Captive centres – company-owned offshore subsidiaries – allow ownership and operational control while leveraging economies of low-cost locations. A properly established, well-maintained captive centre is a strategic asset to its owner. Gary Mason, head of systems development at Allianz Inc, says of the company’s captive centre in India: “Our centre has proven to be a solid partner for our UK operations, delivering talent, innovation and a positive business case.”

Rakesh Gupta, chief operating officer at Allianz Cornhill Information Services in Trivandrum, India, attributes the success of the centre to “a strong local management team at all levels, close integration to business units that transfer work to the captive centre and a strong sense of corporate culture and belonging for the captive centre employees”.

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However, if not managed well these strategic assets can turn into competitive disadvantages. One of the premises of a captive centre is to attain economies of scale by bringing work from different business units under one roof. If this is not achieved, the centres will have high cost structures. The establishment of a captive centre requires significant upfront fixed cost and if this is not recovered through projects, the centre will become uncompetitive and economically unviable.

Daunting demands

Captive centres face daunting human resource challenges in offshore markets, where demand of quality resources far outstrips supply. Captive centres are competing for talent with third-party suppliers, which offer a defined career path and good onsite opportunities. Captives try to offset this with higher compensation packages, but many face high attrition.

Captive centres can lack the ability to add resources in cases of spikes in demand, in comparison with third-party outsourcers. The reasons can be lack of human resources processes, hiring policy and scarcity of talent. Captive centres maintain a much smaller pool of resources compared to third-party outsourcers who can use their resources over much larger sets of clients. This adds to their perceived inflexibility in responding to business needs and results in lack of buy-in from business units.

Location decisions are crucial and often irreversible. Some of the location decisions of captive centres are based on the personal choice of key expatriate employees, which may not be the right choice for the company in the long term. It may be difficult to find the right talent and the cost of operations may be high.

Critical control

Transition planning and management is critical for the success of a captive centre. Unless there is proper knowledge transfer, and a process or function is effectively transitioned, it is unrealistic to expect the captive centre to perform well. This may require lengthening the stay of people from the original team who have the necessary knowledge. Different management styles adopted by the parent company’s transition team and the local transition management team can be detrimental to the success.

There is clear talk of aligning business with IT to achieve desirable performance. When IT is located in a captive centre offshore, alignment becomes difficult. The lack of inclusion of captive IT centres in the overall business strategy development can turn them into a competitive disadvantage. When there is minimal integration and alignment with the parent company’s operational philosophy or culture, the offshore captive centres are not able to deliver high quality IT work.

Processes or functions should be qualified on measurable attributes, and risks should be clearly identified. Progressive companies perform comprehensive IT and business process assessments to determine what can be sent offshore to captive centres and what is not possible. If a wrong choice is made, no matter how good the management is and how well the task is performed, it will fail to meet expectations.

Regulatory change

Legal and regulatory changes, both in countries where the business is situated and where the captive centre is located, can threaten success. As offshoring goes mainstream there will be more regulatory pressure, especially on captive centres, to comply with strict regulations. Tax and business laws in the captive centre country, such as taxation, restrictions on hiring and firing and working hours regulation, can make captive centres difficult to manage, making them economically unviable.

In the case of a captive centre, apart from new operating models, part of the company will be located offshore in a different time zone. This will require new processes and ways of conducting business. To ensure that work is delivered efficiently, re-engineering and transforming old workflows is needed. Hand-off points must be identified and proper service levels and performance parameters designed.

Planning and re-engineering is not enough unless it is implemented well. The biggest hurdle in implementation is change management. When people are used to working in a certain way and dealing informally with their units, dealing formally in a far-off centre will not be easy. Also, uncertainty and fear of job loss can aggravate this problem. This will require professional change management support to handle this and ensure smooth implementation.

Captive centres will require effective governance as the organisation will be challenged with staffing, new working styles and formal/informal information systems. Management must develop policies and practices to incorporate a more flexible approach to labour allocation. Management structures must also support relationships with offshore operations and assure that objectives, contracts, delivery models and measurement are aligned. Programme and process management should address the advantages and challenges when part or all of a project moves offshore, and managers must develop and disseminate best practices for achieving success, cost savings and quality assurance.

Getting technical

Captive centres are either directly involved in technology development and maintenance activity or involved in business processes whose backbone is technology. Captive centres not able to keep pace with rapidly changing technology will create a competitive disadvantage among their peers.

Services that are consolidated and centralised offshore become commoditised over time. When competitors are able to offer similar services to the captive centre at lower prices, the captive centre is at risk.

Establishing a captive centre is more than a cost optimisation exercise. It is an extension of the organisation and will require the appropriate levels of support. It is vital to fully understand which model is appropriate for the business: captive, offshore dedicated centre, build-operate-transfer or joint venture. As market conditions and demands change, re-evaluation of strategy and performance is important for survival. Health checks/diagnostics, process re-engineering, human resource management, strategic revaluation and programme management can keep captives thriving. Predictive and innovative approaches will help minimise challenges that may divert senior management attention.

With the best intentions, not all endeavours are successful. Knowing when to exit from a captive centre and acting on this information can help to save any remaining assets.

Pareekh Jain is a director of the Trestle Group and Ralph Schonenbach is the CEO.

PRACTICAL TIPS

Exiting from Captive Centres

If a captive centre does not become a strategic asset, it is time to consider exiting. Some options include:

  • Shut-off of the captive operations – lay off employees and transition work back to other centres or units as the case may be.
  • Complete sell-off to third-party service providers or a group of investors. The new management can continue to provide services to the parent organisation. The contract terms, etc, need to be decided.
  • Hive-off of departments which are commodity businesses to third-party suppliers, while retaining other strategically important work in the captive centres. Third-party suppliers can continue to provide services to the parent organisation. The contract terms must be decided.

As with closing a business, an exit is not easy. Apart from deciding the options, planning is required for:

  • Employees: What are appropriate severance packages? Does the organisation want to retain outstanding employees who can be relocated to other centres?

 

  • Work: What will happen to the work being performed by the captive? Will it be transitioned to another centre or to a third party?

 

  • Stakeholders: What will be the impact on the different stakeholders? What will be the communication to them?

 

  • Legal liabilities: What are the legal and tax liabilities in the country where the captive has operations?

 

  • Assets: How will the company dispose of land, buildings, software, hardware and other assets in order to ensure their salvage value?

 

  • Processes: How will workflows be adjusted based on the exit strategy?