Dr. ARUN MAHESHWARI, President & CEO, Computer Science Corporation, India

Offshoring is becoming increasingly popular, and companies interested in benefiting from it have a choice of several models. There is no one best solution for everyone. The right solution will depend on the company’s individual situation. Factors such as volume of work to be transferred offshore, ability to sustain the amount of work sent offshore over time, experience in international environment, familiarity with the country in which the operation is to be set up, and risk tolerance should be considered while making the decision.

Third Party Vendor Relationship

For a vast majority of customers wanting to benefit from offshoring, a third-party vendor relationship makes the most sense. It is a low investment, low commitment, low risk, quick start and flexible approach that provides immediate benefit.

Captive Centers

Captive offshore centers have many potential benefits such as better control, greater sense of security and confidentiality, ability to use common methodology, standards and processes across the world, and lower cost. This alternative is appropriate for some companies. Some early adopters of offshoring had no other choice, as the local vendors had not reached a satisfactory level of maturity. For companies dealing with state-of-the-art technology, which is unlikely to be available through third party vendors, or where protection of intellectual property is of utmost critical importance, a captive center may be the only choice. Almost all large IT services companies have set up captives, as their customers are unlikely to outsource to them if they are using a third-party sub-contractor. Additionally, even if the customer raises no objection, it is likely that the sub-contractor may try to develop a direct relationship with the customer. For companies that have very large volumes of work to be transferred offshore, captive centers offer economies of scale and competitive advantage.

While a captive operation may be the right choice for some, it has its drawbacks and risks. Setting up a captive is a large and long-term investment requiring considerable management time. Once committed, it is not possible to withdraw easily. Starting and running an operation in most developing countries including India is a challenge. Many companies have found that a small captive offshore operation is not viable because it is difficult to attract and retain talent, keep up with technology, and have enough breadth of technical expertise to be responsive to the parent company’s changing and evolving needs.

Companies may feel that they are missing the opportunity of reducing cost through vertical integration and some may feel that working through a third party may have an intellectual property protection risk. However, for smaller-up to 500 professionals-and even medium-500 to 2,000 professionals-size offshoring requirements, a company can get as good a price through a third-party relationship, as it is likely to achieve on its own. Intellectual property protection, security, control, and similar issues can be managed effectively if one deals with larger professional vendors and negotiates effectively.

Setting up a Captive

Assuming that a company has decided to set up a captive, there are four major alternatives to consider: Going on its own; Joint venture; Build, Operate and Transfer-BOT; and Buying a going concern. Going on one’s own is the most risky and time consuming. This alternative, however, gives the maximum control and in the long run, the lowest cost. Many companies have tried the joint venture model in India. In practice, this model has not been successful or at least the two partners in question have not stayed together for long. The major problems are cultural incompatibility and disagreements on goals and strategies. Some companies have tried the BOT model where an experienced vendor builds a facility for a customer, runs it for a while, and then turns it over to the customer. In theory this should be a very appealing model as it can offer a company best of both the worlds. It minimizes the risk of starting on one’s own versus forever paying a profit to a third party. There aren’t too many examples of successful execution of this concept in India. Finally, acquiring a running company is a possibility, but the acquisition comes with the current customer base that the acquiring company may not want.

Success Factors

The following actions will improve the chances of success for a captive:

• Get the right person(s) to start the captive. If possible, he should be familiar with both the company as well as the culture of the country where the captive is being set up. An Indian working for the company abroad in a senior position is ideal to head the Indian captive and many companies have successfully tried this approach.
• Do thorough planning. Objectives, strategies, and source of business for the captive should be well defined. Translating top management interest in setting up a captive in a low-cost country is not that easily translated into support from the middle management. This often creates a problem in reaching the expected volume to be transferred to the captive.
• Allow leeway to the local captive management. Many multinationals have a tendency of trying to duplicate their home country environment everywhere. While parent value system, HR policies, etc. should be duplicated in the captive; some modifications of home country policies are definitely required because of India’s substantially different environment compared to western countries.

Operational Issues

In the Indian context, following precautions in the early stages will help avoid problems:

• In spite of liberalization, India is still quite bureaucratic. Use specialist consultants to help with the bureaucracy rather than trying to do it yourself. Allow sufficient time.
• Everything in India is likely to be less reliable than the parent company’s home base. Therefore, plan for contingencies. Vendors may not deliver on time and employees may not join as promised. In India, for example, people who have accepted an offer may not even bother to inform the employer in case they decide not to join.
• Establish rigorous employee selection processes including verification of credentials and reference checking.

Final Thought

As indicated earlier, there is no magic solution that works for everyone. Starting with clearly defined objectives and evaluation criteria, followed by detailed analysis and planning should lead to the right solution. To ensure objectivity and thoroughness, retaining a management consultant to help with the decision may be a good idea. It is easy to visit other companies already established in India. Most of them are quite open to share experiences and perspectives. Associations and consultants can arrange such visits. The more time spent on planning, the faster and more trouble-free the implementation is likely to be.