How Business Process Outsourcing Is Breaking New Ground

As far back as the 18th century, during the Industrial Revolution, businesses sought cost efficiencies by sourcing raw materials and labor from external suppliers. But modern business process outsourcing (BPO) – contracting common business functions like customer service, IT support, human resources and accounting – didn’t take shape until the late 20th century.  

The Expansion of Outsourcing  

Initially, outsourcing focused on manufacturing processes, but it soon expanded to include services. Companies began contracting business processes to specialized firms with the aim of reducing costs and focusing on core competencies. This shift was facilitated by advancements in communication technologies that created seamless coordination between the outsourcing client and external service providers around the globe. 

The 1990s and early 2000s saw a surge in offshoring, with countries like India, China and the Philippines becoming major hubs for BPO services. These countries offered a combination of skilled labor and cost advantages, and by 2017 India's BPO industry was already generating approximately $30 billion in revenue. Although a booming industry, it didn’t come without its challenges, from language and dialect challenges to cultural misalignment or poor governance and control. The BPO industry was both successful and challenging at the same time for all involved.    

Despite these challenges, the sourcing industry has gone from strength to strength, with the global sourcing market estimated to be worth roughly $300 billion as of 2024. And we expect significant growth over the next five to 10 years. It’s where this growth happens that could be surprising. 

The Effect of Technology on BPO 

Like every other industry, the BPO industry has had to adapt to advances in technology, changing expectations, environmental disasters and even global pandemics. The rise of the internet and digital communication tools have been a catalyst for outsourcing more real-time processes, such as customer support and more traditional back-office processing, such as those in finance and accounting, HR and procurement.  

The integration of artificial intelligence (AI) and robotic process automation (RPA) transformed the transactional side of the industry, including the commercial changes needed to shift from historical full-time equivalent (FTE) rates to transactional – and now to the embryonic outcome-focused models as human labor becomes increasingly supplemented by a digital workforce.  

Outsourcing is no longer a human-only proposition.  

What Shifts Are We Seeing in the BPO Industry?  

Today, the BPO industry is experiencing a paradigm shift due to a of the following four factors:  

1. AI Advancements Are Transforming BPO 

Enterprises are increasingly adopting AI-driven solutions to handle tasks traditionally managed by theirs and their service providers’ human workers. For example, in customer service, conversational AI has been managing common inquiries that have historically been prime candidates for outsourcing. This allows an organization’s own internal human agents to focus on more complex issues. You may think this use of AI will reduce reliance on the service provider community, but, here too, AI is taking opportunity away with one hand and presenting it back with another.  

Firstly, generative AI (GenAI) can take large volumes of process and policy information and data and present back succinct support, guidance and answers. This allows service providers that use AI to do more complex work, as they have real-time support coming from these AI companions. The BPO provider community is also using AI to transform the way their agents are onboarded, trained, supported and reviewed, taking away many of their own internal challenges and providing a more robust mechanism to get employees working well, and quickly. This internal work really is upskilling service providers’ abilities to use AI at scale and build a level of competence that is harder to come by when an enterprises is building its own. 

2. BPO Provider Competence Is Growing 

Though outsourcing is sometimes referred to as “your mess for less,” it has become a strategic move for enterprises across industries and verticals. Some service providers have been honing their craft across different industries, verticals and processes for 40 years or more, becoming global experts in how to complete work, regardless of the client nuances and geographic differences.  

The frequency with which the same set of processes have been outsourced to specialist BPO providers over time has deepened their understanding and expertise in BPO. It’s this degree of competency – and the growing use of specialist agents and LLMs – that will enable new opportunities and revenue sources for providers over the next three to five years. 

3. More and More Processes Can Leverage BPO 

As BPO providers have increased their competence in certain areas, they have opened new doors as well. Most recently, on the technology side, providers are taking a lead in developing automation and AI tools to augment their own services. This early move, which protects providers from becoming redundant by the impact of AI, has led to new ways for providers to differentiate themselves based on their own AI offerings. Building and launching AI isn’t easy, and enterprise BPO buyers are happy to take a back seat as technology moves faster and faster.  

Service providers are also finding ways to use their enterprise clients’ data to create insights for their clients’ core business and in the areas for which they are responsible. These insights gained from conversational and transactional data could provide useful information on products, competitors, supply chains and processes. As enterprises grow increasingly frustrated with the limitations of their own internal data and insight teams (if they have them at all), they are leaning on providers to do this. They are also more often seeking partnerships that are open to greater collaboration and built on strong track records of delivery and innovation.  

It's not just complementary services that are the new areas of opportunity in BPO. More complex work in existing areas and new avenues of work entirely are being earmarked, including legal services, business strategy, financial planning and analysis – and even budgeting. As providers evolve, so will their competency on more complex and challenging work, meaning we may soon be in a position where we are asking what can’t be outsourced instead of what can. 

4. New Commercial Opportunities 

The shift from FTE-based contracts, which use the number of personnel deployed, to outcome-focused commercial models is not entirely new. The world of IT outsourcing has been using outcome-based contracts successfully for years. This trend has yet to become the norm in the BPO world.  

Now, as the work moves from being done by a human workforce to being done by an agentic one, sourcing contracts will change. This shift will be driven by providers and BPO buyers alike who are seeking greater value, innovation and transformation of their operations. It will no longer be the traditional your-mess-for-less approach, but with transformation and AI at the very heart of the contract and commercial terms, both service providers and clients will see exciting opportunities for operational transformation at a price point and margin that means both parties win big. 

What Will Define the Next Generation of BPO? 

Outcome or end-state-based contracts align the service provider's compensation with the achievement of specific business outcomes. This is a cost model that is based on achieving certain defined KPIs. These models foster a more collaborative and strategic partnership, encouraging innovation and continuous improvement, as well as the use of the latest tools and techniques. More and more organizations are turning to BPO providers for strategic relationships that can help them truly transform.  

The benefits of an outcome-based model include the following: 

• Aligned incentives: Both enterprise clients and providers share risks and rewards, promoting mutual investment in success.
• Enhanced flexibility: Contracts can adapt to changing business needs and market conditions, allowing for scalability and agility, as well as new innovations.
• Focus on value addition: Service providers are motivated to deliver tangible business improvements rather than merely fulfilling tasks or basic contractual KPIs.
• Upfront and guaranteed savings: When negotiated well, a deal should clearly state the cost benefits, with opportunity for additional gainsharing to further incentivize both parties.

If the benefits are so compelling, then why aren’t outcome-based models the norm?  

Of course, there are significant hurdles in negotiating and implementing these types of commercial arrangements. Transitioning to an outcome-based model requires clear definition of desired outcomes, reliable metrics for performance measurement and robust governance structures. It also relies on a greater level of trust between parties and a true win-win partnership. This kind of relationship is not an easy thing to achieve independently.   

To balance risk and ensure feasibility, some enterprises have used ISG to adopt a hybrid model that combine elements of FTE-based and outcome-based pricing. This approach assures a base level of service while incentivizing performance improvements.  

The BPO industry has become a complex global network of service providers that offer expert and often unique capabilities to assist and transform their clients’ operations. The industry continues to evolve, embracing new technologies and adapting to the changing needs of businesses worldwide. We are entering a new stage for BPO that offers big potential gains for enterprises that understand the changing market.  

ISG helps organizations select, negotiate and contract with BPO providers in alignment with their sourcing and business strategies. Contact us to discuss how we can help you.