The rise of captive centers: Is it the death knell for outsourcing?

I’m sure it has not gone unnoticed by those who keep a close eye on the industry: Several large companies have announced they will set up or expand captive centers in countries like India to take on new work or, in some cases, existing work from their outsourcing partners. The companies are from a range of industries, including financial services, retail and oil, and gas.

Captive centers have long been considered a superior choice when the nature of certain work is proprietary, too complex to hand off to a third party, or requires a higher degree of control. It often means a company is weighing value over cost efficiency for a particular project or line of work.

So, does the recent move toward captive centers mean companies would rather manage the work themselves from remote locations than deal with commercial sourcing partners? Is insourcing is a new trend?

The history of offshoring

The offshoring industry first came into existence in the late 1990s when several large companies took steps to set up captive delivery centers (also referred to as global in-house centers) in Gurgaon and Bangalore. These were controlled experiments to explore “the art of the possible” before these enterprises scaled the facilities up to maximum potential. And, in so doing, they proved to themselves—and to the rest of the world—that globalizing services made the same kind of sense as the globalization of manufacturing had.

Before long, outsourcing entered its second stage as companies went in search of a reliable third-party provider ecosystem that could relieve them of management duties while delivering improved performance and productivity at a lower cost. This led to the breathtaking growth of the global services industry. The success of third-party global providers compelled the long-standing non-Indian providers to set up shop in India and the Philippines.

Meanwhile, captive centers also continued to grow in count and scale. It was clear the offshoring industry could support both captive and third-party sourcing strategies.

Finding a balance between in-house capabilities and outsourcing

Today, we are witnessing the third stage of the outsourcing industry in which companies are trying to strike the right balance between their in-house capabilities and their outsourcing contracts. Many companies have veered too far in one direction or the other—either outsourcing too many functions or trying to manage too much work via their own captive centers—and have suffered from a detrimental mix of cost, risk, value and control.

The trouble is that today the right balance is not an easy or static solution. What used to be an equation primarily based on labor arbitrage now has so many more variables at play, including cloud computing, automation and big data analytics. What might be an appropriate mix of outsourcing partnerships and captive centers this year may not provide the best outcomes in three years’ time. Industries, technologies and service offerings are changing rapidly, and no one approach will satisfy all enterprises.

All in all, these changes are positive for the industry. Service providers still have plenty of room to grow, and outsourcing buyers’ options will continue to expand. Of course, the onus will be on providers to innovate and solve complex industry problems to keep shifting the balance of their clients’ work in their favor. The more they focus on leveraging emerging technologies to solve business problems, the better positioned they will be to compete against captives.