Expert View

Captive Audience: How to Partner with Service Providers to Improve In-House Offshore Operations

Many IT leaders who opened captive centers in India to reduce costs while retaining control of assets, have found themselves disappointed and given up. Here's one solution for salvaging a captive center offshore: partner with local providers.

By Cliff Justice and Stan Lepeak, Equaterra

October 09, 2007 — CIO — If you have a captive center in India, you probably opened it to reduce costs and access a seemingly endless pool of IT talent while retaining control of your operations. But now, as you compete for local resources with established service providers, you might find that real estate and labor cost an arm and a leg, the appreciation of the Rupee is eating into your savings, and that once-promising talent pool seems dryer than a summer in Phoenix.

So how do you turn this situation around? This is the question many organizations are asking as they reevaluate their captives &mdash a.k.a. internal shared-services centers in low-cost locations. One way, as evidenced by recent newsmakers like Citigroup, is to sell off some or all of your captive to a service provider or private equity pursuer. In fact, India's largest BPO service provider, Genpact, itself started as a GE captive that was spun off in 2004. This exit strategy, however, assumes that your captive is an asset, which isn't always the case and therefore isn't often a viable strategy.

Truth be told, the big-name exits are well-publicized minorities. Today, there remain more captive centers operating globally than before, with annual growth projected at 30 percent. EquaTerra estimates that less than five percent of buyers plan to terminate their captive operations or bring work fully back in-house, based on a recent assessment of future ITO and BPO investment. Instead, many captives are leveraging offshore resources to deliver services in a different way, making their operations more productive, efficient and cost-effective.

How? One increasingly common way is to partner with— instead of competing against—one or more outsourcing service providers. Whether a captive is in India or another market such as Russia or China, an underlying delivery challenge is the maturity of the service provider market, which creates stiff competition for increasingly scarce and expensive resources. With local-market savvy, strong institutional knowledge and flexible geographic models, service providers almost always have the advantage. But that service provider maturity, which may be the very bane of your captive center, can also work to your advantage in the form of a partnership.

Partnership models

There are many types of partnerships on the menu, all aspiring to improve captive performance while keeping buyers in control. In one partnership model, providers deliver complementary services from their own locations, as part of an overall service chain. In other "hybrid" or "virtual captive" models, service providers are brought in to perform some or all of the work in the captive center itself. It comes down to structuring a partnership that leverages local expertise and resources to drive innovation and continual process improvement, while at the same time reducing costs. As such, an organization's offshore delivery models tend to evolve over time; there isn't necessarily a clear line between one model and another.