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Jun 26, 2008

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Nice to see these comments.

I am advocate of captive centers. The problems/negatives highligted for captives arise mainly due to
1. Failing to elect a good leadership. Most parent organisations keep searching for domain skills, team size handled,similar past backgrounds etc.I know when you keep leadership and management skills on top of domain skills, when you look for maturity and sincerity, a jeal to take challanges - you elect a leader.

2. Poor offshore-onsite management by leaders.

3. Failure to recognise that relationship management is as important in a Captive as it is in a Outsourced model.

For those who still feel captives are not good enough or they are looking to test the water or looking for a smal team size, a hybrid model of Managed Offshore model is a good choice, where you can leave all the worries except getting the services quality sucessfully to a providers.

There are providers like us who are capaable and willing to provide specialised service to establish a Captive and also provide a Managed Offshore setup. One can visit us at http://www.excelict.com

Sudhir

Graham, nice comparison of the 2 models! Here's my stance on it.

Based on how things have changed and are continuously changing in this arena more and more companies will require the best of both the models.

Captives have some definite advantages such as control, speed of change management and less inter-organizational SLA barriers to cross. However the downsides are the lack of entrepreneurial ownership, innovation and MUST-WIN attitude in the remote company.

In case of an outsourcing provider, with the company ownership residing fully or majorly with the person running the show remotely, you get the MUST-WIN attitude which can offset the impedance caused by cultural conflicts and localized issues - this is where the outsourcing model looks much better.

There are many advantages/disadvantages of each of the 2 models, but I’ll highlight just a few key ones for the sake of comparison:

Captive Advantages
1. Stronger Control
2. Faster change management since it has no impact on SLAs and commercials
3. One-sided agenda driving the operation

Captive Disadvantages
1. Less Motivation/Incentive for the person running the captive operation
2. Less Innovation due to lack of Entreprenuerial Attitude
3. Higher Attrition - Person heading the captive center at the end of the day is an employee (who can easily switch) as a result causing lower sense of ownership and higher attrition throughout the operation.

Outsourcing Provider Advantages
1. High Incentive to go out-of-the-way to make things Happen
2. High Innovation and Service Improvement (with atleast no direct/upfront cost to the customer)
3. Less Attrition

Outsourcing Provider Disadvantages
1. Less Control and more barriers to cross for change management (SLA revisions and commercial negotiations)
2. Two-sided (possibly conflicting) agendas driving the services and operations (Outsourcing provider may have an agenda in conflict with that of the customer e.g. more hours being put in on a task/process would mean more money earned by the outsourcing provider BUT less productivity and higher cost for the customer)


However, as I mentioned earlier, competition and other disruptive pressures will drive customers to ask for best from the both the worlds!

What’s the Solution? Agile Outsourcing!
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In my opinion the business models around this arena are poised to change fast as we move in to the next decade. We’re more and more in need for hybrid business models which take out best from both the ‘Captive’ and current ‘Outsourcing’ models. We term this new breed of business models as ‘Agile Outsourcing’

A key component to enable ‘Agile Outsourcing’ is a team-structure which we call ‘Power Teams’ (for the sake of understanding you can call them ‘captive teams’ but we don’t like using the word ‘captive’ as it gives a connotation of reactive, restrictive and enslaved resources ,which in turn can limit innovation and energy required for success).

So an agile outsourcing model is where the customer works with the outsourcing provider on dedicated resource models outlining a very basic high-level SLA which is subject to change without change in the cost-structure or cash-flows. Wherever the changes do not impact the cost-structures, why fight on agreeing the SLA and commercials. The trust, partnership and long-term commitment to each other’s business success is what fuels and drives such a model.

Best of both the worlds!
This gets closest of getting the benefits of both the worlds. With a dedicated team and a reasonable contract duration, 1 year plus you can negotiate a good monthly rate per resource. This relieves you from worrying about the over-head costs and local administrative issues of the outsourcing provider… and at the same time have stronger control and flexibility in how you would like to use the resources on multiple projects or processes.

Allows for Agile and Change-friendly Delivery Models
Further, it allows you to utilize the more dynamic delivery models such as Agile to smooth out the frictions which are caused due to change management during the delivery. Outsourcing provider likes this model even at a lower price per resource, as it provides them firmer cash-flow projections… which in turn keeps them motivated to provide more flexibility to the customer.

Win-Win for Both!
It’s almost always a win-win for the outsourcing provider and the customer… Ephlux has experienced working in almost all the 3 models (Fixed Price, Dedicated Resources, T&M)… and we’ve found this Agile Outsourcing model to be the best in terms of a good win-win balance between both the parties.

Finally, such Agile Outsourcing models in turn enable the much-sought after IT/BPO bundled service models which further add to the competitiveness and agility of the customer.

Nice summary of history and key criteria!

One other key driver of outsourcing vs. captive is flexibility of a different kind than discussed here: the ability to quickly ramp up/ramp down. It typically takes an outsourcing vendor 3 - 6 months to get a team fully staffed and functioning smoothly. Starting a captive center and getting to the same level of productivity can easily take 12 - 24 months. It may also be very difficult to shut down a captive, since many countries regulate both new business licensing and business closures.

Thanks for featuring this article. Graham Russell hits the nail on the head with this issue. I am surprised that many companies persist with investing in their captives these days, despite the fact they are struggling to manage them with the cost-effectiveness of most service providers.

Most firms are struggling to retain good managers and junior staff within their captives, especially most service providers offering more attractive career opportunities. Many of the arguments that support maintaining captives for reasons of flexibility and security, simply do not hold up these days when you look at the willingness and flexibility of many service providers to provide a "captive experience" without many of the headaches of doing it yourself.

Stephen.

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