Offshoring: Exploring the Captive Center Model

As problems with long-term offshore contracts, such as growing turnover and diminishing quality, become more pronounced, captive offshore operations—in which a company opens its own offshore subsidiary—are gaining favor. The captive model gives a company complete control over offshore operations and, by eliminating the middleman, can boost savings. In fact, Deloitte Touche Tohmatsu found that among financial services companies, captive operations appeared to be more capable than offshore contracts of improving savings and quality over time

Some companies may choose to go the captive route from the get-go, but more often than not it’s a model they develop after working with an offshore vendor for a few years. Some offshore vendors even offer a “build-operate-transfer” model that allows a company to purchase the offshore center from the vendor after a specified period of time.

But the captive model isn’t right for everyone. If your offshoring needs are small, it wouldn’t make much financial sense to set up an offshore subsidiary. Similarly, if you want to outsource a particular technology that an offshore vendor has spent years building a practice around, you might get better performance from the vendor than you would from your own captive operation. But if you’re going to have 2,000 workers offshore or have specialized needs, a captive center is often a better option.

Some companies, like Lehman Brothers, end up splitting the difference with a hybrid model, setting up their own offshore subsidiary and supplementing that with offshore vendor relationships. Last February, Lehman CIO Jonathan Beyman set up a captive center in Mumbai, India, that is focused on very high-level work such as developing and maintaining Lehman’s proprietary software. It’s the kind of work Beyman isn’t comfortable handing off to a third party, particularly when turnover is such an issue. “Hopefully we’ve set up an organization where that’s not as much of a problem,” Beyman says. And in the captive center, “IT and industrial engineers can get together and figure out how to redesign business processes and solve things that are not purely technical problems, but social problems.”

The captive center currently employs 300 people and is scheduled to grow to 600 by the end of the year. But Lehman continues to maintain outsourcing relationships with Indian vendors Tata Consultancy Services and Wipro, which have a total of 400 workers attached to lower-end projects, such as QA testing and infrastructure support, for the financial services firm.