How and when to go 'captive'

Setting up shop overseas helps retain your competitive advantage

Just because you decide you want to take IT work offshore doesn’t mean you need to outsource it. Many companies wanting to tap into the global talent pool have decided to set up so-called “captive” offshore operations instead of working with an offshore vendor. But captive isn’t right for everyone, analysts say.

“Captive offshore operations are the best strategy now for companies that have scale,” says Ben Trowbridge, managing partner at Alsbridge, an outsourcing consultancy. “I think three out of four jobs that move outside the U.S. are moving to offshore captive, not outsourced. They’re Microsoft- or Dell-badged employees who happen to work in India, the Philippines, or Eastern Europe.”

Trowbridge says a captive operation becomes cost-effective at the point where you plan to move 400 or more positions, and that many companies decide to switch to a captive model after doing a few pilot projects with an offshore outsource vendor.

“Captives tend to have lower churn, depending on the brand of the client,” Trowbridge says. “People want to go to work for Microsoft as opposed to a smaller Indian firm that’s doing work for Microsoft.”

Others, however, say staff retention may not be so easy if your company is not well known in India. “You’ll need to have an HR machine to compete against the Indian vendors,” says Frances Karamouzis, research director at Gartner. Captive centers require a consistent minimum volume of business and, similar to offshore vendors, must continually reinvest in updating their technology capabilities, she adds.

“All these add up to overhead costs that an outsourced vendor would be spreading over 100 to 300 clients,” Karamouzis says, noting that “more than 50 percent of captive application development organizations don’t survive more than three years.”

But cost isn’t the only factor. Captive operations “may allow you to be more aggressive,” says Peter Bendor-Samuel, CEO of The Everest Group, an outsourcing consultancy, but they take as long as two years to get up to speed and saddle you with the complexity of managing a remote operation, he notes. And you don’t get access to the best practices, platforms, and intellectual property that a third party can potentially provide.

Yet there are certain situations where a captive operation makes sense. “If all you’re doing is application development, you’re probably going to use outsourcing,” Bendor-Samuel says. “But if this is a mission-critical function you need to keep within the company, you’re probably going to go captive.”