Nearshore Americas

Bubble Conversation: In or Out, Captive Versus Outsourced

My college hoops team keeps me on edge. They seem to look good enough to be in the tournament and proceed to lose a game they should have won. Then, on the verge of being out, they pull out a nice road win and hop right back on that bubble. They are going somewhere, but will they make the NCAA or the NIT tourney? Where will they wind up? Perhaps I should consult the oracles in Vegas before wagering any money on their ultimate bracket destination.

Fortunately, for those who have already determined that outsourcing makes sense (usually the case for a company’s non-core competencies), the decision regarding the work’s ultimate destination doesn’t have to be so gut-wrenching. A prudent scoring system can help your company determine not only where to send work, but also whether to keep functionality in-house (in a captive organization) or to outsource it.

There are pros and cons to each choice, and your evaluations on a spectrum of outsourcing factors will help you determine if outsourcing is the right answer for you, regardless of whether you are considering offshore or nearshore destinations.

Here we focus on a few critical factors related to setting up a captive or using a service provider. Some groups think they can, themselves, recover the margins an outsourcing service provider realizes. However, placing too high a priority on recouping margins can lead assessors to the wrong sourcing model in which they ultimately sacrifice those nonextant “gains” and much more.

Brand Recognition

Simply put, is your company well-known in the geographies under consideration? If not, finding skilled workers may be a challenge. Who wants to work for “Acme Corporation” when there are positions available at globally known companies? Usually, the only way to entice people to come and work for you is to simply “make them an offer they can’t refuse”- i.e., pay them above-market rates. And even if your brand is well-known domestically, you may have to overpay to attract the appropriate talent to your operation initially.

The million-dollar question is: what do we do next year when our above-market people are expecting raises? Do we risk high attrition levels to keep them, or do we take another pinch out of those “recouped” margins to keep the captive steady?

Other-Shore Maturity, Outside the Bubble

Another factor for consideration is: have you ever gone outside of the country and worked in a particular geography before? If not, the school solution tends to favor using a service provider instead of setting up a captive organization. It’s one thing to understand how to orchestrate the work to keep captive employees busy, and it’s a completely different challenge to consider in-country human resource laws, real estate practices, facilities & services operations, marketing, recruiting, etc. which, by the way, all cost money!

If you have neither captive-building or particular geography experience, it is not wise to set up shop in an area with which you lack familiarity. Why not let a service provider (with its own HR, real estate, F&S, marketing, and recruiting teams) handle the details for you? Also, because of their name recognition, they can more easily attract talent. And, because of their vast array of clients and projects, they can more quickly ramp up and down employees without your having to go through costly termination procedures.

Although it may initially seem enticing to set up shop on your own, most people estimating the work forget to factor in the overhead costs that go along with establishing a new organization.

Additionally, consider business cycles where existing resources are not required. With a service provider, it’s much easier to flex workloads without having to pay for underutilized resources. This applies to other functions (e.g., recruiting) as well. Conversely, I’ve seen many organizations under-optimize their work because they have to send it to their “more costly than anticipated” captive as a simple pro-forma activity. It becomes a “create work solely for the sake of keeping the captive busy” situation – clearly not an efficient use of time and effort.

Lastly, remember with a service provider, if things don’t go well in geography, it can be easy enough to let a contract expire or terminate it. When you have invested in much more than people, unwinding an other-shore operation is a costly undertaking.

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With time in the geography and the learnings you gain from your experiences with your service providers, there is no reason why, in the future, you couldn’t start your own captive operation.

Career Path

As alluded to earlier, many organizations that set up a captive unit fail to plan for natural career progression and advancement. The new employees in the captive unit have every intention to rise through the ranks as do people back onsite at company headquarters.

Because of poor planning, after three to five years, companies usually see attrition numbers began to skyrocket. Without an appropriate career progression plan, the captive is doomed to lose its best people to other local companies that have a better career model. And when word gets out on the street about the lack of opportunities to progress, your company’s recruiting operations begin to face enormous challenges (again, usually solved with additional money).

It should be no surprise that even your captive employees don’t want to work in a dead-end job without the ability to learn and do more. These are only a few of the factors to consider when deciding to outsource or to set up captive operations.

Jon Butler

Jon Butler, Principal with StrategyShore, is an expert in technology operations, outsourcing, offshoring and nearshoring. For over 20 years, Jon has helped clients succeed in India and nearshore locations. Jon gets personally involved in client success, having lived for 2+ years and created technology delivery centers in both Mexico and Italy, and also having lived for six months in Peru. Jon’s travel to 60+ countries underpins the importance and power he places on sourcing location cultural affinity. His resulting passion for employee engagement makes him a much sought after webinar and conference speaker.

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