Tag: captives

Today’s Global In-House Centers (GIC) are Exceeding Expectations, and Impacting Enterprises’ Use of Third-Party Outsourcing | Sherpas in Blue Shirts

While the upsides and downsides of outsourcing and offshoring as sourcing models tend to grab the lion’s share of press coverage, global in-house centers (GIC), formerly called captive centers, have made quieter, yet significant, advances. Indeed, parent companies’ rankings of their GICs’ savings and service level performance were considerably higher in Everest Group’s 2012 GIC Value Diagnostic survey than in its 2007 survey (see Figure 1).

Figure 1

GIC Savings and Servce Level Performance

As a result, it comes as no surprise that both GIC and parent company stakeholders reported that the GIC model will affect their use of third party providers going forward (see Figure 2). Most of these stakeholders are mature adopters of the GIC model.

Figure 2

GIC Strategy

There are numerous reasons GICs are gaining traction and status. First, as they mature, they are better able to serve their enterprises across a variety of dimensions including scale achieved, scope of services managed, complexity of work delivered, and level of ownership demonstrated. GICs have not only grown significantly but have also expanded their portfolio to serve multiple lines of business and business units within their parent organization. They are evolving to become extensions of the enterprise, rather than just being a provider of services to it.

Second, GICs’ ability to offer multiple benefits beyond savings, (e.g., process improvement, process transformation, center of excellence-orientation, etc.), to parent stakeholders adds to the compelling proposition of the model. GICs have built process re-engineering, process excellence and technology capabilities in the context of the enterprise. Further, access to tribal knowledge positions them well to serve the parent organization more effectively.

Third, other factors such as need for increased control, minimization of portfolio concentration with third party service providers, and risk diversification may also lead to sourcing decisions in favor of GICs.

Will the pendulum swing toward GICs? As sourcing model selection is a highly complex decision and there is no one size fits all approach, Everest Group believes both the GIC and the third party models will continue to play their own parts, complementing each other in some shape and fashion.

To get your complimentary copy of summary of 2012 survey findings, please write to [email protected].

Is Costa Rica’s Magic Beginning to Fade? | Sherpas in Blue Shirts

Recent news announcements on several third party service providers’ pullouts from Costa Rica may lead people to believe that the country is losing its luster as a sourcing destination for outsourcers and global in-house centers (GICs). But, before jumping to any conclusions, let’s gain some perspective on these announcements.


HP in February 2013 announced it was scaling back the English-language customer support team in its Global Services Center by 400 employees. However:

  1. HP has nearly 6,500 employees in Costa Rica, spread over multiple sites and processes/functional areas, and this move affects only 400 working in just one of the company’s 20 different units operating in the country
  2. This particular reduction in headcount was part of a global restructuring plan announced in May 2012 by CEO Meg Whitman
  3. Most of these 400 employees will be given the opportunity to apply for one of the 300 new jobs being created in the other 19 units
  4. HP is planning to hire 150 employees into the Global Engineering Services unit it opened late in 2012

Rather than signaling that HP’s confidence in Costa Rica is shaken, this move indicates a strategic shift in how the company plans to utilize the location, and that the kind of work supported in the country may be moving up the value chain.

Stream and Teletech

Reportedly driven by rising wages and other operational costs, TeleTech is expected to cut ~ 160 of its 1,250 positions in Costa Rica. And while Stream Global Services recently shuttered its 700-750 FTE operations in the country, it opened a new center in Honduras with a capacity of 750 FTEs.

Everest Group believes these developments are the result of the providers’ evolving location portfolio strategies to control/optimize service delivery costs with rebalanced footprints.

Costa Rica Facts

While the country has traditionally been, on average, 30-40 percent more expensive than other less-developed locations in Central America for delivery of bilingual (Spanish-English) voice-based BPO services, it is still fairly attractive due to its:

  • High cultural affinity and solid English language skills
  • Geopolitical stability, and relative safety and security
  • Well- established depth and breadth of ITO/BPO service offerings
  • Opportunities to support European languages per its ability to attract people from countries in Latin America and Europe

And although wage inflation and attrition levels increased steadily over time, and are now at levels that make its cost profile less attractive than lower-cost and lesser-developed options in Latin America (Managua, Guatemala City, San Salvador, Tegucigalpa, Santo Domingo, Peru, and Colombia) and the Caribbean, sourcing activity in the country has not slowed down for third party providers or GICs.

In fact, Costa Rica experienced record delivery center establishment activity in 2012, on par with China, and behind only India (see Exhibit 1). Amazon and Bridgestone are among the most notable companies that setup GIC operations in Costa Rica last year.

Exhibit 1

Costa Rica delivery center setups

Moreover, as depicted in Exhibit 2, it has dominated center set-up activity in Latin America for the past three years.

Exhibit 2

LATAM delivery center setups

Costa Rica clearly continues to present an attractive mix of skills and opportunities, and these often outweigh the higher cost of operations in service providers’ and GICs’ tradeoff analyses.

So what’s in Costa Rica’s future as a sourcing destination? Everest Group predicts the market will continue to mature across multiple dimensions, and will exhibit the following major shifts/trends:

  1. It will increasingly be leveraged for up-the-value-chain, more complex work, not just in business processes such as F&A, but also in areas including knowledge processes, IT, and creative media. This will be driven primarily by a maturing talent market, synergies with customer service work, and efforts by companies to optimize facility costs
  2. Wage inflation and attrition for bi-lingual (English-Spanish) professionals will plateau in the next 18 months, driven by a moderate slowdown of growth
  3. Call center players will rebalance their Latin American portfolio footprints, and transactional contact center work, especially that requiring a medium level of English proficiency or monolingual Spanish delivery, will move to emerging locations
  4. Large new investments in the contact center space, or existing players scaling to more than 1,500-2,000 in the country, are unlikely. There will be a gradual decrease in size of new centers as companies start to support higher-order work that is less FTE-intensive
  5. Players will continue to leverage some unique talent and operating models to continue operations/grow in the country. These will include tapping into pools from areas adjacent to the Greater Metropolitan Area (GMA), leveraging part-time students and diploma holders, and even opening satellite centers outside the GMA
  6. GICs will continue to play a significant part in the increasing maturity of Costa Rica. They will find value in expanding the depth and breadth of services supported from Costa Rica, in part to better utilize their sunk costs

While we do not expect Costa Rica’s magic to fade away anytime soon, some of its charm will shift from some specific areas, especially English-Spanish voice delivery, to emerging areas of work such as  IT, knowledge processes and F&A. Moreover, the recent developments in Costa Rica are an inevitable part of the natural evolution/maturation of a delivery location; we’ve seen, and continue to see, similar trends in other sourcing destinations such as India and the Philippines.

For a deeper analysis of the GIC landscape in Costa Rica, please refer to our recently-released report, Global In-house Center (GIC) Landscape in Costa Rica and Trends in Offshore GIC Market

Why We are Changing to “Global In-house Center” (GIC) over “Captive” | Sherpas in Blue Shirts

Related: See our latest thought leadership on GICs

When we began conducting webinars for Market Vista when it was launched in 2008, one of the most common questions we received during webinars was “what is a captive?” I even recall one attendee leaving me a voicemail within 10 minutes of a webinar concluding that basically said, “You guys suck because I can’t understand what you mean by ‘captive’ – isn’t it just a shared service center?”

In recent times, I am less frequently asked to explain what “captive” means and, in fact, generally find that most industry insiders all understand and use the term clearly.

So what explains our decision to stop using “captive” and instead use “Global In-house Center” or “GIC”?

Have bath salt-inspired zombies eaten our brains? Do we strangely enjoy having to invest 5 minutes defining terms simply so that people can understand what we are talking about? Or are we just desperate for topics for our blogs?

Nope. None of those.

We did it for the children. (Insert ohhhh and ahhhh here.)

The image of the slide below explains the full rationale for the change and you should be prepared to see it A LOT – in webinars, reports, conference presentations, etc.

GIC Terminology Change

Yes, we know that “captive” is easy to write and say. It has many things going for it.

However, it is a poor word. Quite simply, does anyone associated with a “captive” want to refer to it as a “captive”? Does any bright-eyed recent college graduate run home excitedly yelling “Mom and Dad – I got a job at the captive!” Does the word “captive” inspire anyone, or is it a negative-tinged and off-putting word? Is this really a helpful word to be using 5, 10, or 20 years from now?

As we were contemplating this potential change, I asked a number of my contacts how their organizations refer to internal delivery center organizations. None of them use the term “captive.” Further, all found that they had to explain what “captive” meant to new business users becoming more involved with global services. It is simply not a term that was widely adopted by the people it is intended to describe. In my mind, clearly it is a poor word.

The only arguments for keeping it are inertia and laziness. If we want to find something better, we have to get started at some point, and we agree with Nasscom (India) and BPAP (Philippines) that point is now. And tomorrow. And next month. And next quarter. And next year. And…well, you get the idea.

So we enter a long and painful process of using and advocating for Global In-house Center (or GIC – “Gee-Eye-Sea”) to replace captive. And it will be a journey with lots of opportunity to annoy and “correct” people.

Is “Global In-House Center” (GIC) any better? My view is that it is a good alternative simply because it does not try to go beyond the facts while also being clear. It avoids the temptation to “judge” these centers by referring to them as “innovation hubs,” “Centers-of Excellence,” or other terms that may match intent in some cases but are not clearly and universally true. Global In-house Center is largely self-defining – “in-house” pretty much gets the point across.  “Global” hints at geography but gives room to expand the application (All business units? All locations?).

But we do have to learn a new acronym – GIC. Global In-house Center is a mouthful and will have to be regularly shortened to GIC. But we are all pretty good at learning acronyms…so add it to the list. GIC…and ERP, O2C, ITO, BPO, FAO, HRO, CRM, SCM, ITIL, COLA, CAGR, ROI, TCO, MSA, SOW, and more…

Post Captive Global In-house Center Webinar Musings: Change is Not as Hard or as Quick as You Might Think | Sherpas in Blue Shirts

Last Wednesday, we hosted a webinar on the cost competitiveness of global in-house centers and were privileged to have Kush Kamra (SVP of Global Operations for MetLife) and Charlie Roberson (Head of Enterprise Expense Management and Offshoring for Wells Fargo) join us as guest panelists. The analysis presented came from a joint study between Everest Group and NASSCOM earlier in 2012.

The webinar featured extensive discussion (thanks to our wonderful panelists) and got me thinking about two points in the aftermath of the webinar.

First, as those who attended know, the term “captive” is being replaced by “global in-house center” or “GIC.” In all honestly, I have been reluctant to confidently adopt this because change is hard (is it really worth it?) and “captive” is so simple to use in our reports (a mere seven characters!).

What suprised me is that in the two days after the webinar, three different individuals (two at the FSO event in NY, one during a phone interview) proactively corrected themselves after they said “captive” and replaced it with “global in-house center.” We laughed about it, but the point is that people are open to change and the word can get around pretty quickly. And not to be underestimated, it is much easier to replace a REALLY BAD idea when something better is consistently introduced into the market.

The second point that that I wanted to share is about labor arbitrage. As those familiar with the analysis we presented will recall, we analyzed the relative cost structure of offshore delivery vs. onshore and the sustainability of it under a range of scenarios. In many ways, the analysis simply helps rigorously document what those already close to situation know in their hearts – labor arbitrage is alive and well and not in danger of going anywhere soon.

The day after the webinar, the same topic came up in conversation with a senior solution design executive from a leading service provider. The individual mentioned that entry level positions continue to join at roughly the same salary level as five years ago and wage inflation is not nearly as dramatic as it may seem. However, she pointed out that the price for leadership is going up rapidly (luckily, this is a small sub-segment of the cost structure).

This underscores an important fundamental: supply and demand and how small changes in both can have big impacts. In short, demand for offshore resources is growing at a slower rate at exactly the same time that education systems are producing increasing amounts of resources. Further, training efforts aimed at increasing employability of graduates are slowly demonstrating impact. My prediction is that with the combined impact of slowing growth in demand and increasing supply of resources, we will see very little increase in the cost structure from offshore locations over the next 5 years (and this is before considering the impact of exchange rates). Yes, leaders (scarce resources – completely different supply-demand curves) will continue to become more and more expensive, but much of the cost structure will stay roughly the same.

Looking at this another way, the entire offshore/nearshore delivery ecosystem providing export services (India, China, Philippines, Mexico, Malaysia, Poland, etc. serving the United States, United Kingdom,  Netherlands, Australia, etc.) is only a little over 4 million people on a global basis. In the grand scheme of things, this is a really small labor pool and the ability to create excess supply from the 6 billion humans across Asia, Latin America, and Africa is tremendous – we are not in a supply constrained situation, but rather a demand-constrained scenario. SaaS, cloud, BPaaS, etc. only further suggest the potential for moderated demand for offshore resources.

I understand why people are concerned about cost increases and indeed some costs are increasing and some have increased significantly, but we are a long, long, long way from fundamental shifts in cost structures.

Philippines: From Voice Services to a Broad-based Global Sourcing Destination? | Sherpas in Blue Shirts

The Philippines, which is already giving competition in voice-based services to the leading offshoring destinations in Asia, is now eyeing to further up the ante. The country continues to see robust growth in its voice segment and credible activity in non-voice services.

Several positives…

With its sizeable graduate pool, low-cost of operations, and English language advantage, the Philippines offers an attractive proposition for organizations looking for destinations to offshore services. The Philippines IT-BPO industry registered US$11 billion in 2011 on the back of successful expansion in services and increased geographic diversity. The sector is generating 640,000 direct jobs and another 1.5 million indirect jobs. Given the robust growth, the Philippines is likely to achieve its target of US$25 billion in revenues and generate 1.3 million direct by 2016 as per the IT-BPO Road Map 2016 developed by Everest Group.

The country is also seeing an increase in the share of non-voice work (including IT/ESO) which now contributes about 30% to the industry and there is evidence of credible activity in complex processes, e.g., legal, analytics, although their scale remains small. This is largely because buyers are now looking to diversify their delivery operations beyond established markets and are witnessing satisfactory experience from country’s non-voice services. Geographic diversification beyond the United States is also gaining traction and focus on multi-lingual services is increasing.

Philippines IT-BPO Services Revenue by Service Segments

One of the key reasons behind this success is government’s commitment to the sector which is working to position the country as an attractive destination for diversified services with the target to double share of revenue from other service lines. Continuing in this direction, the government and BPAP are initiating steps to enhance country’s value proposition at segment level (e.g., ESO, animation), with a significant attention on non-voice services.

…however, some concerns remain

Activity in Next Wave CitiesTM is evolving at slow pace. Analysis of the delivery location pattern of top 20 service providers and Forbes 2000 companies reveals that of the 35 centers set-up in the Philippines in last three years, only three were located outside Metro Manila and Cebu. Clearly, Philippines has its task cut out in order to position these cities as alternative locations beyond Metro Manila and Cebu and widen the talent base to ease the supply of talent and address high attrition.

Location Distribution of Centers Set-up in the Philippines

Moreover, ITO and Engineering Services are still not prevalent. The country also needs to continue to increase its alignment towards the United Kingdom and Europe, which are the biggest growth markets after United States. In addition, the country has a high risk of natural disasters. The most recent example is the typhoon activity in 2011, which led to power cuts and disruption of daily activity in Manila. Companies are, therefore, mindful of business continuity plans when they evaluate the Philippines for expansion of their delivery network.

While the government and industry associations are striving to enhance the attractiveness of Philippines IT-BPO sector, it remains to be seen how much the country can get players to think of itself for considerations beyond the arbitrage in voice-based services and more as a broad-based global sourcing destination.

For more details on the Philippines global sourcing market, refer to the recently released reports by Everest Group:

When is a “Hybrid” Sourcing Model not a Hybrid? | Sherpas in Blue Shirts

During a panel on which I participated at the recent Shared Services and Outsourcing Week conference in Orlando, the topic of “hybrid models” came up again. Most of the market bandying about the term were illustrating their, or their clients’, “sophisticated” mix of outsourcing and captive shared services, when in reality – with all due respect – they were actually describing a non-complementary mish mash of uncoordinated legacy delivery model decisions made across business units, operating entities, etc.

If we are to get any tangible – and extra – value from hybrid model, we need to get real about what creates that value. Further, a hybrid is not appropriate for every process or function.

What is a real hybrid sourcing model? Let’s look at automobiles as an analogy. You may have an electric motor-run Chevy Volt and a gas-powered Honda Civic in your garage, but that only means you have two different types of cars that get you to your desired destination using different power sources. On the other hand, the hybrid Toyota Prius uses both gas and electricity, switching back and forth between the two power sources as needed to achieve optimum efficiency, performance and cost savings (and, of course, to be kind to the environment.)

By extension, true hybrid sourcing combines the strengths of outsourcing and captive shared services into a single model designed to capture added value – e.g., delivery speed and flexibility, operational resiliency and investment leverage – not available, or not as easily attainable, when integration of the above two delivery models is lacking.

Against that description, I encourage you to step back and ask yourself, “Is the services delivery model in use within my organization really a hybrid, or did I, or my service provider, simply rebadge it with the provocative, sophisticated-sounding hybrid moniker?”

Of course, the name you ascribe to your delivery model isn’t of much consequence. But it is critically important to determine whether or not a hybrid model is appropriate and advantageous for your organization, as there are times when separate outsourcing and captive shared services models are a better fit. Key indicators that hybrid is right for you include: 1) if there is a service delivery platform that can be shared and re-leveraged; and 2) if a given process is prone to volume and budget changes.

So…is your delivery model really a Prius? Should it be?

Successful Captives: Thinking Beyond Implementation | Sherpas in Blue Shirts

Setting up a captive in India is much easier now than it was ever before. While an abundant and diverse talent pool, appropriate real estate, and much-needed regulatory support and incentive structure have contributed in no small measure to this, a robust ecosystem of recruiters, consultants, transition specialists and law firms have been able to sustain the momentum thus far.

Precedents and learnings from third-party outsourcing and captive units over the decade have ensured that key elements such as talent, governance, communication and change management are tabled as part of the set-up discussions. The how-tos of a captive set-up largely revolve around following a transition methodology that attempts to create and stabilize the offshore organization. As part of this, the project management and transition teams also strive to cover many minute elements including team structure design, work-force estimation, adherence to scope of work and ongoing collaboration with onshore teams, amongst other things.

As much as the how-tos are necessary to ensure a transition, without having a clear idea of the captive’s objectives, these implementation specifics may not suffice in creating and sustaining a successful organization.

From this perspective, there are a few key questions that need to be thought about and solved for before plunging into the details of setting up a captive.

What is the captive’s vision?

The type of value added by a captive for its parent can be across three impact levels – cost, business and strategic. An extension could be a low-cost offshore office that impacts the direct cost base of its parent and improves process efficiency. On the other hand, a Shared Service Center aimed at creating business and strategic impact may result in business process and quality improvement and may even lead on to expansion into new markets. Whether we want the captive to be a cost reduction center or grow into a Center of Excellence (CoE) will emerge directly from the vision of the captive. The vision in turn drives a number of implementation issues including work-force estimation in terms of number of FTEs, type of talent, specialized skill-sets, leadership positions etc.

What is the business-case in favor of setting up the captive?

The answer to this drives directly from the vision. Whether the captive is an extension or aims to evolve into a CoE, we need to think about multiple investments. That makes a business case essential. There have been many cases in which a decision has been made to set up a captive in a best-cost location and the implementation begun. It is only at that point that stakeholders start wondering what returns they might achieve from it. Choices around scale, size, and investment in new capabilities are crucial to offset against the value we aim to derive from the captive. For instance, if we envisage an organization that evolves into a CoE, our business case needs to reflect investments along those lines so that the right planning can be done from day one.

How should the organization be structured?

We have faced this question frequently across our captive transition engagements. And, frankly, there is no “one-size-fits-all” answer here. No rule book states that the structure of the captive should mirror the parent’s organization. Similarly, nowhere is it suggested that the captive organization needs to be structured based on the nature of processes executed there. Reporting structures, level of control residing with the captive, the transition process and similar considerations play significant roles in deciding whether a horizontal-functions-based or a vertical-industry based or a hybrid model work best for the captive organization. The structure in turn is vital in solving many of our implementation issues around team structures and governance models.

While these may not be an exhaustive list of concerns one needs to think about while setting up a captive, answers to these necessary questions go a long way in sustaining the captive and making it a success story.

Genpact’s Partnership with a City Government in China – A Move to Learn from! | Sherpas in Blue Shirts

On November 16, 2011, Genpact signed a five-year strategic partnership agreement with the government of Qingdao to help foster the globalization of Chinese corporations. According to the agreement, Genpact will set up a global process innovation center, and the local government will facilitate establishment of partnerships between Genpact and domestic multinational enterprises. Genpact will provide high-end services and business models to these companies from the center by leveraging its global expertise and implementing industry best practices

Qingdao ChinaQingdao is a relatively new face in China’s global services arena, and has not really experienced notable market activity from ITO-BPO services providers and buyers (captives). Before we talk about the implications of Genpact’s foray into Qingdao, let’s take a quick look at this city located in the Eastern part of China.

Qingdao is a major seaport, naval base, and industrial center in the Shandong province in China. Key industries in the city include household electrical appliances and electronics, petrochemicals, and automotive components.

As an important trading port in the province, Qingdao has witnessed significant foreign investment and international trade. In particular, South Korea and Japan have made extensive investment in the city. According to estimates, Qingdao has the second largest population of Koreans in China – approximately 100,000 – bested only by Beijing.

Coming back to this strategic partnership, it helps Genpact make further inroads into China by expanding its existing six-city presence as part of a journey that started in 2000, including its proactive establishment of delivery centers in the Tier-2 cities of Changchun, Foshan and Kunshan. In addition to the benefits of lower operating costs, access to additional talent pools, and a toe hold in the domestic outsourcing sector, governments in Tier-2 cities are often more flexible in offering incentives. These considerations are likely to have played a pivotal role in Genpact’s investment decision, and has helped place Qingdao on China’s global services map.

For the local Qingdao government, having one of the large global BPO players open a center in their city is a welcome move. It will not only bring process expertise to domestic companies, but also lead to notable job creation in the region. Moreover, it will help build Qingdao’s credentials as a delivery base for global services, enabling the city to find a place on the radar of other global services investors on the lookout for new locations.

This agreement is also evidence to the fact that there is a strong push from government at all levels in China to develop the global services sector. In fact, as part of Everest Group’s Market Vista Q3 2011, we talked about the role the Chinese government is playing through its “1,000-100-10” project to provide thrust to its global services industry and attract investments in the sector.

China's 1000-100-10 Project
Click to Enlarge | Source: Everest Group Captives Database; Everest Group analysis

The Genpact-Qingdao government partnership also underlines important characteristics of China’s global services sector, and presents lessons for broader global services stakeholders:

  • Tier-2 cities in China are becoming important evaluation candidates for service providers and captives. Indeed, Chinese Tier-2 cities already have a significant share among the service provider and captive set-ups, and a higher share than Tier-2 cities in other countries such as India and the Philippines. This has been enabled to a large extent by the wider reach of the government’s incentive programs, and the cities’ robust infrastructure growth.
  • The domestic global services sector opportunity in China is huge. Everest Group estimated the domestic opportunity for global services to be US$20 billion in 2010 (for more details read Everest Group’s Global Locations Compass – China). This is driven both by Chinese enterprises’ need to remain globally competitive and the government’s impetus on outsourcing.
  • Service providers often adopt a partnership model while framing their China go-to-market strategy. This construct involving collaboration with a local partner helps get the plans off the ground quickly, aids in learning the rules of the (local) game, and mitigates risk. In this case, Genpact’s partnership with local government will help it collaborate with domestic multinationals like Haier, Tsingtao Beer, and Hisense in Qingdao. This agreement is potentially a win-win strategy for Genpact, the Qingdao government, and domestic companies alike.

In summary, the Genpact-Qingdao partnership epitomizes the key nuances of China’s global services sector, and reiterates the fact that China can be leveraged not only as an offshoring destination but also a location in which third-party providers can serve the domestic market. It also demonstrates that Tier-2 cities in China are a must to keep an eye on!

A Case of Selective Hearing? | Sherpas in Blue Shirts

A colleague and I recently hosted a roundtable for the leaders of captive centers (i.e., offshore operations not belonging to third-party ITO or BPO suppliers) in the Philippines. In attendance were leaders from more than 15 organizations with operations at varying degrees of maturity. So what do you think their reactions were to the discussion?

On one level, most participants could have felt good. Makati City is bustling (and far better organized than, say, Gurgaon or Bangalore). Most operations are growing well, and are perhaps a key factor in the Philippines’ overtaking India in voice BPO. Everyone around the table is facing the same operating issues around attrition, wage increases, staffing for night shifts, and the constant traffic of visitors from the parent company coming to kick the tires and bond with the associates serving internal or external customers halfway around the globe. The issues would have been worrying for the leaders if they weren’t all dealing with the same stuff.

At another level, the leaders should be worried. After all, it’s easy to be absorbed by the operating issues of trying to keep a few thousand people engaged and focused on customer service and attendance, and making sure they’re happy and well-fed in their 24×7 operations. But the world is changing. Parent companies have gotten a lot smarter in what work they send where, and to whom. Third-party providers are the ones renting out a majority of new office space in Manila, and they are eager to grab what market share they can from the captive pie. Many of these third-party operations are led by Indian managers who are perhaps a bit tired of things in Gurgaon or Bangalore and have come to the Philippines to get their next kick in life.

So why does this matter? On one hand, things can continue as-is; after all, life is good as long as headcount in the captive center keeps increasing, isn’t it? On the other hand, status quo can relegate these operations to becoming a mere spoke in the global supply chain of their parent organizations. Decisions that shape their future will continue to be made by the leaders back home, or worse, by peers in these organizations’ centers in India or other locations.

It’s time for the leaders of the Philippines captives to face the fact that business as usual is not going to last as long as the third parties are coming and parent companies are getting more discerning. More importantly, they need to make themselves heard by demonstrating leadership capabilities beyond day-to-day delivery, and taking charge of the offshoring agenda, or at least starting to shape it.

Captivating Clarifications: Don’t Make the Wrong Comparison | Sherpas in Blue Shirts

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

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:

  1. Additional scope of services
  2. Ability to re-leverage human capital investments

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?

Related Content:

Captivating Clarifications: Captive Centers and the Erroneously Published Obituary

CIO: The Captive Model for Offshoring Is Thriving, Says Research Firm

Report: Captives are Staying Alive

Report: Comparison of Outsourced and Captive Solutions for Capturing Value from Offshoring

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