Captive vs. Outsourcing – Choosing the Better Alternative of Offshoring

Offshoring is the practice of basing some functions of a business overseas. Companies often do this to take advantage of lower costs overseas, such as labour costs, manufacturing costs and so on. Other benefits include overcoming regulations that prevent certain activities domestically, tapping talent that is currently unavailable in the company’s locations, and entering new markets.However, deciding to relocate some of your processes is only the first step, you then need to decide whether to take advantage of outsourcing or a captive model.

A captive involves establishing and operating some form of a partly/ wholly owned entity overseas, whereas offshoring encompasses leveraging the capability of a third-party service provider to deliver the same work. There is a lot to consider when selecting the appropriate delivery model for your company’s offshoring strategy. Unfortunately, there is no magic formula; it is all about finding what works for you. As mentioned earlier, captive operations and outsourcing generally have similar driving forces, such as cost reduction. Yet there are many factors that must be assessed when choosing between the two.

So, let’s begin with a captive centre. Many operational and strategic factors facilitate an organisation’s decision in favour of this model. One reason may be the simple fact that certain regulatory constraints prohibit outsourcing, thus this is the only solution. A captive centre is often preferred when a greater degree of control is needed on the work to be performed. Not only do Captives reduce risk, businesses can reap significant gains of having their own operations in lower cost locations when a long term view is taken.

A captive centre is an ideal solution when there is already the existence of strong delivery processes in the parent organisation, high levels of Intellectual Property (IP), and business knowledge sensitivity.There is the need to build and retain specific domain knowledge and the desire to have direct control over a remote team.

If you go down this route, you need to be prepared for capital investment as well as lead time and you must be committed to managing your captive centre’s team and integrating it into the organisation. You must also be certain that your company is ready for internationalisation and localisation of business management.

It is evident to see that captive models present long term commitment and optimum levels of control. Nevertheless, this is not the ideal solution for all companies, especially those that are engaging in one-off projects or on-going projects that are irregular. Outsourcing is the preferred option in such cases. Outsourcing is ideal for businesses who don’t want a very long term commitment, and when there is lesser IP and business knowledge sensitivity.

Many companies opt to outsource to achieve operational flexibility,as they can free up internal resources whilst either ramping up or ramping down external resources. Aside from this, remote staff don’t face a significant learning curve, as you can access specific expertise and technology you don’t have available in-house. There are also little to no infrastructure and initial setup costs.

If you go down this route you must be ready to invest time in clarifying specifications and managing change requests. You will need to provide carefully and extensively defined requirements and deliverables if you are to benefit from the end results you desire.

To conclude, there are many advantages to be gained by offshoring, however deciding on a delivery model to achieve these benefits is of paramount importance. Generally, a captive centre is ideal for a long term commitment, whilst outsourcing is better for one-off projects.