What is BPO Used For? 7.

*Scalability*: BPO offers scalability, allowing companies to

Organizations contract with BPO vendors for two main adjust resources and scale operations up or down based on
areas: business needs. This flexibility is particularly beneficial in
1. Back-office operations: They include payment dynamic or seasonal industries.
processing, information technology services, quality
assurance, etc. 8. *Focus on Core Business Functions*: Outsourcing non-
2. Front office operations: They include marketing, core functions enables companies to focus their resources
sales, customer relations, and grievance redressal. and attention on core business activities, driving innovation,
Types of BPO growth, and competitive advantage.

BPO companies can be divided into several types based on 9. *Cultural Considerations*: In offshore BPO arrangements,
their location: cultural differences may impact communication, workflow,
and overall effectiveness. Cultural sensitivity and
1. Onshore outsourcing: When an organization hires a understanding are crucial for successful collaboration across
service provider that is located in the same country. diverse teams.
It is also called domestic outsourcing.
10. *Continuous Improvement*: BPO partnerships often
2. Nearshore outsourcing: When an organization hires involve ongoing collaboration and continuous improvement
a service provider in a neighboring country. initiatives to optimize processes, enhance quality, and drive
innovation over time.
3. Offshore outsourcing: When an organization hires a
service provider in a different country. It is also Types of businesses commonly included and excluded from
called offshoring. Business Process Outsourcing (BPO):

Business Process Outsourcing (BPO) encompasses various *Included in BPO:*

aspects that distinguish it from other business models:
1. *Back Office Operations*: Tasks such as data entry,
1. *Specialization*: BPO involves outsourcing specific document processing, inventory management, and
business functions or processes to specialized service administrative support are often included in BPO. These
providers. This allows companies to focus on their core functions are typically repetitive, transactional, and benefit
competencies while leveraging the expertise of external from cost efficiencies gained through outsourcing.
vendors.
2. *Customer Support Services*: Call center operations,
2. *Cost Efficiency*: One of the primary drivers of BPO is technical support, helpdesk services, and customer
cost savings. By outsourcing non-core functions to regions relationship management (CRM) are commonly outsourced
with lower labor costs, companies can reduce operational to BPO providers. This allows companies to enhance
expenses. customer service, improve response times, and provide
support across multiple channels.
3. *Globalization*: BPO often involves the transfer of
business processes to offshore locations, contributing to the 3. *IT Services and Support*: IT helpdesk support, software
globalization of business operations. This facilitates access development, application maintenance, network
to a global talent pool and markets. management, and cybersecurity services are frequently
outsourced to BPO vendors. Outsourcing IT functions
4. *Technology Integration*: BPO relies heavily on enables companies to access specialized expertise, reduce
technology integration to streamline processes, improve operational costs, and focus on core business objectives.
efficiency, and enable seamless communication between the
client and service provider. 4. *Finance and Accounting*: Functions such as accounts
payable, accounts receivable, payroll processing, financial
5. *Service Level Agreements (SLAs)*: BPO contracts reporting, and tax preparation are prime candidates for
typically include SLAs that outline the quality, performance, outsourcing. BPO allows companies to streamline financial
and other metrics that the service provider must adhere to. processes, ensure compliance, and achieve cost savings
These agreements ensure accountability and provide a through economies of scale.
framework for measuring service delivery.
5. *Human Resources Management*: HR functions including
6. *Risk Management*: BPO arrangements involve inherent recruitment, payroll administration, employee benefits
risks, such as data security concerns, regulatory compliance, management, training, and performance management are
and dependency on external providers. Effective risk often outsourced to BPO providers. Outsourcing HR
management strategies are essential to mitigate these risks. operations helps companies optimize processes, access
specialized talent, and focus on strategic HR initiatives.
*Excluded from BPO:* Specifically, PEZA oversees BPO operations located within
PEZA-accredited Special Economic Zones (SEZs). It
1. *Strategic Planning and Decision-Making*: Core strategic provides incentives and support to BPO companies
functions such as business planning, market analysis, operating within these zones, such as tax incentives, duty-
strategic decision-making, and corporate governance are free importation of equipment, and simplified export
typically excluded from BPO. These functions require procedures.
internal expertise, alignment with organizational goals, and
confidentiality. PEZA ensures that BPO companies comply with regulatory
requirements, labor standards, and environmental
2. *Research and Development (R&D)*: Innovation-driven regulations. It also facilitates the establishment and
activities such as research, product development, and R&D expansion of BPO businesses by providing assistance in
initiatives are generally kept in-house. R&D requires securing permits, licenses, and other regulatory approvals.
specialized expertise, intellectual property protection, and
close collaboration with internal teams. In addition to PEZA, the Department of Information and
Communications Technology (DICT) in the Philippines plays
3. *Brand Management and Marketing Strategy*: Brand a role in promoting and regulating the BPO industry,
building, marketing strategy development, advertising particularly concerning technology-related matters and
campaigns, and public relations efforts are often managed initiatives to enhance the country's competitiveness in the
internally. These functions are critical for shaping brand global outsourcing market.
identity, maintaining brand consistency, and building
customer relationships. Overall, PEZA and DICT are key government agencies that
oversee and regulate BPO activities in the Philippines,
4. *Legal and Compliance*: Legal and compliance functions, ensuring compliance with regulatory requirements and
including regulatory compliance, contract management, providing support for the growth and development of the
intellectual property protection, and legal advisory services, industry.
are typically handled internally. Legal matters require
specialized expertise, confidentiality, and adherence to Philippines, BPO companies follow generally accepted
regulatory requirements. accounting principles (GAAP), which are largely aligned with
International Financial Reporting Standards (IFRS).
5. *Executive Leadership and Governance*: Executive However, there are some specific accounting practices and
leadership, corporate governance, board-level decision- considerations peculiar to the BPO industry in the country:
making, and strategic direction setting are fundamental
functions that are not typically outsourced. These 1. *PEZA Compliance*: BPO companies operating within
responsibilities require internal oversight, accountability, and Philippine Economic Zone Authority (PEZA)-accredited
alignment with organizational objectives. Special Economic Zones (SEZs) may benefit from certain tax
incentives and regulatory exemptions. Accounting practices
6. *Core Technology Development*: Core technology need to comply with PEZA regulations regarding tax
development, including software development, product incentives, duty-free importation of equipment, and other
innovation, and proprietary technology initiatives, is usually incentives provided within these zones.
kept in-house. These functions are critical for maintaining
competitive advantage, controlling technology roadmaps, 2. *Tax Compliance*: BPO companies need to comply with
and protecting intellectual property. Philippine tax laws and regulations, including corporate
income tax, value-added tax (VAT), and withholding tax
Business functions included in BPO are often repetitive, requirements. Accounting practices should ensure accurate
transactional, and benefit from cost efficiencies gained recording and reporting of taxable income, deductions, and
through outsourcing. tax liabilities in accordance with Philippine tax laws.

Functions excluded from BPO are strategic, require 3. *Foreign Exchange Regulations*: BPO companies in the
specialized expertise, involve confidential information, or are Philippines often deal with foreign clients and conduct
critical for maintaining competitive advantage and transactions in multiple currencies. Accounting practices
organizational control. should comply with Bangko Sentral ng Pilipinas (BSP)
regulations regarding foreign exchange transactions,
In the Philippines, the primary government regulatory and including reporting requirements and currency conversion
supervising agency relative to Business Process rules.
Outsourcing (BPO) is the Philippine Economic Zone
Authority (PEZA). PEZA is responsible for promoting and 4. *Philippine Financial Reporting Standards (PFRS)*: While
regulating various industries, including BPO, within BPO companies may follow IFRS as the basis for financial
designated economic zones throughout the country. reporting, they also need to comply with Philippine-specific
financial reporting standards issued by the Philippine
Financial Reporting Standards Council (FRSC). These
standards may include additional disclosure requirements or need to evaluate the accounting treatment of foreign
interpretations specific to the Philippine context. currency transactions, including translation of financial
statements, hedging activities, and the impact on financial
5. *Labor Cost Accounting*: Labor costs, including salaries, performance.
benefits, and related expenses, often constitute a significant
portion of BPO operating expenses. Accounting practices 6. *Regulatory Compliance in Special Economic Zones*:
should accurately allocate and record labor costs across BPO companies operating within Philippine Economic Zone
different cost centers, service lines, or client contracts to Authority (PEZA)-accredited Special Economic Zones
facilitate cost analysis and profitability assessment. (SEZs) may benefit from tax incentives and regulatory
exemptions. Auditors assess compliance with PEZA
6. *Government Reporting Requirements*: BPO companies regulations, including tax incentives, duty-free importation of
may be subject to additional reporting requirements imposed equipment, and regulatory reporting requirements specific to
by government agencies such as the Securities and SEZs.
Exchange Commission (SEC), Bureau of Internal Revenue
(BIR), and other regulatory bodies. Accounting practices 7. *Client Concentration and Dependency*: BPO companies
should ensure compliance with these reporting requirements may have significant revenue concentrations from a few key
to avoid penalties or sanctions. clients or industries. Auditors assess the risks associated
with client dependency, including revenue volatility,
While many audit standards and techniques used in auditing contractual risks, and the potential impact on financial
BPO companies in the Philippines may be similar to those stability.
applied in auditing other businesses, there are some
peculiarities and specific considerations relevant to the BPO 8. *Labor Cost and Employment Practices*: Labor costs
industry. Here are some audit standards and techniques that typically represent a significant portion of BPO companies'
may be unique or emphasized in auditing BPO companies operating expenses. Auditors evaluate compliance with labor
compared to other businesses: laws and regulations, including wage and hour laws,
employment contracts, employee benefits, and workplace
1. *Understanding Outsourcing Arrangements*: Auditors safety standards.
need to have a deep understanding of the outsourcing
arrangements entered into by BPO companies, including the 9. *Disaster Recovery and Business Continuity Planning*:
scope of services, service level agreements (SLAs), pricing BPO companies implement disaster recovery and business
models, and contractual terms. This understanding helps continuity plans to mitigate the risk of service interruptions
auditors assess risks, evaluate the appropriateness of and ensure continuity of operations. Auditors assess the
accounting treatments, and determine the impact on adequacy and effectiveness of these plans to minimize
financial statements. operational disruptions and protect client interests.

2. *Data Security and Privacy Compliance*: BPO companies 10. *Emerging Risks and Industry Trends*: Auditors stay
handle sensitive client data and may be subject to data informed about emerging risks, industry trends, and
security and privacy regulations, both locally and regulatory developments impacting the BPO sector. This
internationally. Auditors need to assess the effectiveness of includes monitoring changes in technology, cybersecurity
controls related to data security, confidentiality, and threats, regulatory requirements, and geopolitical factors that
compliance with regulatory requirements, such as the Data may affect BPO operations and financial performance.
Privacy Act of 2012 in the Philippines.
IT and Data Analytics Proficiency: BPO companies rely
3. *Service-Level Agreement (SLA) Compliance*: Auditors heavily on information technology (IT) systems and platforms
evaluate BPO companies' compliance with SLAs agreed to deliver services efficiently. Auditors should have
upon with clients, including performance metrics, quality proficiency in IT auditing techniques, data analytics tools,
standards, and turnaround times. This may involve testing and technology-driven audit approaches to assess the
the effectiveness of controls over service delivery processes design and effectiveness of IT controls, analyze large
and assessing the accuracy of performance reporting. volumes of data, and identify IT-related risks.

4. *Technology and IT Controls*: BPO companies heavily Regulatory Compliance Knowledge: Auditors should stay
rely on information technology (IT) systems and platforms to updated on relevant regulatory requirements, including tax
deliver services efficiently. Auditors assess the design and laws, labor laws, data privacy regulations, and industry-
effectiveness of IT controls, such as access controls, data specific regulations applicable to BPO companies in the
integrity controls, and system monitoring, to mitigate IT- Philippines. Compliance with regulatory requirements is
related risks and ensure the reliability of IT systems. critical for ensuring the accuracy and completeness of
financial reporting and mitigating compliance risks.
5. *Foreign Currency Transactions and Hedging*: BPO
companies often conduct transactions in multiple currencies Assessing audit risk in Business Process Outsourcing (BPO)
due to global operations and client engagements. Auditors companies in the Philippines involves evaluating the
likelihood and potential impact of material misstatements in - Document audit judgments, conclusions, and rationale to
the financial statements. Here's an overview of the key support the audit opinion and provide transparency to
components involved in assessing audit risk for BPO stakeholders.
companies:
History of Philippine Outsourcing
1. *Inherent Risk*:
- Understand the inherent risks specific to the BPO Philippine outsourcing began when Accenture started
industry, such as revenue recognition complexities, reliance outsourcing services. Sykes was the first to set up a
on IT systems, foreign currency transactions, and regulatory multinational BPO company, while eTelecare Global
compliance challenges. Solutions established the first call center in the country.
- Evaluate the complexity of BPO operations, including the
variety of services offered, client dependencies, contractual The Philippine government has been actively supporting the
arrangements, and exposure to economic and industry risks. BPO industry since the beginning. It established the Special
Economic Zone Act to attract foreign and local investors. It
2. *Control Risk*: later established the Philippine Economic Zone Authority
- Assess the effectiveness of internal controls over (PEZA) to encourage investments by providing tax
financial reporting (ICFR) within the BPO company, including incentives.
controls related to revenue recognition, IT systems, data
security, and compliance with regulatory requirements. In 2005, the BPO sector hit 3% of the global market and
- Consider the design and operating effectiveness of key almost 2.5% of the country’s GDP. Last year, the IT-BPM
controls, the presence of control deficiencies or weaknesses, market comprised nearly 15% of the worldwide market share
and the extent of reliance placed on controls during the and almost 8% of the GDP. Today, the nation has over 700
audit. BPO firms across the country.

3. *Detection Risk*: Current Outsourcing Market

- Determine the level of detection risk acceptable for the Colliers cited that the Philippines, along with the United
audit based on the assessed inherent and control risks. States, followed India as the top outsourcing hub. But the
- Plan audit procedures to detect material misstatements in nation could capture a bigger slice of the global market
the financial statements, including substantive testing, share.
analytical procedures, and tests of details, considering the
nature, timing, and extent of audit procedures required. In fact, the Philippine IT-BPM market accounted for 13% of
the global market share, reaching $29 billion in revenue in
4. *Risk Assessment Procedures*: 2022. According to Outsourcing Journal, the country ranked
- Perform risk assessment procedures to identify and first in voice-related outsourcing services.
understand significant risks inherent in BPO operations, such
as client concentration, contractual complexities, data The IT and Business Process Association of the Philippines
privacy and security risks, and regulatory compliance risks. (IBPAP) highlights some of the key milestones of the
- Tailor audit procedures to address specific risks country’s IT-BPM industry:
identified, focusing on areas with higher inherent and control
risks, and allocating appropriate audit resources to mitigate It is the biggest employment provider in the country, having
audit risk effectively. generated 1.44 million direct jobs and 3.61 million indirect
jobs in 2021.
5. *Materiality Assessment*: It significantly contributes to the local economy, accounting
- Determine materiality thresholds for the audit based on for 7.5% of the country’s gross domestic product (GDP).
quantitative and qualitative factors, considering the BPO It expands to provinces, where 30% of its total industry
company's size, industry norms, stakeholder expectations, workforce is outside Metro Manila.
and regulatory requirements. It has fortified top industries such as retail trade, real estate
- Evaluate the potential impact of misstatements on the development, and telecom.
financial statements, including qualitative factors such as With all these facts and figures, outsourcing to the
reputational risk, regulatory consequences, and investor Philippines is an effective business strategy for scaling your
perceptions. operations and reducing costs.

6. *Professional Judgment*: Philippine Laws and Regulations Governing the BPO

- Exercise professional judgment throughout the audit Industry
process, considering the unique characteristics and risks
inherent in BPO operations, and adapting audit procedures One of the challenges of offshore outsourcing is complying
as necessary to address emerging risks or changes in with a nation’s laws and regulations. Noncompliance might
circumstances. result in legal and financial implications. The same applies to
outsourcing to the Philippines, although the country has
favorable laws for foreign companies.
Discover the Philippine laws and regulations that govern the night as long as their employers provide safe and healthy
outsourcing sector. working conditions

Special Economic Zone Act of 1995. This law seeks to The Advantages of Business Process Outsourcing
establish special economic zones (SEZs). Its goal is to
attract local and foreign investors for job creation and There are many reasons why you would choose to use a
economic growth. It also provides tax incentives to BPO BPO company to help grow your business. Each BPO
companies operating in these zones. company will offer solutions to some or all of the following:

Data Privacy Act of 2012. This law sets out the rules and Cost-efficiency
regulations for collecting, using, and storing personal data in The most often cited reason to outsource is cost-efficiency.
the Philippines. It seeks to protect personal data by requiring By utilizing different labor markets, BPO companies
BPO companies to implement security measures and privacy specialize in hiring talented employees at a lower cost.
policies. Tasks like handling IT help desk calls, offering first-tier
support, or content moderation have high repeatability but
The DICT Act of 2015. The Department of Information and still require a human touch. Outsourcing these activities can
Communications Technology (DICT) oversees and regulates allow your higher compensated team to focus on more
the use of information and communication technology in the complex, in-depth issues while providing a high-quality
Philippines. The DITC Act aims to provide universal access service across all functions.
to quality, reliable, and secure ICT services, which the BPO
sector must prioritize. Language Requirements
As your company expands, you might require marketing
Telecommuting Act. The Philippines recognizes materials or customer-facing services in multiple languages.
telecommuting as a legitimate work arrangement. This law BPO vendors are set up to quickly hire in many countries
seeks to protect the rights of telecommuting employees. with locals who can provide services in their native language.
Since the pandemic, it has allowed employees in the BPO The advantage to this approach is that you don't need to set
sector to work from home or remotely. up foreign entities or have recruitment staff or paid recruiters
who can assess the language skills correctly. Instead, the
Investment Priorities Plan. This policy document is a BPO company will handle the hiring, language tests, and
blueprint for guiding local and foreign investors seeking to skills assessments on your behalf.
align their entrepreneurial and financial capabilities with
business opportunities. It focuses on “scaling up and Expanded Hours
dispersing opportunities,” which also applies to the BPO As with language, a scaling business often needs around-
sector. the-clock services. Services such as 24/7 support or
business development in new geographic locations can be
Foreign Investments Act of 1991. This law seeks to welcome provided more quickly by a BPO. They also have a strong
investments from foreign investors, whether private knowledge of staffing models to best cover different holiday
companies or governments. The goal is to expand schedules, redundancy for sick leave and vacations, and
livelihoods and provide employment opportunities. The BPO task hand-offs. This arrangement lets you have people
sector is a top priority because it is the biggest contributor to working in their local hours instead of attempting shift work in
the economy. your local teams. Leaning on a BPO partner can help your
business thrive as you expand globally.
Omnibus Investments Code of 1987. This law aims to
encourage domestic and foreign investments, covering four Seasonality and Flexibility
provisions: the duties and responsibilities of BOI; promoting Depending on the nature of your business, you may need
investments with incentives; providing incentives to short-term staff to help you cover busy seasons or
multinational companies; and providing incentives for export unforeseeable spikes in demand. Many BPO companies can
processing zone enterprises. quickly scale up temporary teams or provide shared services
where employees aren't specific to your company but are
Department Circular No. 1, Series of 2008. The Department available to help as required. Once again, this saves you
of Labor and Employment (DOLE) initiated and implemented recruitment costs, training costs, and other
this policy to assist those in the country’s BPO industry. It onboarding/offboarding inefficiencies.
specifically provides guidelines for the safety and health of
employees in the call center industry. Fast Scale
When you're scaling rapidly, hiring never seems to end. The
Department Advisory No. 4, Series of 2010. DOLE also sets time taken to interview, onboard, and professionally develop
out guidelines for flexible work arrangements. It essentially these hires, and expand your leadership team to maintain a
applies to the BPO sector, especially during the pandemic. healthy leader-to-direct report ratio is significant.
The advisory also allows female BPO employees to work at
Often, BPO vendors have people assessed and waiting for
the right role or have internal hires looking for new
opportunities that can transition in days. It's also in the best
interest of a BPO to continually develop their employees and
provide high-quality services so that you want them to scale
along with you. Trusting a BPO company to handle these
tasks will give you the same level of expertise, just faster.

Risks of Partnering With Non-compliant BPO Companies

Another reason some BPO companies might not pay taxes

is that they are not registered or do not have a license to
operate. These companies are called underground BPO
companies. They allow work-from-home (WFH)
arrangements while paying staff relatively higher
compensations, but there is no security of tenure on the part
of the workers.

Underground BPO companies are limited to services such as

small, specialized roles and virtual receptionists. They
cannot handle large-scale call centers, lead generation, or
synchronized back-office operations.

Clients do not have guaranteed BPO security when working

with non-compliant service providers. Privacy and security
are also at risk because they do not follow the right data
handling procedures. They also fail to comply with the
standards and certifications needed for confidential
information, such as:

Payment Card Industry Data Security Standard (PCI-DSS)

International Organization for Standardization (ISO) 27001
General Data Protection Regulation
Health Insurance Portability and Accountability Act of 1996
(HIPAA)
Below are other risks of working with underground BPO
organizations:

They are not dependable, so service quality suffers.

Hidden costs in training and software or hardware upgrades,
plus additional invoice costs, eat up your budget.
Information transfer is not comprehensive, which leads to
errors.
A company’s private data is exposed without robust data
protection policies. One perk of working with a reputable
service provider is the availability of information-related
services, including data security. Businesses improve the
accuracy of their data confidentiality procedures when
partnering with a skilled managed service provider.