By Brian Smith, Partner & Managing Director, FSO Services North America, TPI
Global organizations typically offshore a broad range of business processes. To optimize their resources, early adopters, particularly those in the financial services industry (Citibank and Standard Chartered Bank, as examples), established their own wholly owned and operated offshore business units, called "captive centers". In light of recent events in India (Satyam, Mumbai attacks) and the changes in economic priorities in their home markets, global companies have begun to rethink their sourcing strategy and review the mix of outsourced and captive solutions, and the onshore/offshore mix. Like Nick Heath's article, Banks: Offshoring, Not Outsourcing (BusinessWeek Online) explains, Satyam and regulatory scrutiny has made many institutions wary of the risks associated with trusting third parties with information.
While it may seem like a good idea to revert to relying on captives, there are various other structures that can mitigate risk without the capital expense. Since many captives often do not attain critical mass, they eventually lack the efficiency that parent entities want and become a liability instead of an asset. Captive units that do not reach critical scale are often 30 to 50 percent more expensive than the median third parties after a company either invests in revitalizing the captive and later sells the business to a third party after the captive atrophies beyond repair. A minority of captives or "best-in-class" captives, however, can attain cost performance gains better than those of the third-party service providers.
Alternatively, parent companies are increasingly evolving toward a balanced hybrid captive model, retaining strategic core employees while the commodity work is spun off to third parties. A hybrid captive model offers the following benefits:
- Leverages the captive's premises improving its efficiency ratio
- Makes better use of fixed overhead
- Can be perceived as reducing risk
- Lowers the cost of third-party resources, since the service provider does not need to provide infrastructure, secured space, and other resources that the captive possesses.
The hybrid captive concept has emerged as a means of structuring a relationship that gives the buyer of services a significant degree of transparency and management oversight over operations carried out offshore by a service provider.
Increasingly, as firms move to second-generation offshoring, it is necessary to look beyond labor arbitrage as a means to increase capability and variable capacity that helps achieve previously unattainable value. Evaluating your organization's strengths and analyzing which approaches can help optimize your offshoring strategy can unlock value not previously seen in previous or current labor arbitrage experiences.
