Those with a long experience in IT will recognise the folly of trying to "computerise" a business problem. If the problem is not well understood you will just end up with a mess.

So is the case for outsourcing where organisations try to outsource something that they have been unable to previously manage. In those cases the outsourcing normally fails. Part of that reason is that the faulty management team are still around.

I completely agree with the drawbacks of Captive Offshoring centers as firstly most of these companies come with a different culture and work environment that does not fit the model at the offshore location which results in a HR mess.

Also the perception that the grass is green on the other side.

The best model for outsourcing with be to outsource to the established and local companies that can be more cost effective and easy to manage.

Ashok

Just goes to show that to fix a problem, first you have to have it adequately and narrowly defined.

I've never been a fan of outsourcing to begin with. I truly believe in keeping jobs in America instead of sending them to another country. To quote an old adage - you get what you pay for.

Outsourcing will not make all internal problems magically to go away. Moreover, every deficiency that a company had internally will be magnified once it goes out. If you cannot manage it effectively in the house what makes you think that managing it half way across the world would be easier?!

Costs differential might be tempting at first, but what you going to do once it narrows down to virtually nothing? and each project needs extensive rework because of mismanagement, miscommunication, plain misunderstanding and misinterpretation of the requirements and local customs? I am not even going into what might happen if the manager on the ground has different ideas about what's good for him.

Some of American IT professionals predicted this problem back in the mid 90's.

It's a case of chickens and the roost.

I wonder if this will give results of corporations bringing IT work *BACK* to the U.S. and employing those struggling IT Professionals here.

'zulie

The report on the implosion of captives may be premature. This report highlights the need for creative thinking by global enterprises considering a global service delivery model. Captives can be structured so that an external service provider manages service levels. An outsourcing relationship could be converted to a captive, or an "externally co-managed captive" (my term). Such structures can go in and out of pure captive mode, depending on "transformation" needs. Captives also lack the ability to add resources in cases of spikes in demand, unless they subcontract to outsourcers. But some captives are needed for control of data, human capital, true branding and other management goals.

So outsourcers will have a symbiotic co-existence with captives even where the captive remains technically independent. Captives will survive, but may adopt some external support for volatility in demand, SLA management and business continuity. outsourcng - law . com

I completely agree with the article and would like to emphasize Richard's comment: "you need to have the problem adequately defined".

We offer outsourcing services from Argentina to some US companies (Recruiting and software). Being local allows the company to better manage the Human Resources, reduce attrition levels and at the end offer a better ROI than starting from scratch.

Lack of adequate management is always a big problem.

I am not at all surprised ... for all the high level education (computer science, MBAs, PhDs, etc.) ... very few people seem to understand very much about the structure of costs ... and the behavior of costs. Sad really.

And the situation in the global relief and development sector is even worse. How else do you explain so much poverty and hunger and crisis in a world that has so much potential?

Peter Burgess

Gee, what a revelation (sic)! 'Captive' off-shoring is more costly than pure-play outsourcing. wow. (Yawn. Or, perhaps instead, "Duh!")

This article seems like so many others that Ziff-Davis dangles: sensational title, thought-provoking concept/theme, but, you've gotta pay $280 for an 18-page white paper that never goes deep enough into detail or facts - true 'research' - to draw any sort of conclusion...

Well, 100% of anything is probably folly and faulted... While it's obvious and natural that the captives are more expensive than a pure-play outsourcing relationship cost-wise (how could anyone expect differently with all of the additional overhead associated with implementing and on-going management of company policies, procedures, systems and processes, from half-way round the globe no less?), one must remember the fundamental business reasons and priorities underpinning the decision to go "captive" in the first place...

The author calls the majority of companies who've chosen the 'captive' strategy to be 'flawed' because "it is driven by personal reasons such as an expatriate employee's urge to go back to India for family reasons." vs. key business fundamentals.

That's like comparing reasons for deciding on which restaurant to go to dinner with reasons for purchasing a yacht. There's no relevant connection whatsoever...

Who cares? What do those personal reasons have to do with the key business reasons??? I once worked for a public company whose founder and CEO moved the entire HQ from southern California to Indianapolis for the sole purpose of marrying a woman that could not leave Indiana because of joint child custody from a prior marriage. The move cost well over a million dollars and there was not one cost-benefit, let alone any ROI, associated with it. But the Board of Directors said, "you are the company!" to the guy, and, we moved. So what???

The author mentions only in passing the more relevant (but tougher to track down, enumerate and quantify) key fundamental business reasons that companies with 'captive' strategies cites: "...save money, protect intellectual property or more tightly control processes...". So, where's the follow-up on these??? How do the implemented examples actually deliver on these key reasons??? The more relevant and telling question(s) would reveal whether or not the 'captive' organizations have realized these important goals, and if so, to what degree/level, as compared to those that have gone with pure-play outsourcing.

But while pure-play outsourcing provides a natural and logical cost advantage, pure outsourcing itself has been, in most cases, either disasterous at worst or disappointing at best also. Ever notice how few "success stories" there actually are out there? I don't think I've ever seen ONE of them! And I mean stories where the outsourcing arrangement has not only met or beaten the pre-outsourcing financial savings and ROI projections in the pro-formas the finance and accounting geeks have put up, but ALSO succeeded in terms of moving the business forward, i.e. helping to achieve marketing, sales, customer service and other operational success. Customer service issues (both internal and external), communication issues that stem from language and cultural differences, confusion resulting from company/corporate policies and procedures, etc., can all lead to swelling customer dissatisfaction as well as costs - not exactly the panacea hoped for.

In my experience, the most logical arrangement would be a combination/integration strategy, where part of the function's operations are purely outsourced, part of them (the critical IP, secured data control and branding issues/functions) are 'captively' outsourced, and part of them are quite frankly 'in-sourced'. It's up to each organization to determine where either the "sweet spots" or "sensitive spots" in each sub-function of the organization are (IT Help Desk, Desktop Support, Data Center Operations, Software Application Development, Systems Integration, etc.) but having an integrated team consisting of a US-based 'presence' manager, a captive outsourced person or team, and a pure-play outsourced team working in harmony as a seamless unit would seem to be optimum.

Working together to create the 'symbiosis' mentioned above is always the biggest challenge in implementing and managing this kind of relationship, and requires constant and open communication, shared goals & objectives, and quite frankly shared incentives. In my experience, the best way to cement the integration relationships is to bind the fates of those on the team together - everyone succeeds or fails together, lives or dies together. That tends to align priorities and efforts very quickly.

There you have it; it's less than 18 pages and you didn't even have to pay $300 for it! Ha!

The report is most likely not comparing apples to apples. It is comparing per head cost. Just to present 2 examples.

A geographically distributed company team would (a) not require additional resources to manage the relationship, performance and delivery with a third-party outsourcing vendor; and (b) gain from improvements due to the team-members knowledge of the business -- domain, processes, etc., when contrasted with the ever rotating personnel of the third party outsourcers.

All models -- company-owned but geographically dispersed, third-party managed captive or completely outsourced -- have a role to play in the systems delivery model. The business has to formulate its strategy driven by business needs and implement accordingly.

I suspect this Forrester report, like many others I have read over last couple of years, is 'sponsored' by the likes of TCS, Infosys, et al.
It's foolish to assume that the management team that's not competent enough to operate successfully a captive offshore center would somehow manage successfully the relationship with a third-party offshore provider.
Over the last 5 years I've led several teams for multiple clients that included onshore, near-shore and offshore members. My experience tells me that there is no substitute for competent management of these relationships and it doesn't make much difference whether the offshore operation is captive or third-party.
I'd advise folks to take Forrester reports in general and those coming from India - the home-turf of third-party offshore providers - in particular with a pinch of salt.

A predictable result indeed! While local companies are already optimized by local market forces, transplants tend to keep some traits of the parent company under a local "bubble". This leads to additional resources being spent on non-productive transition or "matching" tasks which in turn lead to performance differentials.

Bad process and management, is still, when the covers are peeled back, bad process and management--regardless of delivery methodology, point of origin or final point of delivery.

Trying to cover the true cost of poor (or complete lack of)Process Engineering, Poor Service Delivery or lack of a cohesive overall IT Service Management Strategy by 'leveraging' what appear to be 'cost savings' will almost always come back to roost as the wasted time and effort and the lack of a processes to mitigate those wasted resources fail to deliver on their promise.

Any business decision should be based on a firm alignment with the company's corporate strategy.

Let's take for example a mid sized firm operating in the US with a small IT dept. Assume due to some reasons,the company needs to cut costs. The first thing on CXO's minds these days is reduction of costs at support functions such as IT, payroll, finance etc. Conveniently this is supposed the hide the other inefficiencies which might exist in the management of sales, operations etc. and make cash flows look good in the short term. Instead of tackling the problem at the root, outsourcing and captive units in india or elsewhere are set up to magically reduce costs. Its like hiding your head under sand under danger hoping it will go away automatically.

Basic principles of economics would suggest that coutries like India have a comprative advantage when it comes to labor intensive work, be it IT, BPO or manufaturing. How that advantage has to be tapped profitably by corporations worldwide is a problem executive have to answer before they decide to go offshore. What else are they paid for? If offshoring or setting up captives was a magic wand then why would we need CXOs to weild that?

In my personal experience one clear gap in running successful captives is the lack of inclusion of captive IT depts. in the overall business strategy developement. These offshore, farway low cost workers, are supposed to deliver quality IT produce without any alignment to the overal company's mission. There is rarely any integration with the parent company's operational philosophy or culture.

Therefore, my suggestion is that offshoring, whether captive or to third party providers, is a powerful tool for cost reduction and expansion iff used in line with long term business strategy with clearly defined goals and objectives and not merely for hiding management ineffciencies onshore.

Outsourcing may be a short-term fix for a problem that needs long term, strategic analysis. In Pharma development, many outsourcing decisions have been made for a 1st year reduction in overall costs and a quid pro quo between old corporate friends.

In the first year the CRO (or outsource entity) may very well roll back billables to 2004 or earlier rates. The pricing strategy is to allow S&P or someother inflation tool as well as pass-through costs, etc. to make up for the loss over the term of the contract.

The first year the CEOs look like the darlings of efficiency and money saving from the attrition of internal staff. The few rank and file employees left guide the CRO through the company processes until they receive separation packages or find another job with another company. Once the internal Subject Matter Experts leave, the CRO has a strangle hold on the expertise to run what is left of the Data Management areas. Processes that weren't identified during the initial analysis will need to be paid for in the form of Contract Modifications.

Year 2, costs increase geometrically and the organisation is caught by the shorthairs in this vampiric relationship. There hasn't been any thought given as a contingency plan should the sole source CRO fail to provide due diligence. The CEO who thought of this flawed money-saving move has probably moved on and the debacle is left for the New Kids on the block.

Year 3, there is substantial turnover in the CRO internal as the poorly paid, inexperienced programmers they hired right out of college are now savvy experienced programmers unwilling to work at the artificially low salaries imposed by CROs. Now there is even less quality in output than there was during year 1 as there aren't Subject Matter Experts to bolster the inexperience of the new programmers.

Whether it be captive outsourcing, off-shoring, or in-house dedicated outsourcing, real management and clarity of a longterm vision for the company treating each entity as a resource as well as a commodity is needed.

I've been on both sides of the dog & pony show and I believe that outsourcing has it's place as a band-aid -- not a permanent fix.

A captive center is company-owned - it is NOT outsourcing. If a company has trouble properly staffing and managing its international operations that's not a reflection on *outsourcing* - but it does speak to the company's competency at global sourcing and governance.

Not every company is well-equipped to staff and manage global teams. The smart ones get outside help for it, but not necessarily from service providers. Many companies fail to understand the value of establishing a program management office and prefer to let non-experts apply non-standard means of managing 'offshore' initiatives. Thus you see higher costs and higher failure rates.

According to a recent business article 92% of comapnies who outsourced did so to reduce costs. now the turnover rate in India is making it dificult.

The real take away from this article is that we are now at a critical turning point. We can jeer about the effort failing, or we can provide an American replacement that really works.

John Nash
American Programmers Independent, LLC.

Since I've worked in US for 10 years and then in India for 2 years, I have seen both sides of the coin.
I think Rusty Weston and David Beans hit the nail on the head. My 2 cents:

As the saying goes "You Can't Outsource A Problem!"

Outsourcing makes sense when maintaining systems, but when it comes to R&D - beware....

Well, companies who do offshoring for the sole reason of cost savings are doomed to fail. First see if the skills available (both Managerial and Technical) match your requirements and only then calculate your savings.

And more importantly if one wants to succeed, please stop thinking of a offshore center as some cheap appendage one can use the way he/she likes. Or to just dump some mundane work that nobody wants to do. That is when you want to outsource - just pay a third party to complete a clearly defined deliverable.

Remember, employees of captive centers are the companies own employees and they want to see the company succeed as much as employees elsewhere. For sure success of captive centers, learn to TRUST the offshore managers, delegate significant responsibilities and make their success/failure directly linked to the project's results. The bottom line is - DELEGATE and TRUST. Excessive control from across the world is a big, big mistake companies often make.

I work in a captive center in India for a US based Product company and manage a few products, and I found that irrespective of the turbulence the company went through after M&A - the center kept its head down and did many Suite realeases from the past four and half years! Basically the India center bailed the company out!

The reason it was possible was b'cos of the strong Management and Technical team the company built in India over the years, who wanted to see the company succeed. I don't see how an outsourced center can show that kind of commitment!

Interesting discussion. Reason for Captive offshoring boils down to one thing - ROI. Many organization fail to calculate the ROI. They all go by one number - labor arbitrage. But there are several intangible costs like setup, management, attrition, communication etc that are never factored into calculating ROI. Hence the major reason for failure.

I will say "one size does not fit for all". All captive center do not fail and as vijay has mentioned outsoucring is more than a cost arbitrage

I will suggest for an approach of "think local and go global". The captive center which have adopted to local conditions have done well, the pure play outsorcing services provider are always not the answers. These are good for the process which do not add value to enterprise and are repetive. The other processes should be managed by enterprise, captive center by definition are part of enterprises and not the removed part of enterrpises.

Outsouring is a strategy and should be implemented and driven by the overall strategic objective of the enterprise.

One issue not mentioned is what this does to the morale of the remaining staff. When companies near sited, short term drive for profits erodes the core workforce and Tech staff look for other vocations don't whine about the "lack of talent" if you want good people you have to pay for good people. American students that are interested in Science Math Engineering and tech see the 35 year old ex-tech workers flipping burgers and say "no way am I going into that field" The morale in your staff is probably so low that even a hint of "outsourcing" will cause your best people to start updating resumes.