Captive center models have been in play since the early 1980's, and since then, they've changed and evolved in three primary phases, into the hybrid model that exists today. In the first phase, captive centers began as a consolidation of regional or global internal services or processes such as R&D, manufacturing, engineering, finance, procurement, human resources, or accounts payable. They quickly gained popularity, as a way to reduce costs by moving jobs from expensive centers like New York, London, or Tokyo to India. But although companies like Motorola, GE and American Express became instant success stories, many captive centers faced issues in this phase, including uncompetitive costs and underutilization of resources.
In the second phase, companies turned to offshore vendors as an appealing alternative to underperforming captive centers, offering better cost savings and increased flexibility. However, there were also flaws in the offshore model, as companies did not retain valuable skills and knowledge, and were frustrated by lack of innovation. In the third phase, which continues today, innovation from offshore vendors still lags, and companies are looking for more value from their outsourcing relationships. The primary flaw here is that relationships are often formed with vendors' offshore leadership teams, which do not always have the background and experience necessary to consult with companies or the context to deliver on the onshore leadership team's promises.
Today, despite their flaws, captive centers are thriving, experiencing growth to the tune of $11.1 billion in annual revenue, a +300% increase since 2003. But it's important to note that today's captive centers are operating under new models, and 30% of their work is now technology, including IT support and development work, rather than just traditional work stemming from the early history of the captive centers. And, in the midst of this renewed interest, offshore vendors are experiencing a surge of involvement with their client's offshore captive centers as well, often creating a hybrid between the two centers. Across vendors, there are four common offshore captive center models in use today:
• Ex-pat model. This is the "technology-light" version of a captive center. In this model there are typically only a few senior IT leaders located at the captive center, either permanently or temporarily.
• Augmentation Model. This is a traditional time-and-materials (T&M) arrangement, run completely from offshore locations. Typically, in this model, the client will provide the project leadership and manage the deliverables, while the vendor provides the skilled resources and manages the recruitment and training process. This model works well for companies doing large numbers of product upgrades and other standard system integration work that is straightforward and repeatable.
• Captive +1. In this model, the captive center and the vendor's ODC are mirror images of each other, meaning recruitment and training of all resources is done at each site. Also, each site provides equal leadership and corporate headquarters manages each relationship independently. Because all technology work can be equally accomplished by both teams, the work is assigned based on ability, synergy with ongoing or previous work, and resource experience. This model works well for software companies that need to do product development and testing, because it doubles the company's capacity. It is also an effective disaster recovery model.
• Noncore model. This model falls between the Ex-pat and Captive +1 models. In this model a core set of senior IT leadership is located in the captive center to direct both the work of the captive center and the vendor ODC. Proprietary or competitively sensitive tasks are done completely in the captive center, while all other work is done in the offshore ODC. This model works well for companies with a fair amount of steady proprietary applications and products, but a significantly greater amount of standard, nondifferentiated work suitable for outsourcing.
Going forward, these new models could represent between 15% and 20% of the total work that is currently outsourced to offshore vendors. Companies with successful captive centers and strong relationships with offshore vendors will be most successful in using one of these hybrid approaches, while companies with no captive center should consider establishing a small satellite office in locations where their vendors have an ODC.
As captive centers become an increasingly important part of offshore work, sourcing and vendor management professionals must work with the rest of IT to showcase the benefits of a hybrid approach, including bringing IT work back to the captive centers and providing new opportunities for offshore vendors.
Jan Erik Aase is a Principal Analyst at Forrester Research, serving sourcing and vendor management professionals.