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Research firm: The captive model for offshoring is thriving

Stephanie Overby | July 8, 2011
Captive centers will continue to play a major role in offshoring for the foreseeable future for two reasons, says Eric Simonson, Everest Group's managing director.


"This is a sign of some captives struggling, not the model struggling-and most of those shut down were very small and barely got started," Simonson says. "It should be expected that not all new entities (captives or other operations) will be successful."

Simonson points out that 30 percent of the top 20 IT service providers that Everest tracks have been acquired in the last three years, yet that does not mean that the IT service provider model is struggling. "Failures of some entities does not mean the model is flawed," Simonson says. "The landscape continues to evolve."

While captive offshoring success was defined in the past by meeting cost reduction goals and effectively managing risk, going forward additional value will be required.

"The value may be in terms of ability to ramp up and down resources for ad-hoc needs, create new ideas that advance the status quo, contribute talent to the global leadership of an organization, or provide an option to enter or better serve new geographic markets," Simonson says. "Success increasingly becomes about the impact the captive has on the broader organization, not just the cost of a process or activity."

To gauge the health of the captive center market in the future, adds Simonson, analysts will need to look not at the number of new captives established, but at the growth of existing captives. "The captive market will continue to grow, but largely by existing organizations both scaling and evolving the nature of work they perform," he says. "[But] most firms for whom captives make sense already have a presence."

While India remains the center of the captive universe, add Simonson, the model will be even more important in other offshore locations. "For example, large high-tech companies will see China captive operations as important for a combination of localization of products for east Asia, providing back-office support to other east Asian geographies, and supporting the domestic China market," Simonson says. "Due to the diversity of languages, industry knowledge, and domestic market business opportunities, the use of captives outside of India is more precisely defined."

 

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