Captives or Outsourcing: What’s the right offshoring business model?
Nowadays it’s rare to find a global company that is not running at least part of its core operations from another country. Indeed offshoring is one of the most common ways to optimizing a operations, mainly due to these main reasons:
- Reduces cost mainly through labor arbitrage.
- Brings an opportunity for organization design and find synergies through economies of scale.
- Offers an opportunity to harmonize processes and develop automation and deal with complex technological changes.
- Helps building core competencies and new capabilities, through deeper specialization, easier technology implementations and around where the best talent pool is.
- Fosters a multicultural culture of doing business, so important on a globalized economy.
I am sure there are many more reasons and certainly off-shoring brings a number of challenges too, but I am not going to cover them. The purpose of this blog is to help understand off-shoring as a value driver for your business and to find the right off-shoring business model: captives or outsourcing.
In order to make a better decisions is good to learn from the past so let’s get a closer look at what happened in India, the World’s largest service provider for off-shoring capabilities.
Learning from History – the evolution of captives market in India
The origins of GIC’s date back to the mid 80’s with the first establishments from multinational giants such as American Express, British Airways and General Electric: Since then the market has expanded at double digit growth to become a $23 Bn industry nowadays (see table 1)
Table 1: GIC’s Market Indicators
Until the early years of the XXI century, large corporations were looking for captive establishments in India that would deliver cost arbitrage opportunities aided by a huge talent pool. Between 2005 & 2010 the drivers for captive creation shifted, mainly driven by Globalization, the increased economies of scale and the specialization of the workforce which led to enhanced operational efficiency, value add and innovation.
This journey of growth didn’t come without obstacles: poor infrastructure, cultural differences, attrition, rigid SLA’s and low productivity have been typical challenges but also the 2008’s credit crunch and economy meltdown brought the first divestments and reversed trends toward cost arbitrage and globalization opened new markets.
The reality now is somewhat a bit different. GIC’s entities have experienced steady increase in numbers and significant growth in size and revenue.
So GIC’s is not a deceasing business in India, however enterprises are looking at off-shoring options in a total different way as they did some 20 years ago. Some companies choose to diversify operations in two or more locations (multi-shoring) to reduce risks and some others are considering outsourcing as a more attractive option now that vendors have the scale, expertise to do the job and at a lower cost than GIC’s.
So what is the learning in here? Firstly, that the primary business driver now should be value creation as opposed cost arbitrage. Secondly and looking ahead, corporations looking at offshoring options will have to choose a partner that truly understands how global megatrends are reshaping entire industries, and how new digital technologies optimize offshore operations.
IBM Bangalore – IBM provides off-shoring services both captive set-up or outsourcing.
Assessing offshoring models: outsourcing vs captive
For finding out how offshoring can bring value, you need to assess the options against a solid set of criteria and I’ve used as a base the great framework developed by the Shared Services & Outsourcing Network (SSON) to cover the most important aspects when deciding and comparing both options. See table 2.
Table 2 – Outsourcing vs Captive
Both off-shoring models have built strong advantages as you can see on table 3 and so, sometimes the parent company may use both models, to fit the requirements of the different business areas that are to be off-shored.
Table 3 – advantages of both models
Offshoring Strategy – IBM’s PoV
Bain & Company / NASSCOM Report: Global In-House Centers in India report
Forbes – Top ten countries for off-shoring
SSON – Offshoring Support Services: Outsourced or Captive?