Over the past two decades, the business process outsourcing (BPO) sector has shown remarkable growth in the Philippines. With over 1 million Filipinos employed in the said sector in 2015, the Department of Trade and Industry even projected that it can generate up to $250 billion in 2020.
With this trend, more and more companies are seeking BPO services to help make their businesses a success. Hence, it is only essential that you consider hiring their service to enjoy the benefits of outsourcing.
However, before jumping into this endeavor, you should have the proper knowledge to successfully outsource tasks for your business. For instance, did you know that BPO is divided into two business models? These models are called third party outsourcing and captive service, and knowing these can give you the upper hand over your competitors. To help you understand more, let’s define what these two models are.
Third Party Outsourcing
In third party outsourcing, a business hires a different company to outsource their tasks. In this model, businesses often outsource non-core or non-critical tasks such as claims processing, email support, and tech help desk. This setup is also a classic client-vendor relationship, wherein service level agreements and contractual obligations govern the companies.
Third party outsourcing comes in two main forms:
Project Based Outsourcing – this approach is best suited for business projects with irregular frequencies, such as software development. In this model, pricing is based on time and material costs and fixed costs.
Dedicated Development Center — this model is preferred when companies are considering long-term goals, like developing a technology. Since such projects require resources, the vendor provides the necessary equipment, facilities, and a dedicated team to work on the task. This approach requires a fixed monthly fee per full-time employee.
The captive service model makes use of an owned subsidiary instead of another company to outsource their business. In this setup, subsidiary is wholly owned, and may be located locally or in another country. Compared to third party outsourcing, complete control over the outsourced tasks is being observed in captive service.
In captive service, there are two common approaches to set up the operation:
DIY or Start from Scratch – this approach is often preferred by companies with advanced market knowledge and analytics. In this model, resources, market knowledge, and local expertise are needed to start the business. Starters may create the organization by due diligence, or opt to buy an existing company.
Build-Operate-Transfer –companies that lack extensive resources or specialized expertise prefer this approach. To make up with the lack of expertise or resources, the service of third party vendors are sought in this model. These vendors take care of initial setup, training of staffs, and establishing and stabilizing operations for a predefined time. Once the contract is done, the ownership is then transferred from the vendors to the company.
Although captive service is gaining some growth in the Philippines, third party outsourcing still takes the majority of the preferred BPO services. This is because captive service is perceived as less efficient when crises arise in the industry.
Captive Service vs. Third Party Outsourcing
Having defined both models, the next question is: what are the main differences between the two that set them apart? While both are driven by cheaper costs, there are actually several factors that can help you decide which model best suits your business needs.
- Cost – while both models offer cost-effective solutions to businesses, there is a big difference when it comes to their costs. Since establishing a captive service center may start from scratch or from buying an existing company, the model requires huge upfront investments from the parent company. However, although captive service is costlier than third party outsourcing, companies also enjoy the benefits from this model such as full ownership, retaining the knowledge of industry, etc.
- Control – the most notable difference between captive service and third party outsourcing is the managerial control of the tasks. Since core and critical functions are often outsourced in the captive service, e.g. financial reporting, high-end analytics, etc., it requires more control than the other. The original company dictates how the tasks should be done in captive, whereas in third party outsourcing, it is the vendor’s discretion how the work is performed, as long as the contract requirements and agreements are met.
- Risk Management – when it comes to data protection and intellectual property, captive service offers a more secured option for companies. This is because the parent company has full control over the outsourced tasks, and these functions don’t really leave the company’s grounds. This is also the reason why captive service is preferred when it comes to outsourcing core and critical functions of the business.
- Speed of Implementation – when it comes to the speed of implementation, third party outsourcing provides the faster BPO services since it does not require much gathering of resources and training of staffs to start the tasks, as compared to captive service.
Learning the differences between captive service and third party outsourcing should help you decide the best BPO services to start your business. However, keep in mind that you may eventually need both models once your company evolved. Hence, learning the ropes in both models wouldn’t hurt, and having an informed outsourcing strategy should take you one step closer to your business success.