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May 12, 2007

Why captive outsourcing centers are "imploding"

Basab Pradhan, former head of sales at Infosys, has his own take on the recent Forrestor Research report on how captive centers of MNCs are underperforming their third-party outsourcing peers.
...The real reason why captives fail is because IT organizations don’t know how to make distributed teams work. Here are a few things you will find in how IT organizations work with captives:

1. They don’t have and don’t realize the need for stronger life cycle processes for distributed development.

2. Organization models put all decision making in headquarters and none in the captive.

3. Dull, repetitive tasks like testing or support that nobody in headquarters wants to do are the first to be shipped out.

4. Average experience levels in captives will be lower. Just the nature of the Indian market. Companies won’t invest in adequate training and then arrive at incorrect conclusions that employees in the captive don’t “get” the business side of things.

5. Small things matter. Like when conference calls are scheduled. If they are always during work hours at headquarters but outside of work hours in Bangalore, there’s a sign of dysfunction right there.

6. Headcount at the captive keeps growing, but the organization model is such that headcount at headquarters never comes down. The business case goes phut.

I also enjoyed the following comment about the report (at CIO Insight, via Basab's post):
This article seems like so many others that Ziff-Davis dangles: sensational title, thought-provoking concept/theme, but, you've gotta pay $280 for an 18-page white paper that never goes deep enough into detail or facts - true 'research' - to draw any sort of conclusion...

...The author calls the majority of companies who've chosen the 'captive' strategy to be 'flawed' because "it is driven by personal reasons such as an expatriate employee's urge to go back to India for family reasons." vs. key business fundamentals. That's like comparing reasons for deciding on which restaurant to go to dinner with reasons for purchasing a yacht. There's no relevant connection whatsoever... Who cares? What do those personal reasons have to do with the key business reasons???

...In my experience, the most logical arrangement would be a combination/integration strategy, where part of the function's operations are purely outsourced, part of them (the critical IP, secured data control and branding issues/functions) are 'captively' outsourced, and part of them are quite frankly 'in-sourced'. It's up to each organization to determine where either the "sweet spots" or "sensitive spots" in each sub-function of the organization are (IT Help Desk, Desktop Support, Data Center Operations, Software Application Development, Systems Integration, etc.) but having an integrated team consisting of a US-based 'presence' manager, a captive outsourced person or team, and a pure-play outsourced team working in harmony as a seamless unit would seem to be optimum.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.