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

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.

Fortunately for buyers, venerable players like Motorola and Texas Instruments have already blazed a trail of partnership models, so you can take a lesson from the early movers without 20 years of trial and error. For example, if you already have an offshore captive and want to improve performance, consider carving out some kind of partnership with a local service provider. If you’re thinking about starting a captive center, consider launching a virtual captive out of the gate.

Here are some of the options:

• External partnership. Service providers have the local resources and expertise to deliver non-core activities and, if necessary, they can modularize business processes and distribute them to global locations. These competencies can help captives develop intellectual property—in the form of processes, technologies, products and disaster recovery systems—often more effectively than they could do independently. A Boeing R&D captive in Russia, for example, leveraged more than 40 third-party partnerships to design parts of the 787 Dreamliner while maintaining control of—and even enhancing—its own IP. And now Boeing reportedly is evaluating a new captive in India, which may involve business process outsourcing, knowledge process outsourcing, manufacturing and engineering in support of its defense-aviation business. Also in India, Microsoft and Cisco are using outsourcing partnerships to augment their captives. Some pharmaceutical companies, meanwhile, are leveraging Indian service providers for much of the IT systems and R&D activities involved in clinical trials.
• Hybrid partnership. Rather than leveraging a service provider’s external services, you can do what multinationals like Deutsche Bank, Verizon, Alcoa, Aviva and Standard Chartered Bank have done with their captives: bring third parties directly into the center to provide IT infrastructure, HR services or back-office process management. With such a hybrid model, you enhance your center’s productivity by capitalizing on a service provider’s expertise, and you retain ownership and control. Hybrid partnerships enable buyers to focus specifically on services that must remain in-house, while handing off non-core activities that can be delivered by tactical staff augmentation or full-scope outsourcing within the center.
• Virtual captive. In this model, which is a more expansive version of the hybrid, a third party provides nearly all of a captive center’s operations. In other words, it appears to be your organization—typically with your name, your processes and many of your people—but with a service provider’s infrastructure and certain skill sets. Especially in India, this model is rising in popularity, with some speculation that virtual captives will become the country’s new standard. General Electric, Nissan, Wachovia and others—after decades of experimenting with different models—now have virtual captives, concluding that it makes more sense to partner with a service provider to establish offshore delivery than to build it internally. So while the initial costs of a virtual captive may exceed those of a traditional outsourcing agreement, a virtual captive is significantly less costly than a wholly owned captive center, and it provides many of the same benefits.

Picking the Right Captive Model

So what’s the right route for your captive (or captive-to-be)? The first step is to assess the performance of your center, namely by comparing it with that of service providers in the market. This process is currently under way for several multinationals, who are reevaluating their captives and redesigning their global delivery models. Strive for a realistic, quantitative comparison on factors like utilization, employee turnover and cost of labor, and certifications such as Six Sigma and CMMI. Also consider end-user metrics: How does the customer satisfaction of your captive compare with that of service providers? If necessary, as part of your due diligence, bring in an outside advisor to get the data you need.

No matter which partnership model you choose, it’s important to realign the parent company around your offshore strategy and develop strong governance processes for managing third parties, lest you end up with numerous partnerships that lack a unified goal. Too often, the misalignment of sourcing strategies hampers captives from the start, making them mere dumping grounds for non-essential work.

Captive centers—in India and elsewhere—are not going away. Rather, they’re leveraging offshore resources to form a bridge between shared services and outsourcing, getting the best of both worlds by strategically balancing control and flexibility. EquaTerra estimates that some captives in India can realize an additional 20 percent in savings—namely by partnering with mature service providers to augment staff, redeploy resources, automate processes and improve overall service quality.

Even more, the outlook for captives may be helped by the U.S. credit crisis, as a slowdown in the mortgage industry may require some loan-processing service providers in India to reduce staff and/or cut back on hiring. EquaTerra believes that over time, the credit crunch will generate a flow of staff back into the Indian marketplace, possibly easing the labor challenges for India’s captive centers.

But when it comes down to it, managing the performance of captive centers is about delivery, not location. About 80 percent of western captives may be in India, but captives in other markets such as Russia and China are facing similar delivery challenges—many of which result from competition with a mature community of global service providers. Instead of competing with that service-provider maturity, buyers can leverage it—in the form of a partnership—to improve the performance of their captives.

Cliff Justice is Managing Director, Globalization, and Stan Lepeak is Managing Director, Research, for EquaTerra, an outsourcing advisor.