Global organizations typically offshore a broad range of business tasks and processes ranging from very simple to very complex. To optimize their resources, early adopters, particularly those in the financial-services industry (Citibank and Standard Chartered Bank, as examples), established their own wholly owned and operated offshore business units, called “captive centers.”

While many firms continue to use third-party providers for such units, other later entrants to offshoring established various forms of “hybrid captive” models as a means to strike a balance between the benefits and risks of owning a captive and utilizing third parties. During the past few years, a number of management models have mushroomed. As a result, the market is seeing an emergence of some best practices — and some available practices as well.

Operating a captive in a country such as India, is a complex undertaking, and many such units are established with a grand vision of creating a super-efficient, low-cost “operations and technology factory.” However, because many captives never attain critical mass, they eventually lack the efficiency that parent entities want and ultimately become a liability instead of an asset.

Weighing Captive Efficiency vs. Third-party Utilization
TPI research has shown that captives are more frequently less efficient than equivalent third-party service provider arrangements from a cost perspective. The respective cost structures differ because of factors such as compensation, workforce, the ratio of associates to team managers, more support staff, corporate allocations, and the spend on business continuity planning/disaster recovery planning driven by corporate policy.

A minority of captives or “best-in-class” captives, however, can attain cost performance gains better than those of the third-party service providers.

Captive units that do not reach critical scale are often 30 to 50 percent more expensive than the median third parties and generally evolve in common ways. First, the parent company either invests in revitalizing the captive, creating a viable player with costs at an acceptable premium, or the captive atrophies to a point that the business is eventually bought out by third parties.

Alternatively, parent companies are increasingly evolving toward a hybrid captive model, with strategic
core employees being retained while the commodity work is spun off to third parties.

Hybrid Captive Models
As customer organizations continue to reset their sourcing strategies on the basis of the assessment, a number of different structures are emerging in the marketplace. A “hybrid captive” model is defined as a captive that has evolved to become the local hub of a network of third-party providers.

Instead of making piecemeal, unit-oriented decisions to outsource or offshore, hybrid captive models are implemented as a result of systematically assessing applications and processes. As customer organizations consider their options, the assessment first focuses on determining processes or functions that should be executed via the following options:

• Retained by on-site customer personnel
• Carried out in onshore shared service centers
• Sourced from the offshore captive unit
• Sourced from third parties (whether onshore or offshore).

A hybrid captive structure is intended to create value by leveraging the investment, management team, and infrastructure of a captive to become a local prime contractor and the hub for obtaining services as needed from third parties. This can provide value in several ways. In the first instance, the captive management can examine its own book of business to determine what activities are core and non-core, and then outsource non-core activities to third parties (see Hybrid model A in the diagram). This will free up space to enable the captive to take on more work from the parent without an increase in infrastructure investment, or even allow an improvement in seat utilization by enabling the third party to use the captive’s own infrastructure during the periods when it is not being used by captive employees.