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Offshoring: the captive center rises again

Stephanie Overby | Jan. 12, 2011
High failure rates. Shutdowns. Divestitures. Author and researcher Dr. Ilan Oshri explains why, despite it all, the wholly-owned offshore service center is coming back -- and here to stay.

FRAMINGHAM, 12 JANUARY 2011 - You can be forgiven for thinking that the days of the offshore captive center were numbered. Citigroup (C), Unilever, Deutsche Bank, and Dell (DELL) are just a few of the Fortune 500 companies who have sold or shut down their one of their wholly owned offshore service centers in the last year. Some 60 percent of all such captive centers fail to meet expectations. And the third-party offshore outsourcing industry, particularly in India, has reached a level of provider maturity that one wonders why a company would take on the hassle of setting up their own shop abroad. (Indeed, many industry watchers have.)

But the captive center lives on. Captive activity reached a two-year high in the fourth quarter of 2009, with the opening of 40 new wholly-owned service centers offshore, according to outsourcing consultancy Everest, and the last five quarters have seen growth in the captive market. We talked to Ilan Oshri, author of the forthcoming book, Offshoring Strategies: Evolving Captive Center Models (February 2011, MIT Press) about the resurgence of offshore captives, the centuries-old history of the model, and the continued difficulty of making them work. Why write about captive centers now?

Ilan Oshri: I have published six books on offshoring and outsourcing. In 2006, I got interested in captive centers while I was visiting Bangalore looking into a problem area between a captive center and a local vendor. That made me think if captive centers outsource work which has already been offshored, they were probably pursuing other strategies. The academic literature offers very little about captive centers and the professional press also did not take interest in captive centers unless it was a failure story. This industry deserves a thorough study starting with the basics: taxonomy, strategies and capabilities. For the past few years, we've been hearing that interest in captive offshore centers—particularly IT centers combined IT and business process centers—were waning, and companies from AOL (TWX) to Unilever have shuttered or sold one of their offshore captives. Are they really coming back?

Oshri: According to Everest Research, they are. 2009 saw an increase in the number of captive center setups. My view is that captive center is one sourcing model from the many sourcing models available nowadays. It has its advantages and disadvantages and there will always be firms that will find this sourcing model suitable for their needs.


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