A few years ago, in a conference discussion on the topic of building captive service centers in India, several of us offered the view that a captive center would be "stranded assets" in a few years' time. To be clear, a captive service center is a company-owned offshore operation. The activities are performed offshore, but they are not outsourced to another company.
My rationale seemed sound. Why would a company want to invest in the building of a captive center when there was no obvious pathway for continuous value-creation? Wouldn't a captive service center simply run its course and be left with no place to go?
Wouldn't outsourcing be a better path for gaining the advantages of lower-cost, higher-capacity destinations?
Well, time has passed and while I still believe that the time/cost/effort to create a captive operation today is ill-placed, it is clear that our sentiments of a few years ago were largely wrong. Today, organizations are looking to move fast through either outsourcing or ventures of some flavor that leverage an existing offshore operation. The investment thesis for a greenfield captive center here in 2006 just isn't strong.
As my colleague Chaz Foster points out in a recent article on CFO.com (Back Office for Sale), there's quite a hot market for dispensing with captive service centers today. If an investment had been made back when we were down-playing the logic, a company might very well be in a position to monetize that operation through a transaction here in 2006.
Why is that?
Well, simply said, many of the industry's leading service providers have been slow to make their own investments in India, China, and Eastern Europe. As global service models increase in popularity, the service provider community is eager to accelerate its capabilities. If they acquire a corporation's offshore operations, they get not only a service center from which to service multiple clients, but they also get a new cornerstone client.
And the around-the-world game of musical chairs continues.
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