The Offshore Captive Conundrum
Seeing the fantastic margins that Indian software vendor make (upward of 20%), many buyers have wondered if they are paying too much for software services from India. Over the last five years, many companies have attempted to setup their own, captive software centers in India, thus bypassing the margins they have to pay to the vendors.
While this approach has some easy to see benefits, the reality has been rather disappointing. A 2007 research by Forrester had this to say about captive centers:
The trend of establishing a firm’s own facility — known as a “captive center” — in locations like India, China, or Russia continues to find converts. During the past two years, more than 300 North American and European companies started their own offshore setup to lower the costs of product development or back-office operations. However, the majority of the reasons firms cite for building their own facility versus outsourcing to a third party are flawed. Our research shows that in the majority of cases, it is driven by personal reasons such as an expatriate employee’s urge to go back to India for family reasons. As a result of the lack of management support, spiraling costs, skyrocketing attrition, and a lack of integration, more than 60% of the captive centers in India alone are struggling.
- Shattering the Offshore Captive Center Myth, Sudin Apte, Forrester Research
A year later, the situation seems to have significantly worsened:
Debate still rages regarding the success of offshore captive centers. But many firms that previously believed in the captive approach changed sides in the debate — having a change of heart and scouting for third-party providers and even selling off their captive centers. Several blame a changing offshore reality for the debacle while others claim it was the outcome of changing business and innovation requirements. Yet these changes of heart are not random. In fact, scrutiny exposes a four-stage life cycle through which most captive centers evolve. Firms with captive centers need to find a way to expedite their evolution through the four stages to successfully leverage offshore for their business needs.
- Understanding the Captive Life Cycle, Sudin Apte, Forrester Research
Mr. Apte goes on to explain that most captive start slow, attempt to accelerate and hit roadblocks which result in a gradual lowering of expectations. Continual below-par performance eventually leads to looking for exit routes.
While I agree by and large with Mr. Apte analysis of the situation, I find it hard to accept this life cycle as sacrosanct. In other words, I believe it is possible for captives to break out of this downward spiral from inception towards exit.
In this and following posts, I attempt to break down the Failure Factors that impede a captive center’s growth and propose approaches that convert these failure factors to success factors.
