Offshore captive centers are again a thriving outsourcing model

While several companies sold off their captive offshore centers during the recession, these global in-house options are back in vogue in 2015.

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Captive centers — in-house IT and business process delivery arms — accounted for one quarter of the $150 billion global services market last year, according outsourcing consultancy and research firm Everest Group.

While there was significant talk of the demise of the offshore captive center in the previous decade the approach is alive and well in 2015, says H Karthik, partner and leader of Everest Group’s global sourcing research practice.

“The [global in-house] model has been thriving, and divestiture activity continues to decline,” Karthik says. “At an overall level we expect the model to continue to grow.” Those captive center sales that do occur will be driven by organizational preferences, not dissatisfaction with or underperformance of the model, according to Karthik, and new set-ups will outpace divestitures in coming years.

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The captive center is particularly well-suited to work that deals with sensitive information or intellectual property as well as business critical or complex tasks. They “are considered part of the organization and, by virtue of that, are better positioned to serve in areas which may be deemed internal or may require business context and familiarity with internal processes,” Karthik says.

Technology and manufacturing, distribution and retail (MDR) firms are the biggest users of captive centers, and emerging technologies such as social, mobile, analytics and cloud computing are leading to higher adoption of these in-house centers, according to Everest Research. Fortune 500 firms dominate the market — 61 percent of captive center parent organizations report revenues of $10 billion or more, according to Everest. And most centers are significant in size; 64 percent of them employ more than 500 professionals, according to the research. But Karthik says there is growing adoption of the model by smaller firms.

Popular locations for captive centers

India remains the preferred location, accounting for half of all global in-house centers are continuing to grow “primarily because of the scale and scope of work it can support at highly competitive costs,” says Karthik. But some other geographical options are emerging as promising alternatives, including the Philippines, Poland, China, Malaysia, Costa Rica, and Romania, for various reasons.

The Philippines is a favorite spot for company-owned contact centers. Poland offers banking and financial services expertise. Malaysia delivers Asian language support. Romania is a nearby option for Western European enterprises. In addition, “companies with concentrated footprint in India are able to lower the concentration risk by diversifying in alternate locations,” Karthik says.

As the captive center market has grown, it has also begun to mature, evolving from a source of cost savings to a source of business value and performance improvement. “Most established global in-house centers in the market are focusing on enhancing process effectiveness and efficiency, expanding scope of services, and moving to deliver more complex work,” says Karthik. “[A] few global in-house centers, which are large and mature, are also focusing on delivering revenue impact to the enterprise.”

This story, "Offshore captive centers are again a thriving outsourcing model" was originally published by CIO.

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