Which is a more viable option – captive
providers or third party vendors? This has been a question
plaguing the outsourcing industry since the BPO (Business
Process Outsourcing) boom in the 90s. For many global players,
offshoring is not so much the issue as the choice between
opting to set up a captive unit or outsourcing to a third
party service provider.
Background
Realizing the potential of countries like India in terms
of cost saving and brain power, many Fortune 500 companies
opted to outsource none-core processes in the 80s. GE and
British Airways led the path for captive services by setting
up wholly owned subsidiaries in India. Local players also
realized the scope of this budding industry and offered
services, with the backing of established players or venture
capitalists. The BPO industry soon realized the advantages
of outsourcing to third party service providers (TPSP) instead
of investing in captive units in terms of responsibility
and cost savings.
Why captives at all?
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Compulsion to
keep absolute control over processes |
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Fear of intellectual
property being compromised |
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Inclination to
keep critical activities within the organization |
In terms of cost, captives stand 30 percent higher than
third party players. So what is it that prompts companies
to invest in captive offshoring arms? What makes them a
strategic choice still is that most captives follow the
practices set by the parent company, which means better
operational excellence." So better customer satisfaction
can often be guaranteed. However, there is always the danger
of diminished accountability among captives since there
are no "clients" as such to keep tabs on operations. In
fact, third party service providers can outperform captives
since they need to keep a reality check all the time to
attract more customers. According to the Everest Research
report, for captives to deliver strategic value to their
parent companies the BPOs "must operate differently and
integrate better with their parent companies, create alignment
on the definition of value between parent and captive stakeholders,
help cultural change within their global organizations to
facilitate the evolution of the captive beyond an arbitrage
player; and design and implement governance mechanisms to
integrate better."
Current Business Process Outsourcing scenario
The debate on the offshoring operational model can be viewed
in perspective by basing it on the Indian scenario. Analyst
firm Forrester Research maintains that more than 60% of
current captive BPOs are not in a healthy shape and that
by 2009, more and more companies will shelve their captive
business in favor of third party players, especially in
the fields of customer support and product development.
Indigenous companies like TCS, Firstsource and Infosys are
taking over the captive businesses of their clients both
in India and abroad. In the majority of cases, setting up
of captives is driven by personal reasons such as an expatriate
employee's urge to go back to India for family reasons.
As a result of the lack of management support, spiraling
costs, skyrocketing attrition, and a lack of integration,
more than 60% of the captive centres in India alone are
struggling."
On the other hand, according to the Everest Research Institute,
in spite of market perceptions to the contrary, the captives
in India are all set to grow at a rapid pace. The Indian
captives market amounts to around US $9 billion, employs
about 200,000 full-time employees and accounts for 30% of
the Indian offshore services market. In fact, current captive
players like Dell International Services are expected to
expand their headcount, with the company affirming that
it has no plans to wrap up its captive services. The Fortune
2000 companies continue to initiate new operations, with
over 50 operations added in the last three years and existing
captive operations intending to double their capacities
in the next two years. Captive revenues have increased from
$5.2 billion in 2004 to $6.9 billion in 2005 and to $9 billion
in 2006, according to estimates by the Everest Research
Group. It is also interesting that while many captive units
have surrendered to third-party outsourcers or sold their
facilities to third parties.
Each unto its own!
All said and done, what India is witnessing is a dynamic
coexistence of both models depending on individual business
process needs. The trend is moving towards a hybrid model,
where customers may look at going for both captive and third
party players addressing separate business needs. Financial
entities like banks opt for captive facilities, while many
IT companies that began as captives have moved on to become
third party players. There are also companies that use third
party vendors to initiate Business Process Outsourcing services
and then recall operations once business stabilizes.
Whichever way the outsourcing industry is headed, it cannot
be refuted that augmented services and unquestionable quality
will have the final say. As the Nasscom/McKinsey report
points out, companies will need to fortify their best practices
and promote operational excellence to remain competitive.
It is time that the BPOs looked at improving and standardising
their processes and practices to remain in business. It
applies to both captives and non captives."
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