May 28, 2018
Shared services models are a proof that geographical boundaries are no limitation for businesses today. These models are adding a global tag to the businesses around the world. Earlier their adoption was largely limited to Fortune companies. However, recent years have witnessed numerous mid-size businesses attempting to mark their global presence.
Companies are going global by crossing their native countries and setting up their businesses in the locations where they can achieve economies of operations, reduce back-office expenses and achieve better organizational efficiencies. India is one such preferred location for offshoring activities. There have been establishments of several captive centers in India in recent past and the trend continues.
When it comes to establishing infrastructure and running operations in a foreign country, outsourcing certainly promises a lower cost of business while providing captive consulting and expert support. However, companies lose a certain degree of control in an outsourcing model as they do not own the foreign operations and people working on their projects are not their employees. That is why those intending to retain the absolute ownership in their foreign establishments prefer a captive center or a wholly-owned subsidiary.
Captive centers are service delivery centers, typically in a nondomestic, low-cost location and are fully owned and run by the parent company. All the personnel which is part of the captive center are the legal employees of the organization.
In a captive center or global in-house center, the parent company owns all the shares and can exercise absolute control. However, the captive center continues to be an independent entity and its industry or line of business may be different from that of the parent.
Here are the key benefits that the parent company can avail by setting up an offshore captive center:
Captive IT centers
In the series of outsourcing flow, there has been a surge in a captive information technology (IT) center model. These centers are advantageous for the parent’s company in the way that along it has an own strategic center at an offshore location which provides data security, risk reduction, and smooth processes at minimal costs. Besides being rich with a talents technology workforce, India offers an unparalleled flexibility at friendly costs. Therefore, there has been a consistent surge of captive IT centers in India. Furthermore, the Indian Government has taken initiatives to welcome global companies set up there IT captive centers in India.
Cost saving undoubtedly is one of the biggest motivation for a company, especially mid-size firms, to consider setting up a captive center at a favorable offshore geography. Statistics have revealed that compared to developed countries where the cost of labor is quite high, having a wholly-owned subsidiary in developing countries like India can bring down the overall cost by as much as 60%. Now that’s some saving! No wonder there is a mass movement in that direction.
There are multiple aspects of business where captive offshoring can reduce the overall cost of running the operations. Major of these aspects are as below:
Obtaining greater operational efficiency at a much lower operational cost is surely a welcoming fact. An analysis says that business can get the tasks done with outsourcing at as little as half the cost, in some cases even less. Outsourcing helps the business to get tasks completed at half the cost or even lesser! Since it is the primary cause of executing the idea of outsourcing, no surprise the number of global outsourcing aspirants is on the rise.
In most of the developed countries, the workforce with specific skill set is either scarce or available at a high remuneration. Offshore captive centers in a developing country like India have access to the skilled human resource at the low cost. One of the most important reasons why companies decide to take their businesses offshore is because of the availability of high quality at a much lower price. That is why, realizing its edge on technology and technological advancements, many large and medium-size companies have been expanding their global footprints by setting up their captive IT centers in India.
A business needs to be sustainable to meet its long-term aspirations. There should it should always have provisions for unforeseen situations where its operations may face hiccups. Captive centers, in this context, offer a latent benefit. If the parent company somehow faces problems due to unforeseen factors such as natural calamities, technical glitch, regulatory changes or market volatility, the offshore subsidiary can immediately come into place and take care of the pending tasks. This way the projects are handled ceaselessly while the company is working for the rebound. Thus, captive centers can help prevent significant possible losses and costs to the parent company.
As mentioned earlier in this blog, captive centers can help the businesses achieve better efficiencies and improved productivity. Another way to look at it is that you can get more value with offshore operations on every dollar you spend.
There can be some challenges to the time zone difference but in the long run, it has a great benefit. Even when a business is closed the work is still getting done and productivity is always moving forward. Of course, it goes without saying this increase a company’s revenue if you are managing it in the right way.
Nothing can establish the brand of a company as good as its customer service can. A good customer service indisputably has an integral role in the sustainable success of a company. An offshore captive center can also ensure the availability of assistance to the customers round the clock and resolve any issue they as and when it appears. Also, there are no gaps even during the holiday and festive seasons in the country where the parent company is located. The captive center unit addresses this problem by keeping the workforce available and active during those seasons.
Clearly, there are tremendous cost advantages associated with the captive offshoring and global in-house operations and depending on its requirements and business objectives, a company may decide whether a captive center model is a feasible option.
However, it requires a meticulous study and analysis to ascertain its viability. More often than not, companies only look at the short-term cost savings and end up with a myopic vision. This tempts them to start running before they have started to walk and the fate of the captive center decision meets the doom. Therefore, it is advisable to look at the complete picture of the model and confirm whether it is in alignment with your business objectives. With that done well and painstakingly, your captive centers are sure to fetch you great cost benefits up to 60% which is quite sizeable.