Choosing between Captive and Outsourcing

The Shared Services and Outsourcing Network has an interesting article titled "Top Ten Mistakes Made When Offshoring".  It has a number of interesting points but one is the mistake companies make when they are focused much more on the onshore/offshore decision rather than the captive vs. outsourcing decision.  Companies are understandably interested in taking advantage of the labor arbitrage that comes with moving work offshore.  But in their rush to move work, they may make the mistake of choosing the wrong delivery model.

In a captive model, the company essentially goes it alone, building out its office space, hiring staff and managing the center.  At the other extreme, the outsourcing model is handled by another company with the governance (hopefully) retained by the client company.

So what are the challenges around a captive solution?

1.  Unfamiliarity with the market:  Unless a company already has a presence in that market, it can be difficult to navigate the cultural and political environment.  That's why most companies that go the captive route choose a "brownfield" - that is, a shared service site that is usually part of an existing facility.

2.  Turnover of personnel:  Unless a company has an unusually strong brand name (think GE), the churn of personnel could end up being very disruptive.

3.  Lack of management attention: Regardless of the captive vs. outsource decision, company's management must put in place a proper governance function to provide the necessary oversight.  Without the right management attention, many of the benefits in the business case may not come to fruition.

4.  Rising salaries: With a constantly changing world, locations originally chosen for a captive site may not be as competitive as originally thought.  In India, for example, salaries have risen substantially from the time when they were considered a low-cost location.  This can lead to churn in the organization as talent moves from one opportunity to the next (see point #2).

Neither choice - a captive unit vs. a 3rd party outsourcing agreement - is always the right choice; rather, it must be part of a broader strategy in order to choose the right delivery model.