Captive centers have their own advantages over outsourcing. Just be mindful of the work involved before you begin working with a real estate agent in Mumbai.
Last issue, I wrote about the third phase in the globalization lifecycle: the sourcing phase. Specifically, I talked about one model: sourcing to a third-party provider. But the third-party provider model is not the only global sourcing ownership model available. Another, which merits its own due consideration, is the captive center.
The most common reasons why a client organization chooses to build an offshore captive center are the firm wants to exercise control over operation; the organization believes it can accomplish a lower-cost model on its own than by sourcing to a third-party; it has security or IP concerns; and it cannot find an existing third-party service provider to fulfill its service requirements.
A captive center may be the best option where proprietary issues, operational and management control, and risk ownership are important, and/or the client has a long-term commitment to the region, and the business is looking to develop an additional profit center.
Because captive centers offer client organizations a greater amount of control, many organizations believe that this option eliminates the risks associated with offshoring. However, building a captive center involves its own set of risks and may not have advantages over the third-party provider model.
If done right, captive centers have a number of advantages over third-party sourcing, including:
• They attract top local talent for industry-specific skills (if one can effectively leverage his brand or promote the challenge of the tasks);
• They present an ability to transfer more complex and IP-related tasks than under a third-party model;
• Direct control over the operation lets one develop the culture as he see fit; and
• Potential for spin-offs and other asset value-realization options.
But captive centers bring their own challenges as well, including:
• Organizational challenges: Offshore captives challenge the staffing, style, and formal and informal information systems of the client organization. One employee recruitment challenge comes from the fact that captive centers don’t offer the variety of work that third-party providers do (some job candidates tend to feel that their learning and growth opportunities may be more limited at a captive center than with a third-party provider).
• Process challenges: The client organization must pay special attention to optimizing infrastructure and technology at the captive center.
• Financial challenges: Firms need to manage cross-border cash flows and ensure that cost advantages are real and being preserved over time. Client organizations may be especially challenged by the higher start-up costs associated with a captive center as well as by expat, retention, and management costs.
• Cultural challenges: Cultural differences between a client organization and its offshore captive center can create challenges just as cultural differences between the client organization and a third-party provider can.
Exult (now part of Hewitt Associates) offers a good example of a company that successfully managed the challenges and leveraged the benefits associated with captive centers. In late 2002, the company—which had already successfully outsourced some of its IT requirements—began to consider offshoring business processes as well. After taking an initial assessment of its offshore requirements and internal processes, Exult sent RFPs to BPO providers, but felt none were mature enough.
Instead of giving up and keeping its processes in-house, Exult built a captive in Mumbai, India. It calculated compensation ranges, took taxes into account, and signed regulatory, customs, and legal documents. When it came time to announce the venture and begin the hiring process, press releases were sent out and ads were placed. It also set up a training program for new hires, including westernization, voice coaching, and accent minimization. The end result: a 320-person captive BPO center in Mumbai that yielded savings of more than 40 percent over onshore facilities by its second year of operation.
Client organizations looking to replicate Exult’s success with the captive sourcing model should be driven by a rigorous evaluation of their strategy, risk factors, control factors, and cultural norms. By understanding the benefits and challenges, firms can achieve the benefits afforded by the captive center.