Offshore Outsourcing: Can This Captive Center Be Saved?

Executives with captive centers in India are starting to wonder whether it's time to offload their offshore assets as GE did and Citigroup is reportedly doing. But Cliff Justice, an expert at EquaTerra, says that most captive data centers can be fixed.

By Stephanie Overby
Thu, November 08, 2007

CIO — Last week it was reported that Citigroup struck a deal to sell its wholly-owned offshore IT and BPO center Citigroup Global Services, with offices in Mumbai and Chennai, India, to outsourcer Genpact for nearly $700 million.

Neither Citigroup nor Genpact (which was the wholly-owned offshore captive center for General Electric before it became an independent company in 2005) has confirmed the deal; but the news reports have other executives with captive centers in India wondering whether it’s time to offload their offshore assets, too.

The reason: a number of IT organizations set up wholly-owned centers offshore with wholly unrealistic expectations. Do it yourself instead of outsourcing to a third party and, the thought was, and you could access new markets, retain management control, and save more money to boot. Faced with the reality of rising costs, from real estate to salaries, along with greater management investment that they’d bargained for, some companies may be wondering if Citigroup, or GE before them, had the right idea selling off all or part of their captive facilities in India.

Not so fast, says Cliff Justice. Justice, head of globalization for Houston-based outsourcing consultancy EquaTerra, says that most captive centers can be fixed by partnering with local providers and resetting expections. That means CIOs and other executives need to get more realistic about their expectations associated with human resources, management overhead, and other costs. Besides, Justice says the chances of selling a captive data center for a profit are slim to none for most would-be sellers who lack the scale or scope of Citigroup’s BPO center.

Justice spoke to Senior Editor Stephanie Overby about ways to improve the performance of offshore captive data centers. What percentage of U.S. companies offshoring IT and business process services are doing so via their own captive centers?

Cliff Justice, EquaTerra’s Head of Globalization: First of all, although companies are developing captives in China, in Central Europe, in Latin America, and other parts of the world, India is still the predominant location for captives.

We count about 500 captive centers in India right now. So probably half of the companies who are in India in any significant way are doing so with a captive center. It’s predominantly financial services and software companies. Why have so many companies decided to go it alone offshore, rather than outsourcing to a third party in India? Lower costs? The lack of mature providers? Desire for control? Regulatory restrictions?

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