Business: Wholly-Owned Outsource Facilities Failing…

Captive Offshoring Centers Are Imploding
Click title for source at CIOInsight.com…

Posted by Allan Alter on May 1, 2007 9:38 AM

A just-released report from Forrester Research explodes one approach to outsourcing – the offshore captive center, where companies set up their own, wholly-owned facility for software development, IT support, back-office data processing, call center operations, or business process outsourcing. After studying 40 companies (including high-tech firms, financial service companies, manufacturers and retailers) which set up these centers, Forrester’s country head and senior analyst, India operations, Sudin Apte, concludes in this report Shattering The Offshore Captive Center Myth that:

As a result of the lack of management support, spiraling costs, skyrocketing attrition, and a lack of integration, more than 60% of the captive centers in India alone are struggling.

Instead of saving money, the cost of operating captive center costs is typically higher than using third-party providers. The cost per person, per month of a captive center is $4,944, compared to $4,231 for a “third-party supplier.” And over three years, the costs of a 150-person captive center are $29,453,799, compared to $21,723,299 for using a third-party supplier.

And while companies say they want to save money, protect intellectual property or more tightly control processes, in reality….

“…the majority of the reasons firms cite for building their own facility versus outsourcing to a third party are flawed. Our research shows that in the majority of cases, it is driven by personal reasons such as an expatriate employee’s urge to go back to India for family reasons.”

According to the report, many American and European companies that have set up captive centers have closed them down, brought in partners or sold their centers to local companies – and many more will do so in the next three years.

Forrester’s study is consistent with one of the most important findings of our most recent outsourcing study – that instead of saving money, outsourcing is usually proving to be more expensive. Everything depends on management and execution.