The Evolution of the Offshore Captive Center
At one time, setting up an offshore IT services center made perfect sense. When Indian outsourcing providers' capabilities were immature, explains Rutchik, some Fortune 500 companies feared fledgling outsourcers couldn't support their requirements. Instead, they set up their own subsidiaries to provide IT services or back office support in India.
For others, like Aviva, which sold its offshore shop to WNS Global Services last year, the captive center was the ultimate end state of offshoring. They began by outsourcing to a third party in India to take advantage of the Indian provider's infrastructure and human resources. But in what became known as the build-operate-transfer model, the ultimate goal was to take ownership of the offshore operation to reap the cost-savings associated with eliminating the vendor middle man.
Now the build-operate-transfer process is taking place in reverse as companies resell these operations back to IT services providers.
In the last decade, the capabilities of Indian outsourcing providers' have greatly improved, says Rutchik, and running a captive center no longer seems worth the effort.
"It takes lot of overhead and management attention to manage internal facilities and personnel and deal with the labor laws in another country," says Rutchik. "You're exposing yourself to a lot of administrative burden just to do back-office type work in lower cost locations."
Western companies that set up shop in India have also struggled to hire the best and brightest; many Indian professionals prefer to work for IT vendors that can offer a greater variety of work experiences and more opportunities for career advancement.
Another reason American companies setup up captive centers-to gain greater control over resources-has proven to be a double-edge sword.
"If you owned your own facility, you could absorb incremental increases in demand more effectively," explains Rutchik. "You had a couple hundred people working for you in India and [if] suddenly you had 20 percent more work, you could have them absorb that. If you were working with an outsourcing provider, you would have to pay 20 percent more."
But that benefit has become a burden as demand has diminished. If you have 20 percent less work today and have a well-constructed contract with an offshore provider, your costs will go down. But "when you have your own people, you either have to pay for that excess capacity or terminate people and deal with all kinds of difficult issues having to do with layoffs," explains Rutchik. Ditto for investments in other fixed costs such as IT infrastructure and office space.
Operating a large subsidiary in India can also tie up capital a company wants to use to forge new outsourcing deals in other countries. "Large companies are realizing that there is no 'best' country to get your resources from," says Feuless of Compass. "Increasingly they are looking to the major outsourcers to provide best of breed sourcing on a global basis."
Indeed, most companies that have inked deals to sell their captive centers have simultaneously contracted with the buyers to provide IT and business process services back to them. Citi, for example, now has a nine-and-a-half year, $2.5 billion contract with TCS and a six-year, $500 million deal with Wipro.
There are some instances in which offshore captive center ownership still makes sense. If a company wants to offshore a customer-facing or highly sensitive activity, or it already operates in the local market providing other services, owning a services subsidiary may still provide a return on investment. But for typical business process and IT services, says Rutchik, "with all the choices and capabilities there are today, there's no reason to do it."
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