Monthly Archives: May 2010
The Disadvantages of Captive IT Centers
Since the inception of off shoring or buying services from international vendors, a lot of captive centers have also materialized. This kind of business created by companies from industrial countries such as the US, is a version of off shoring characterized with full of control over the captive center unlike in off shoring companies wherein the firm has no control over the products made. However, the interest in captive centers decreased each day due to a number of disadvantages that this opportunity offers. Here are some of the most common downsides of captive IT centers:
Higher Expense than Expected
A lot of firms are not willing to pay high salaries to invest for the best talents and some of them don’t always expect high General and Administrative costs which can usually destruct a small company.
Indian Captive Centers
In the contemporary world of ultra-modern lifestyle, the Indian captive market turns out to be a huge venture. Nowadays where the world is now going technologically advanced, this kind of business enterprise continuously expands at a rapid pace across boundaries, functions, and geographies. As a matter if fact, it is now increasingly becoming mainstream. Thus, the role of the captive is evolving.
The Eighties was actually the era when the origin of the Indian captive market really began. It was the time when various state-of-the-art companies set up captives so as to provide engineering services. But it was in the early-mid 1990s where people witnessed the beginning of captives being set up for BPO/transaction processing.
Future of Captive Centers
Since outsourcing and software industry is the thing in this day and age, it is not doubtful that somehow people also think about the future of captive centers. Believe it or not, in recent times there has been a healthy debate among outsourcing professionals about the future of offshore captive units established by several parent organizations around the world.
A lot of people claim that nearly all captive centers these days now just struggling to perform. What’s more, these captives are suffering from high operating costs and face above-average challenges of staff attrition. Plus, integration with the parent is also a serious issue.
They also suffer from poor execution and lack of scale. As a matter of fact, one estimate says that there are over 400 captive centers in India, and the rising rupee is leading to their shakeout because they are “cost-centers” with depleting margins. Parent companies are expected to finalize their exit strategies, and may soon sell out strategically and reduce their stakes significantly.
Yet, many still think that the future of captives is at any risk%3b nor will captives vanish from the Business Process Outsourcing (BPO). Some assume all captives will be up for sale very soon.
If truth be told, it’s important to believe that what works or does not work for software-development centers or technology support or product design is not necessarily the same for the BPO business in the context of a debate on the future of captives.
Nowadays, an estimated 67 percent of all BPO business in India arises from captives, and one could argue that this has been the moral fiber of the success of this industry. In fact, the nonappearance of credible third-party providers with adequate scale is one reason why captive units were established in the first place.
Furthermore, several captives have successfully demonstrated undertaking of higher order capabilities and processes through innovative ideas and non-conventional vibrant thinking. Generally speaking, costs alone are not necessarily the only measure of a successfully run unit.
Nonetheless, some things will carry on. Industries like banking are greatly regulated around the world. For this reason, in this in itself may prompt parent organizations to keep hold of their captive centers.
Ultimately, as long as captives are viewed by parent organizations as being a critical and strategic enabler to their own success and a truly integral part of their organization rather than a basic lower-cost supplier of offshore services, the future is truly very bright for captives!
Advantages of Offshoring Over Captive Centers
To basically cut down costs, most business enterprises these days have already started offshoring their product development work. In fact, they did this for over a decade by now. Actually, many companies around the world get this idea and followed it so as to make things easier and cost effective.
Nowadays there are already over 500 product companies that have jumped from the offshore bandwagon and established captive centers in South Asia and East Asia. The expectation of the company’s that have established captives is to have close control over the offshore R&D operations and thought they could make things easy and happening.
Despite that, the interest of establishing captive centers is downsized day by day according to studies. The challenges that captives are facing is resulting in a significant decrease in the number of new captives that are being introduced. Some of the key challenges that result in decreasing interests towards captives are:
Lack of Scale – This one of the key factor for operations as it impacts every element of a captive’s performance: cost, attrition, productivity, recruitment etc. The factor that plays a major impact is in-country branding.
Higher than anticipated Costs – captives often pay high above the market rates throwing the entire cost model out of whack so as to scale up. Hence the average cost of captive’s are loaded almost 20% higher than working with a provider.
High Attrition – High attrition rate effects productivity and destroys the morale. Industry statistics show attrition at captive centers is almost twice as high as the average provider rate.
Second-class-citizen status – Many companies treat their captives as their low cost offshore teams. For this reason, this causes low morale and breaks the loyalty bond towards the organization.
Poor Development Process and Coordination with the Onsite team – Many organizations face difficulty in establishing strong development process and implementing productivity measures.
Management Attention Wanes – If truth be told, the difference in time zones is actually the main factor that troubles the collaboration with the onsite team and captive centers. It takes away the attention in focusing towards the core focus of the company.
Virtual Captive Center
Globalization is the thing in this day and age. Today, technologically advanced enterprises like outsourcing and software development companies are incessantly on the rise here and there mostly in the large cities. Thus, various business processes and activities are now being performed offshore. Simply put, the world is now turning into a global village.
As a result of globalization, virtual captive centers are now becoming all the rage. As it provide great value to enterprises such as the lowered up-front financial risk with the supplier taking on the burden of initial investments. . A virtual captive center is a hybrid model that combines the features and advantages of offshore captive centers and outsourcing models. Virtual Captives bring tremendous benefits but are not suited for all outsourcing initiatives. They are not a model for low value-added processes or for small-scale outsourcing initiatives of less than 40 people.
Lately the concept of “virtual captives” has emerged and had gained the acceptance of the global sourcing community. Actually the term “virtual captive” is generally used to refer to a new global sourcing model that aims to blend the benefits of both the captive offshoring and third-party outsourcing models. This hybrid model usually entails a buyer entering into an operational alliance with a supplier, in which the supplier provides the assets, IT infrastructure and allied services such like staffing and training other than dedicated resources to service the buyer.
When you come right down to it, India is undeniably the leading destination when it comes to offshoring. As a matter of fact, it ranked as the number one offshore destination in the world as far as IT and BPO services are concerned. In fact, Pune City, an administrative division in Pune subdivision of Pune district of Maharashtra in India enjoys much of the attraction of other cities in India for the IT, BPO sector. It has loads of talented resources, good educational institutions, a large English speaking population, as well as technological competencies.
