Does a Hybrid Offshore IT Outsourcing Model Make Sense for Your Company?

Companies have often used a mix of captive offshore centers and outsourcing deals with offshore service providers to meet their global IT and business process needs. In recent years, however, some mature outsourcing customers have embraced hybrid models that, theoretically, deliver the best of both worlds.

With the build-operate-transfer model, customers partner with an offshore outsourcer who builds a service center, runs it for specified number of years, and then transfers ownership to the customer.

The idea is that it’s a less risky entrée into the captive space; the customer pays the provider to do all the heavy lifting from construction and setup to hiring and training, paying an operating fee and eventually a buyout fee for those benefits. MetLife set up such a deal with EXL and now owns the offshore center itself. The model minimizes upfront investment and increases speed to market, says H. Karthik, vice president of sourcing consultancy Everest Group.

[Related: 6 Hot Offshore IT Outsourcing Markets Offer New Options]

Another hybrid option is the “virtual captive.” It is actually owned by the customer who provides overall management and control and anyone visiting the campus would assume from the branding and employee-badging that it was pure-play insourcing. In reality, the service provider is responsible for most day-to-day operations.

One of the first virtual captives was a BPO center set up in 2005 owned by Wachovia and operated by Genpact. The virtual captive, on paper, provides the risk sharing and build-up benefits of the build-operate-transfer model but imparts more control to the customer than the pre-exit build-operate-transfer model.

This model can also help to address certain client regulatory or risk needs. “It gives customers more flexibility and the advantage of just focusing on management while the service provider takes care of ongoing operations,” Karthik says.

Navigating a Hybrid Offshore Outsourcing Model Brings Complexity

While such hybrid models aren’t likely to dominate the next wave of offshoring, says Karthik, mature outsourcing providers are increasingly interested in experimenting with them. And while some companies — such as Wachovia, MetLife, Citi and Dow Chemical — have navigated the hybrid offshore waters successfully, there have been equally unsuccessful attempts in recent years, according to Karthik.

[Related: Switching IT Outsourcing Providers Easier (and Less Costly) Than Ever]

The companies that make it work have a long-term vision and a strategy for reaching their desired end-state, says Karthik. And their service providers shared both.

In fact, there are plenty of things that can go wrong with these hybrid options.

“On paper, they are meant to provide the best of both worlds,” Karthik says. “But it’s much more complicated to pull off a hybrid model. It requires clearer thinking, better alignment, and different incentives. There are lots of challenges.”

With the build-operate-transfer model, for example, there can be little incentive for the provider to invest in the offshore center knowing that they will be transferring it to the customers in a few years. Large, successful vendors may be less willing to devote their A-teams to such entities.

A virtual captive may require more management oversight than some customers anticipate. Both models also require extensive change management, says Karthik. “If you don’t manage that well, these hybrid models can fail.”

A hybrid model may make sense for those companies that seek the benefits of a captive center, but do not have the in-house capabilities to set it up themselves. But Karthik advises companies to make sure it’s the most appropriate decision long term.

“You may be better off with a [captive] or outsourced model,” says Karthik, who estimates that hybrid centers account for 10 percent or less of the outsourcing market. “Tread with caution.”

Those that choose to pursue a hybrid model should get all stakeholders on board first. “This impacts both the business users within the company and the end consumers of the company,” Karthik says. “Think about that impact and align internal stakeholders.”

It’s also important to build a fully loaded business case; a hybrid model is not a hands-off effort. “Do not underestimate the effort of managing this,” says Karthik. “[You also] have to choose the right service provider and create a long-term vision.”

Stephanie Overby is regular contributor to CIO.com’s IT Outsourcing section. Follow everything from CIO.com on Twitter @CIOonline, Facebook, Google + and LinkedIn.