What Factors Affect the Cost of BPO?

Business processing outsourcing (BPO) is typically an option for companies to remove certain activities from their operations. A main reason for BPO is to lower costs and attempt to achieve an economy of scale. Many factors can affect the cost of BPO, however, including labor availability and skills, government regulations, contractual obligations and other issues.

Labor costs are often among the main reasons why a company engages in BPO. Therefore, the main factor that affects the cost of BPO is labor. For example, a company might outsource its customer service function to a foreign country. The country selected will most likely be one that has an extremely low labor cost, particularly for unskilled workers. Shifts in labor costs will make the BPO services received less attractive as overall costs increase.

Another factor that affects the cost of BPO is government regulations. Companies in a heavily regulated country often face high taxes, compliance costs to meet regulation standards and labor rules or charges imposed from governments. These businesses typically seek other locations where they can transfer some business activities. Other times, simply outsourcing services to another business is an option. Finding the lowest costs associated with government regulations and BPO typically is the goal.

Most BPO services and companies have contracts in place that dictate the type and cost of activities. Contracts can contain any number of factors that alter the base cost when outsourcing business processes. For example, a company might pay a flat fee for simply using the BPO service. A secondary charge might apply for the number of minutes that each customer service agent spends on the telephone. These and other factors will change the total cost paid for outsourcing business processes.

Many companies conduct a basic cost-benefit analysis to determine the factors that will affect the cost of BPO. This list compares the costs for completing the activity internally versus outsourcing the activities to another business. This list usually is comprehensive and includes all major and minor factors that affect the process. The option with the lowest overall cost — either internally or externally — typically is the action taken. This analysis might also be a review to assure companies that BPO services are still financially viable.