From Cost Efficiency to Innovation – Captive Centers 2.0

From Cost Efficiency to Innovation – Captive Centers 2.0
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by Sanjeev Kapoor 11 Mar 2016

Since the early eighties and the nineties many conglomerates have experimented with the outsourcing and the captive business models in the context of back office support functions.

Some companies began with captive centers and then moved to the outsourcing model in search of further efficiency and lower costs.

Compared to outsourced providers captive centers have had a bad reputation as far as speed of execution and innovation is concerned.

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  • An outsourcing vendor can take about 3 months to fully ramp up and start delivering at peak productivity while a captive center might take much longer to be up and running.
  • Ending an outsourcing engagement is also easy compared to shutting down a captive center.
  • Captive centers were also seen as laggards when it came to innovation and were criticized for lacking entrepreneurial drive and not being nimble or flexible enough.

And so, many conglomerates sold off their captive centers to outsourcing companies in India, as this 2009 story shows.

New days for captives

The situation however has drastically changed in the past couple of years.

As low cost locations like India has started losing their cost effectiveness for many clients some captive centers have risen to the challenge of driving innovation and ushering digital transformation.

According to research from the Everest Group 15% of the captive centers are

“Value creators” having built digital capabilities in multiple digital segments and focused on extending their influence across the enterprise…(while) 2% are true innovators in digital, having achieved significant scale and breadth of services covering most segments.

These captive centers can be both offshore as well as onshore and they accounted for 25% of the $125bn global services market in 2014.

Some of the scenarios in which captive centers have excelled are involved sensitive information, intellectual property and mission critical tasks that needed deep familiarity with business processes.

The report also stated that technology, manufacturing, distribution and retail firms are the biggest users of the captive model.  Some other interesting statistics include:

  • The parent companies of 61% of captive centers have revenues of more than $10bn.
  • 64% of these centers are staffed by more than 500

The characteristics of captive center 2.0

According to MIT Sloan Management Review the captive design centers follow this path as they mature and start delivering more value.

Captive Centres 1

Evolution of captive centers

In order to encourage the shift to the right there are some things that need to be done right:

1) Management of talent

Having access to top tier talent and giving them free reign is one of the most critical things a company needs to do if it wants the captive centers to be drivers of change and innovation.

Employees should be allowed the freedom to do things the rest of the company doesn’t. For instance, if they want to develop products exclusively using Agile or by following the DevOps framework there shouldn’t be any restriction.

Accelerated career progression should also be considered, and top performers should be offered incentives like commensurate compensation and stock options.

2) Partnership with startups

To further hone their entrepreneurial instincts captive centers should be allowed to partner with startups and be a part of the larger ecosystem. This gives them access to a huge talent pool that would be otherwise untapped while simultaneously exposing them to the latest technological trends.

Captive centers can offer office startups space and equipment, mentorship or even financial support.

3) Collaboration with other vendors

As captive centers work on cutting edge technologies they should be given the freedom to collaborate with other companies working in emerging fields like AI and machine learning, data science, IoT, and predictive analytics.

These collaborations can be fruitful and result in the development of new technology which can be rolled out to the wider enterprise.


Captive centers still won’t make any sense if you are strictly looking at them through the prism of costs. But properly managed, a captive center can be your own version of “Google Labs”, where products of tomorrow are designed today.

In the increasingly fiercely contested business battles of the future, being able to create the best customer experiences and using innovation to solve business problems is the only guarantor of success.

A captive center can hold that hope of victory for you.

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