“A key challenge for captives continues to be scale,” says Borowski. “For smaller captive operations, it becomes difficult to operate as cost effectively as an outsourcer.”
Fixed and overhead costs are inherently greater when you’re doing it yourself, driving up the cost per resource. It’s also more challenging to scale services up and down. While it’s not unusual for an IT service provider to tweak its employee base and operating structure, including layoffs when necessary, that’s much harder for an enterprise to do, notes Martorelli.
Captives can also face retention challenges, particularly if they don’t provide opportunities for advancement, says Borowski, as they risk losing employees to other captives or IT service providers who offer more upward mobility.
Productivity can also decline over time, particularly for organizations used to working with third parties. “Whereas outsourcing providers often have contractually committed productivity improvements forcing them to continuously improve processes, productivity, and cost efficiency to achieve profitability targets, there’s no similar burning platform for captives,” says Borowski. “Captives can become stagnant with marginal improvements over time.”
7 questions to consider before going captive
Certain situations aren’t conducive to establishing a captive center. For example, if your enterprise faces financial or operational challenges, lacks funding to sustain operations, or has legal or regulatory constraints that preclude offshoring. Moreover, captives are not advisable for temporary services or ones that experience significant variability in demand.
However, a captive center can make sense if the organization is clear about its intentions and aware of the risks and work involved. “When captives experience challenges, it’s typically some combination of a flawed service delivery strategy, poor planning and design, or poor execution,” says Borowski. “This should be a thoughtful, strategic decision that enables an organization’s long-term business direction and objectives.”
The following questions can help you assess whether a captive center is right for your organization:
What are the key business outcomes we’re seeking? Like any IT decision, the primary focus should be on the problem to be solved, not the potential solution under consideration. “The services model, location model, talent model, governance model, performance model, all need to [be] anchored [in] the core objectives,” says Agarwal.
What’s the business case and is it viable? Lay out realistic costs and benefits for both the build (captive) and buy (outsourced) options to determine which approach is most likely to help achieve your desired objectives. The IT organization should also confirm that the business case is achievable for their specific organization, Borowski says. Here, common mistakes include overly aggressive cost savings targets; lack of investment in captive center leadership; moving work offshore too quickly; insufficient investment in knowledge management, learning, and development of captive staff; and a myopic focus on SLAs as metrics of success. “This is a strategic capability for the company if built right, and companies need to approach it accordingly,” says Agarwal.
Can we operate a center that will deliver on our business case? The benefits of captive center ownership hinge on how well you can manage the center’s talent and costs over time. More nuanced questions Martorelli suggests asking include: What makes the enterprise more capable of attracting and retaining talent than potential outsourcing partners? How will the captive center remain competitive with third-party alternatives? What are realistic expectations for managing costs over time?
Are our leaders committed to the strategy? “No model is failproof,” says Agarwal. “You have to commit to it and make it work.” Here, buy-in is vital, especially when challenges arise. “The very factors that propel [captive centers] forward — desire for cost savings and access to talent — can sow the seeds of their eventual decline if expectations are not met or sustained,” says Martorelli, adding that captive center momentum can quickly sag as a result of executive turnover or loss of interest.
What location makes the most sense? Research locations with an eye toward whether it possesses the labor and infrastructure necessary to support the scope of the center and any future growth.
Who will help us set up the center? “Engaging specialists and local resources to support activities such as site selection, recruiting, permitting, and facility buildout helps to navigate pitfalls and accelerates implementation,” says Borowski. Those considering the BOT approach should educate themselves on its pros and cons. “Customers should be realistic about the service provider’s real interests,” says Martorelli. “Don’t expect the service provider to be anxious to simply transfer all of their best people to you.”
How will this affect the rest of the IT organization? Onshore talent could be displaced as a result of the captive center. At the very least, roles will change, and oversight of the captive facility will be needed. “IT leaders cannot forget to consider the impact — real or perceived — on the resources directly or indirectly affected by the offshoring action,” Borowski says. “Developing a retention strategy is key so that resources displaced by the offshoring have an incentive to stay through transition and stabilization.”
Overall, as the trend continues, with companies expanding existing captive strategies, new adopters entering the market, and more companies moving outsourced work to captive operations, the IT leaders most likely to succeed with the model will be those who have experience in driving results from remote operations and take an intentional and selective approach to determining which business outcomes can be achieved via the captive center model.
