Building upon a May blog post, we recently published a report on the health of the offshore captive model entitled “Captives are Staying Alive.” The report was in partnership with Tesco HSC, a Bangalore-based captive with more than 5,000 employees providing IT, business, and finance services to the rest of the global retailer’s organization. CIO magazine picked up on the report and asked some additional questions for its coverage of our analysis.
In the course of providing additional input to Stephanie Overby (the author of the magazine article), I realized that one critical question was not highlighted strongly enough in our analysis: can you compare the captive sourcing model with the third-party outsourcing model?
On first glance, the obvious answer is “yes.” And indeed, many of us have spent time picking apart the ways in which to compare the costs of both models, plus the merits of outsourcing lowering time to implement and reducing up-front investments (see our deepest, off-the-shelf assessment from almost four years ago).
Any effort to develop a global services strategy that includes a meaningful thought process on the optimal mix of sourcing models will have to sort through how the various strengths and limitations of both models align with a particular organization’s needs and objectives.
But is that really the whole story? Is a one-to-one comparison of models going to provide the right insights to inform a strategy?
First, let me caution that captives require a commitment to scale in order to be successful. Many of the reported failures of the offshore model (bringing jobs back onshore because offshore is too expensive or complicated) are actually caused by lack of scale and associated commitment to manage these issues properly to reduce or eliminate their impact. In others words, do not use the captive model on a whim – only do so if you are deeply committed to ensuring it attains sufficient scale in total headcount and in size and quality of the leadership team. It requires both enough people (say 500-750 minimum for most types of work delivered from “farshore” locations) and enough leaders.
Scale issues aside, there are two fundamental differences in the captive model that need to be considered to understand its potential role in a global services portfolio:
Both of these factors are often overlooked because they are second-order implications that derive from successfully building a captive delivery model; as a result, they are not commonly considered a first-order benefit in the target business case.
Additional scope of services
In an outsourced model, scope is primarily defined in terms of process responsibility and number of FTEs completing various tasks. This is also true in the captive model, but captives can further act like offshore corporate centers and take on work that: 1) is not easy to define; and 2) stretches across the front, middle, and back offices. This opens up the ability to deliver from offshore almost any work that doesn’t require close proximity to the end customer. It also helps explain why captives tend to outgrow their initial real estate plans quickly, and with significant “other bucket” work.
Examples of advanced roles I have seen in captives include product management, pricing strategy, corporate communications, talent management strategy, operations research and optimization, and IT standards and security architecture. While these are not normally outsource-able activities, the captive model provides the opportunity to deliver more scope from offshore – it is simply about adding offshore employees in sales, marketing, or other functions to the global team, not signing SOWs with negotiated pricing and service levels.
In short, a captive enables the option to add lots of additional activities that are not initially planned and that do not lend themselves to the outsourcing model. For organizations seeking to manage themselves in a truly global manner, this is an important consideration and can provide value in a wide range of ways.
Ability to re-leverage human capital investments
The process of fully bringing an offshore resource up to speed to complete a job is critical, and takes longer than most like to admit. In an outsourced model, once the time has been invested to make an individual fully functional in understanding all the nuances of a system or the business’ needs, he or she may be promoted within the client service account, or may leave the account to work for another client. (And organizations do benefit by receiving talent from other accounts as the associates do possess certain forms of expertise, although they lack organizational context, which takes time to cultivate.)
In the captive model, fully functional associates remain in the organization and advance to related roles, or may be moved to other locations to cross-pollinate or further deepen their skills. This ability to retain and enhance the understanding of organizational context is an important factor in capturing value from human capital investments in a captive model.
If you’re creating a global talent model, resources gaining experience with your enterprise in an offshore location can prove to be very valuable for the rest of your organization – you have greater ability to predict success in new roles, they inherently understand your organization from multiple angles, etc. Net-net, specific skills can be developed in both the outsourced and captive models, but deep organizational context is best cultivated in the captive model.
Large organizations must continue to optimize their global services strategies, and the external versus internal sourcing mix debate will continue to be emotional. Emotion is fine; but just be sure you are framing the right comparisons, and don’t forget the real, yet hard to value and compare in a business case, second-order benefits of the captive model.
What unexpected benefits have you seen from internal service delivery in captives? Can those benefits be valued?
This is one in a series of thought leadership articles by Eric Simonson on the continuing role of captives in the global services landscape.
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.