manage activities across multiple global
locations, which allows greater flexibility in meeting specific (and sudden) customer
requirements as well as risk diversification.
The hybrid delivery model (also “dual-shore model”) is often adopted by medium size offshore
BPO providers. It combines offshore and onsite services. Typically, the onsite team would handle
the project’s program management and the client-facing components, whereas the offshore team
28
Hodges (2003) qoutes McKinsey Global Institute projection of 75% of US GDP coming from knowledge workers
by 2024, up from 62% in 1994.
29
See Kalakota and Robinson (2004) for extensive description including useful practical examples.

18
would take care of the remaining supporting activities.30
Besides the wage savings, another
advantage is that the project can be performed around the clock.
The global shared services model leverages mega-service centers that consolidate organizations’
internal processes. Sometimes, these centers are run as independent businesses. The advantages
include the guaranteed markets for the service centers,31
an established management hierarchy
and the mitigation of some of the organizational issues related to BPO through an external
vendor.
In the BOT model, the client contracts an offshore partner to build and temporarily operate a
shared services or offshore development center. The model gained broader acceptance due to the
high failure rate of outsourcing projects and companies decided to build their own offshore
subsidiaries. However, the legal-, tax-, hiring- and management- related barriers companies face
often cause these offshore expansions to be far more complicated than anticipated.32
Multisourcing is based on using multiple offshore suppliers to reduce the power that a single
supplier might gain from an exclusive contact. Multisourcing mitigates risk, provided that the
client is able to manage and integrate multiple vendor relationships. Often, the companies with
less experience in offshore BPO select this model until they get more comfortable with the BPO
execution.
Another useful complementary approach towards offshore BPO is provided by McLaughlin and
Fitzsimmons (1996) who recognize five basic globalization strategies: multi-country expansion,
importing customers, following (your) customers, service unbundling and beating the clock.33
9.3 Relevant factors
McLaughlin and Fitzsimmons (1996) identify several factors that influence what services are a
potential good fit for offshore outsourcing: customer contact, customization, complexity,
information intensity, cultural adaptation, labor intensity and other.
As for the BPO clients themselves, Tas and Sunder (2004) stress the importance of change
management and governance. Key enablers of successful remote BPO management are virtual
30
e.g. in software development it would be coding, testing etc.
31
While reducing uncertainty, this could also be a disadvantage as it distorts the competitive incentives.
32
Due to an easier implementation and risk reduction, the number of BOT contracts is expected to grow.
33
For a detailed description of each strategy, see McLaughlin and Fitzsimmons (1996).

19
team rooms to monitor performance against commitments, active project plans, virtual team
alignment, communication and review calendars, and periodic audits.
Elmuti and Kathawala (2000) conducted an empirical survey and determined other factors that
impact the success of global outsourcing projects..
9.4 Problems
The fact that offshore BPO quickly penetrated into the service industry mainstream in some
countries (primarily US) does not imply unblemished progress. Fannin (2004) analyzes some of
the most urgent problems, including quality concerns.34
In addition, with a growing number of
BPO providers, the dependence-related issues mentioned earlier are further emphasized by
potential bankruptcies.
There are numerous problems facing the offshore BPO. Instead of listing them exhaustively, the
rest of the section looks at one important issue that crosses the line between “economics” and the
newly emerging topics of the global society.
Power et al. (2004) state that one of the most difficult and often neglected problems of the
offshore BPO is the impact of cultural differences on vendor-client cooperation. As service
providers are located in diverse places like India, Ireland, China, Mexico, Canada and the
Philippines, the languages, dialects, norms, values, management approaches and ethics vary.
Before entering a relationship, many clients tend to underestimate the impact that seemingly
minor variations like accents may have. Moreover, norms and values have significant influence
as well. Power et al. (2004) use the example of an Indian service provider that may be reluctant to
inform a client about difficulties it is experiencing while working on a specific project. The
provider may do so in a good will hoping to recover at a later stage. However, the client may face
additional losses if a failure occurs and he does not learn about it until the very last moment.
If these issues are not addressed, both parties to the outsourcing contract are likely to end up
frustrated, which can result in low productivity and tarnished reputations. Educating the staff
about the cultural environment of the outsourcing partner through common teambuilding
workshops and other activities can help bridge the differences.
34
Fannin (2004) uses the example of Dell’s “quiet failure.” Dell had to stop routing corporate customer calls to a
technical support center in Bangalore after it received complains about thick accents and scripted responses.

20
9.5 Future outlook
An often discussed topic related to the offshore BPO is the outflow of low value-added jobs from
the developed countries into the developing ones. This trend increases effectiveness and gives
hope to some of the regions with great social disparity and a generally low standard of living. At
the same time, it raises worries about the unemployment rate in the developed countries.
The solution to this problem is apparently not an easy one. However, it seems that the outflow of
the low value-added jobs to countries where the labor costs are lower is inevitable , and
attempting to prevent it may be counterproductive.
While reducing some jobs, offshore BPO also provides new entrepreneurial opportunities. It
represents another step towards the global economy. The challenge facing the service industries
in the developed countries seems to be primarily strategic and managerial. Intellect, education,
skill and ambition might lead to the sustainable long term success in the global playing field.

21
10 Appendix B: List of typical BPO services
Banking Services
Account opening services
Account information capture
Customer queries
Check clearing
Check payment reconciliation
Statement processing
ATM reconciliation
Investment account
management
Management reporting
Loan administration
Credit debits card services
Check processing
Collections
Customer Account
Management
Mortgage Services
Application verification and
processing
Disbursals and collections
Payment reconciliation
Account information updates
Mortgage Loan Servicing
Finance Services
Document management
Billing
Shareholder services
Claims processing
Accounts Receivable
Accounts Payable
General ledger
Accounting services
Treasury Operations
Management
Credit Card Services
Applications screening and card
issuance
Customer account management
Collections and customer
follow-up
Account queries and limit
enhancements
Accounting and payment
reconciliation
Insurance Services
Policy Owner services
Claims processing
Transaction & Re-insurance
Accounting
Statutory reporting
Annuities Processing
Benefit Administration
Customer information capture
Risk assessment and premium
computation
Policy processing and account
monitoring
Claims management
Payment reconciliation
Asset management Services
Account creation
Account maintenance
Transfers and additions
Dividend payments
Brokerage payment
MIS reporting
Customer service
Health Care
Medical Transcription Services
Customer Care
Customer service
Customer analysis
Call centers
Consumer information services
Customer Relationship Mgt
Human Resources Services
Payroll and benefits processing
Training and development
Retirement investment and
benefits management
Hiring and staffing
Recruitment screening,
Administration and relocation
services
Payroll processing
Compensation administration
Benefits planning
Administration and regulating
compliance
Sales and Marketing Services
Telemarketing Services
Direct Marketing and Sales
campaigns
Web-related Services
Website designing
Website management
Site personalization
Site marketing
Search Engine, Directory
Optimization and
Positioning Services
Catalog / content management
Web analytics
Database Design
Web security services and
integration with CRM
Back-office systems for
inventory management
Web enablement of legacy
applications
Electronic bill presentment and
payment services
Graphics/Animation
Web-based Email Processing
Web-based Help Desk
Web-based Chat Support
e-Learning: Web based online
education services
e-publishing
Source: United Nations (2003), exact quotation

22
11 Appendix C: The four offshore BPO waves
Source: Hodges (2003), reprint

23
12 Appendix D: Five categories of BPO providers
“There are five categories of business-process outsourcing providers today, most with
offshore abilities. They are:
12.1 Type I
Large, global outsourcers—usually with an IT-outsourcing heritage—such as IBM/PwC,
Electronic Data Systems Corp., Computer Sciences Corp., and Affiliated Computer Services
Inc. Companies in this category usually have total revenue well in excess of $2 billion and
serve multiple industry sectors and countries.
12.2 Type II
These providers include Aon Consulting, Convergys, Deloitte & Touche, Cap Gemini Ernst &
Young, Exult Inc., Mellon HR Solutions, and Unisys. They're slightly smaller, with revenue
in the $500 million to $2 billion range. Most specialize in one to three horizontal business
functions, such as finance and accounting (F&A), human resources, and procurement; some
offer industry-specific BPO, such as mortgage processing for financial services or travel
reservation systems.
12.3 Type III
Collegis Inc., Creditek, Equitant, NewRoads, SourceNet Inc., and SynHRgy HR Technologies
are examples of focused BPO providers, which are more plentiful than many buyers perceive.
These providers usually specialize in a single business function, such as HR or F&A, or a
single end-to-end process, such as order-to-cash or fulfillment. They have revenue of $20
million to $100 million and are typically privately held with venture-capital backing. This
category possesses deep subject-matter expertise and robust process solutions but lacks
resources for "megadeals" or transactions involving hundreds of transitioned personnel.
12.4 Type IV
This category comprises offshore providers, predominantly India-based, that are emerging
rapidly as quality BPO alternatives largely due to their significant cost advantages—for
example, labor and quality. Examples are Brigade Corp., Ephinay Corp., Exlservice Inc.,
Infosys Technologies Ltd., Tata, Wipro Technologies, and WNS Global Services. Their
specialty usually involves call centers and Level-1 support of many horizontal general and
administrative business processes. These providers are winning business at an unprecedented
pace and many Type I and II outsourcers are trying to set up operations in India to compete.

24
12.5 Type V
These are BPO companies that don't yet exist. In other words, private equity firms, such as
Accretive Group, Frontenac Co., General Atlantic Partners, GTCR, UBS Capital, and
Warburg Pincus, will create a BPO provider from scratch as long as an anchor client is willing
to take the risk. Large companies often have a "brownfield" operation in a given function,
such as HR, finance, or check processing. Carving it out to marry it with a venture-backed
start-up can be the best alternative, particularly if the objective is to create equity value in the
future.”
Source: Hodges (2003), exact quotation

25
13 Appendix E: The relationships between the explanatory
variables and the propensity to outsource (PO)
Chandra (1999) tried to find key variables to explain the “propensity to outsource”. He
identified intangibility, inseparability, standardization, uncertainty related to variability of
demand or of technological change, complexity, end customer contact and competitive
position. The suggested relationships between the explanatory variables and the PO are
summarized in a table below. Further, Chandra (1999) examined the influence of “moderator
variables” like the core-activity characteristic, the criticality and the number of alternate
suppliers on the variables above.
Variable Influence on PO
Intangibility The greater the intangibility of service activity, lesser the PO.
Inseparability The greater the inseparability of the service activity, lesser the PO.
Standardization
The greater the standardization of the service activity, the greater
the PO, or alternatively, the greater the customization, lesser the PO.
Uncertainty related to
variability of demand
The greater the uncertainty associated with the service activity,
lesser the PO.
Uncertainty related to
technological change
The greater the technological uncertainty associated with the service
activity, great the PO.
Complexity
The complexity of the service activity tends to strengthen the
relationships between both mentioned types of uncertainty and PO.
End-customer contact
The more the service activity involves contact with the end
customer, lesser the PO.*
Competitive position The more a firm competes on price, greater the PO.
* Further, Chandra (1999) mentions the effect of the nature of interaction between the potential outsourcer and
its customer on PO. Specifically, the PO would be greater in the arm’s length transaction than in direct
interaction.
Source: Chandra (1999)

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