September 2007
Many variables dictate whether captive offshore (i.e., buyer owned and maintained) shared services operations are a preferred alternative to internal domestic shared service centers or third-party outsourcing, according to a new report.

Assessing the Role of Captive Operations in Global Services Delivery Models , from sourcing advisory firm EquaTerra, states that global organizations must assess a broad range of factors, including operating costs, attrition rates and economies of scale, as well as industry-specific factors and the competitive landscape, when evaluating their captive center operations.

Failure to adequately account for these factors frequently results in an underperforming captive center that becomes a catchall for nonessential work sent piecemeal by managers with short-lived interest in using the center. Further, captive centers that operate without a strategic goal fail to cultivate a culture of continuous improvement, which not only negates their value to the corporation but also might cause significant and costly operational challenges.

“Organizations that have deployed or are considering deploying offshore captive centers need to clearly define what services those centers can best perform and whether they can do so more efficiently and effectively than a third party," say co-authors Cliff Justice, EquaTerra’s managing director of globalization, and Stan Lepeak, EquaTerra’s managing director of research.

This bundle of services will change over time. In some cases, outsourcing might become preferable for routine activities while the captives handle specialized services, they add. "The bottom line is that buyers must carefully examine their offshore outsourcing strategies to determine the route to maximum value.”

Captive Growth

EquaTerra estimates that over 300 Western organizations have captive operations in India alone, and it expects the growth of offshore captive operations to continue to grow upward of 30 percent annually. Given these growth levels, buyers must determine how to assess performance levels, identify the best means to drive performance improvements or seek alternatives to existing operational models.

These alternatives include:

• Realignment. When starting a captive operation, organizations sometimes extend existing processes and their inefficiencies to the new office. Instead, they should seek to improve performance by realigning the organization to use the captive center more effectively.
• Partnerships. A partnership with a third-party service provider can create opportunities for product or service innovation that are beyond what many captives can achieve independently, given skills or cost constraints.
• Hybrid partnerships. The captive center partners with one or more third-party service providers that offer some of the captive center activities (e.g., infrastructure, HR services, process management) to enhance the center’s performance.
• Virtual captives. In this more expansive version of the hybrid partnership, the buyer partners with a service provider that will provide nearly all of the captive center operations. The buyer typically retains ownership of key personnel and processes, though this is not always the case.
• Divestiture. Buyers in industries exposed to extreme cost pressures could be better served to sell their captives. While realignment or specialization can boost performance, the costs to do either and the time before benefits are seen could prove to be too costly, particularly if there is the opportunity to sell the center.

Stephen Miller is manager of SHRM Online's HR Outsourcing Focus Areaand SHRM Online’s Compensation & Benefits Focus Area.