Tag Archives: Offshore Captive Center
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.
On Establishing and Managing an Offshore Captive Center
Last 2009, a white paper was published by CIO.com about establishing and managing an offshore captive center. It was a very illuminating paper as it highlights important concepts when it comes to an offshore captive center.
The paper’s author, Mr. Renny I. John, outlined the steps that must be undertaken by business executives when establishing and managing an offshore captive center. According to him, there are three main phases that an interested organization must undergo to be successful in their offshore captive. These phases are appropriately named as follows: Strategize, Establish, and Operate.
In the Strategize phase, a company must consider some important factors before it can set up an offshore captive center. First, they must decide on the right country and city to establish in. Second, applications and processes to be offshored should be clearly outlined. Third, clearly define the business model the captive will assume. Fourth, knowing and dealing with cost and operating issues is a must. And lastly, executives must be able to create a detailed plan on products and set timelines for its delivery.
The next phase in establishing and managing an offshore captive center is Establish. The parent company should be able to set up a management structure with clearly defined roles that will oversee the entire operation of the captive. Next, regulatory systems should be established in the captive. Infrastructure is the next step, where the parent must prepare the necessary buildings, equipment, and materials needed. Once prepared, it is time to look for key leaders and support personnel to operate the business. After this, business processes should then be clearly defined. Once the processes have been established, the on-site administrators can begin transferring their knowledge with the offshore captive team. When it is ascertained that knowledge transfer is successful, the captive center can begin by performing a few small to medium tasks as a sort of test.
The only thing that remains to be done is the Operate phase. There are only two elements that need to be observed at this phase. First, quality management should be set up and maintained by the administration. And lastly, performance of employees should be systematically monitored and evaluated by quality control specialists.
Skipping on any of these steps would be very unwise. The story of failed captive centers in the past should serve as a lesson for those who still plan on establishing one. As long as these steps are observed, executives can be assured that they’re on the right track.
The Problems Of An Offshore Captive Center
With the boom of the offshore outsourcing industry many corporations are enticed by the lure of big saving and better services when they transfer many of their back room and customer service operations to business process outsourcing BPO companies.
With improved profitability experienced by these large firms some have been tempted by the possibility of eliminating the third party provider completely and set up an offshore captive center of their own.
Unfortunately the dream of greater profits bigger savings and even better services have all come to naught Except for a few exceptions companies who own offshore outsourcing captives these days are desperately getting rid of their subsidiaries.
Take Citi for example. Last 2007 the giant financial group sold their Indian BPO to Tata Consultancy Services TCS. Other companies have followed suit and a string of sales and transfers have occurred over the years. This makes one wonder what exactly happened. Why are potentially lucrative ventures not going anywhere at all? The answer according to Steve Mazek author of Software without Borders is the inherent characteristics of an offshore captive firm. If the parent company fails to take these into consideration then they will end up with a big drain to the resources. According to him captives tend to pay more for rent and furnishings than the locals. They lack institutional knowledge and they’ll need time to be efficient Captive centers also get a lesser share in IT outsourcing. Underutilized captive centers are more costly to maintain than their counterparts. Sending your own managers to begin set up is 60 percent more expensive than hiring a third-party provider.
Another thing is that small captives find it hard to get talent than do larger firms and third party companies.
And finally exiting the market is harder since it takes up to two years to shut down a captive Given these details it really comes as no surprise that parent companies are really in a bind Unless they are able to pull off a stunt that made companies like Exult a success then expect this trend on offshore captive centers to continue in the years to come.
