Captive Center vs Outsourcing

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Business process outsourcing exploded into offshore outsourcing in the early 2000s, causing several companies to jump ship and go offshore to lower their operating costs. Unfortunately, because of the lack of knowledge surrounding how to manage outsourcing relationships, companies found themselves dealing with over-ambitious cost-cutting goals, the limited scope of services, and other complications.

This quickly created several problems in the outsourcing industry and led to a situation where outsourcing costs and related challenges were actually starting to impact the financial perks of the service. Fortunately, more systematic methods have been put into place and now large-scale offshoring efforts are focused just as much on cost reduction as they are on talent sourcing opportunities and improved service quality.

Offshoring Options

Traditional outsourcing relationships involve a vendor providing services and resources to clients based on the contracts set forth. Usually, this is all done at the vendor’s discretion so long as they meet their contractual obligations to the customer. Pure captive centers are a new concept that companies are using to build their own service operations from scratch rather than relying on outsourcing to provide all of the facilities and solutions.

Captive centers require more time and effort invested before they become a savings tool, but the amount of work that you put in can change the game significantly. Collaborative sourcing, a third option, combines these two methods. In this model, a company will hire an outsourced service to assist with setting up the offshore service center. Companies can choose from three models:

  • Build-Operate-Transfer
  • Assisted Captive Offshoring
  • Joint Ventures

How to Choose the Most Effective Solution

Both captive center operations and traditional offshoring have their perks and benefits to consider. Therefore, if you are trying to narrow down the options and figure out what is best, here are some things that you will need to consider. Taking these factors into account will make all your decisions much easier.

1. Scalability

One of the biggest things that a business has to pay attention to in their operations, including when it comes to Business Process Outsourcing, is scale. Smaller companies are ideally suited for traditional offshoring solutions, while a larger company may benefit more from the development of a specific captive center that offers fixed overhead costs and more scalability for growth than a traditional solution.

2. Speed and Cost

Outsourcing is preferred by a lot of people because it is quick and easy to put into place. While some solutions are easier than others to integrate or implement, the traditional offshoring method is generally more affordable for smaller businesses. On the other hand, a captive model may offer a more long-term solution to cost improvements even if it isn’t the speediest process.

The budget that you have to spend on offshoring or outsourcing will make an impact on your decision. It isn’t necessarily that one method is better than another in terms of flexibility and costs, but that you should weigh the costs of each and determine what is best suited for your needs.

3. Ease of Exit

Shutting down a full captive center can take a lot of time and effort, and leave a company holding more assets than they may be able to manage. On the other hand, shutting down a standard outsourcing relationship is typically just a matter of terminating the contract, leaving no “hard assets” behind, and letting companies move forward onto the next solution.

The Bottom Line

The biggest consideration in choosing between captive centers and traditional outsourcing is the size of your business. Traditional outsourcing is effective in many operations but those companies that are large enough to need their own offshore captive center may find that the cost benefits and other perks outweigh leaving the work to someone else. Talk to a professional BPO consultant to find the best solutions for your company’s outsourcing needs.