Monday, September 19, 2011

Advantages of Offshoring over Captive Centers

It has been more than a decade when software companies started off-shoring their product development work in order to cut their costs largely. This trend is being followed by the companies around the globe to make things easier and cost effective.
Today more than 500 product companies have jumped from offshore bandwagon and established captive centers in India, China etc. The expectation of the company's that have established captives is to have close control over the offshore R&D operations and thought they could make things easy and happening.

A study showed that the interest of establishing captive centers is being reduced day by day. The challenges that captives are facing is resulting in a significant decrease in the number of new captives that are being introduced. Some of the key challenges that result in decreasing interests towards captives are -
1.      Lack of Scale - Scale plays a major factor for operations as it
impacts every element of a captive's performance: cost, attrition, productivity, recruitment etc. The factor that plays a major impact is in-country branding. In places like India and China people always have a preference to be associated with big names/mnc's to grow faster. So potential employees always have a preference for companies like Google, Accenture, Infosys etc, who have named themselves as local leaders rather than companies that are never heard before.
2.      Higher than anticipated Costs - Many companies are not willing to
pay good salaries to attract top talent and underestimate high G&A costs which can crush a small organization. In order to scale up, captives often pay high above the market rates throwing the entire cost model out of whack.
Hence the average cost of captive's are loaded almost 20% higher than working with a provider.
3.      High Attrition - High attrition rate effects productivity and
destroys the morale. Industry statistics show attrition at captive centers is almost twice as high as the average provider rate. The factors that are responsible for captive's attrition are –
  • Lack of career path opportunity, especially at smaller captives.
  • Second-class-citizen status: Many companies treat their captives as
their low cost offshore teams. This causes low morale and breaks the loyalty bond towards the organization.
Poor Development Process and Coordination with the Onsite team - Many organizations face difficulty in establishing strong development process and implementing productivity measures. But very few of captives are able to implement productivity measures like CMMi, Six Sigma etc to improve the processes for knowledge transfer and other collaborations. These measures taken have a direct impact on productivity as a whole.
Management Attention Wanes - The major factor that harms the cooperation with the onsite team and captive centers are the difference in time zones, which takes away the attention in focusing towards the core focus of the company. At the very beginning everybody are excited but afterwards the management attention moves to the rest thing. Further, in order to contribute to the next product release, the management is trying to ensure and focus in proper functioning of the captives.
The above limitations do not play any role in Off shoring. As Off shoring is just contracting with another company or person to do a particular job/function, and now every organization outsources in some way or other.
Typically, the function being outsourced is considered non-core to the business. The firms that are providing the outsourcing services are third-party providers, or as they are more commonly called, Service Providers. These services providers are already well established with facilitating all resources and infrastructure that is required to carry out the development process.
Every company evaluates a service provider before outsourcing the work, based on -
  • Strategic Thinking - In order to develop the organizations philosophy about the role of outsourcing in its activities.
  • Evaluation and Selection - It is done in order to decide on the appropriate outsourcing projects and potential locations for the work to be done and service providers to do it.
  • Contract and Development - It is done to work out the legal, pricing and service level agreement (SLA) terms.
  • Outsourcing management or governance - To ensure, refining the ongoing working relationship between the client and outsourcing service providers.
The major advantages that drives offshoring than having a Captive Center is
  1. Cost Savings - By outsourcing the work that were done in house will often reduce the employee levels and related costs, such as recruitment, supervision, salary and other benefits. This also reduces the cost of equipment obsolescence and depreciation. A portion of the cost savings will go to the outsourcer, but in return the company doesn't need to invest a lot in setting up infrastructure and hiring people etc, thus making a huge cost savings and reduce the work load.
  2. Quality of Service - As your company will be the outsourcer's customer; you will likely experience a "can-do attitude", which may not be exhibited by an in-house employee.
  3. More Capital Funds - Off-shoring reduces the need to invest in non-core business functions, thereby making your capital investment free to make profits in the business.
  4. State-of-the-art-Technology - Due to the huge scope in this field, outsources have to spend time and money on the latest equipment and on employee training to get competitive edge on others. By outsourcing in certain areas, you are assured of receiving the most efficient services and latest technological expertise within that particular function.
  5. Price Stability - By IT outsourcing, you will likely be able to obtain stable pricing, eliminating the future need to shop around. It will also help to budget operating expenses and capital purchases more accurately, while potentially preventing the likelihood of surprise expenses.
  6. New Business Partners - Outsourcers are always to be viewed as your business partner. And as a business partner, they share in the desire to keep your company operating at its maximum potential.
  7. More time to focus on Core Business Activities - Outsourcing helps to focus more on your core business activities. As Management spends time in planning and directing the company's business strategies and not wasting time in managing time in certain ancillary functions. This will help in improvising things in both the ways.
Contact me to know more about this business model.

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