Captivating Clarifications: Captive Centers and the Erroneously Published Obituary | Sherpas in Blue Shirts

Posted On May 17, 2011

This is one in a series of thought leadership articles by Eric Simonson on the continuing role of captives in the global services landscape.

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Most major news outlets write obituaries about the famous far in advance of their demise so they can publish within moments of official verification of the unhappy event. The tactic works well, except when the obit is published but the death didn’t actually occur . . . as is the case with captive centers.

In the 2006 – 2008 timeframe, considerable “research” and speculation was tolling the death knell for the captive model. But the reality is, captives are not only still alive and kicking (e.g., NASSCOM in March 2011 held its first-ever captive enclave), but also growing and maturing to form a different and more important component of their organizations’ global sourcing model.

So how did this disconnect come about?

First, the divestiture of some captives gave the global services media and the market in general something provocative to talk about. What they missed was that these captives weren’t sold because they were failing. Quite the opposite. Rather, third-party service providers — e.g., Genpact, WNS and EXL — wanted to buy them to gain distinctive capabilities they couldn’t develop themselves that would enable accelerated delivery prowess and differentiation in the marketplace. Looked at from this perspective, it’s not at all an indictment of the model’s failure to deliver services, but instead a validation that some captives had been done quite well.

Second, in that timeframe, there were many rumors of captives being up for sale. Some of them did get bought/sold, and others didn’t. But the rumor mill fueled the doomsday fire, even though most that were divested were for strategic reasons — e.g., a need to generate cash during the height of the financial crisis, diminished interest in operating in certain geographies, or the decision to handle a specific skill set in a different manner.

Third, after captives became more common, many companies just jumped into the fray. But they established their captives at too low a scale, with too few resources, insufficient commitment from their parent organization, and inability to invest in making the talent model work to obtain the right leadership and front line employees. Many of those captives struggled, and ultimately their operations were either outsourced or brought back in-house.

By contrast, the captives with more commitment and more volume started optimizing the model by outsourcing portions of their operations, in some cases to conserve capital and in others to create career paths. This was not because the captive model wasn’t working, but instead because the way to leverage a hybrid delivery model for optimum value was becoming clearer.

Today’s captives are moving even further along the optimization continuum. Many are outsourcing the commodity transactional work to third parties, while assuming responsibility for higher-skilled work such as complex analytics, R&D, and high-end judgment processes…the work you might have expected to see in a corporate campus rather than an AP center in Knoxville, Tennessee or any other Tier 2 city in the U.S.

At the end of the day, captives are neither good nor bad; they are just different. And for organizations that have the commitment and scale, they are likely to be an important, integral part of the overall global services model, in tandem with outsourcing.

For more insights on the evolution of offshore captives, check out our newly published report, Captives are Staying Alive: The Rumors of My Death have been Greatly Exaggerated.

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