There are many ways to improve the performance of offshore captive.

by Bob Cecil

If you’re like many organizations, you’ve probably considered global service delivery as a way to bolster competitive advantage. As part of that strategy, you might have some F&A operations in an offshore “captive”—an internal shared-services center in a low-cost location.

But a strategy created yesterday doesn’t always work today, which is why some organizations are taking another look at their captive centers. Such reevaluation is important in today’s economic uncertainty, as organizations are wise to review service delivery alternatives for improving performance, productivity, and cost reduction.

Captives often struggle with operating costs, attrition rates, economies of scale, and other challenges. No matter what offshore market your captive is in, third-party service providers already there typically have a leg up on the available resources, from real estate to talent. Similarly, captive centers often have attrition that’s 10 to 20 percent higher than service providers’ centers—a fact that requires captives to spend more on advertising, recruitment, training, and retention. Finally, some captives struggle to operate efficiently. A center that’s doing accounts payable for its parent company simply can’t get the same economies of scale as a service provider that’s fielding high-volume work from multiple buyers.

In response, some organizations are realigning their captive centers, others are partnering with third-party service providers on offshore operations, and still others are divesting captive centers altogether. What’s the best route for improving your captive? Consider the following options:

• Realignment. Does it seem like your captive has become a dumping ground for non-essential work? If so, your organization may have made the common mistake of sending existing processes—and existing inefficiencies—to the new office. This turns the captive into a catch-all for work sent piecemeal by managers who have a short-lived interest in using the center. One remedy is to realign the parent company around the offshore strategy. Reintroduce the captive to business unit managers, and seek recommendations from them on how to best leverage the center, such as taking on more end-to-end process responsibility. At the same time, educate managers at the captive on company-wide operations, and motivate them to establish relationships with the business units and a more comprehensive perspective where they can weed out the nonessential work while retaining and expanding more critical activities performed in the center.

• Partnership. Is your captive struggling to drive innovation while reducing costs and increasing efficiency? Local providers often have better access to resources and more flexible operations, so consider partnering with them to improve captive performance. A partner could assist with such areas as recruitment and infrastructure development or provide staff augmentation. Such partnerships can enhance overall process performance, make better use of assets, and create a better risk profile.

• Hybrid Partnership. It might make sense to use a third-party for some activities within your captive. In a hybrid model, a provider is brought into your center to do some of the work, while you focus on services that remain in-house. You may choose best-of-breed partners for areas such as procure-to-pay or
order-to-cash, where the provider performs operational activities and the captive management assumes client-sensitive and analytical activities. You retain overall control while leveraging a provider’s local brand and core capabilities, which can help retain staff, improve productivity, and drive ongoing savings.

• Virtual Captive. What if it simply makes more sense for your company to buy offshore delivery versus building it internally, but policy prevents the release of full control to a third party? In this case, consider a virtual captive, in which a service provider delivers nearly all operations. In this model, which is a more expansive version of the hybrid partnership, the center appears to be your organization—typically with the parent company’s name, processes, and many of its people—but it would have the service provider’s infrastructure. Nissan and Wachovia are among a growing number of companies with virtual captives.

• Divestiture. There are situations—such as extreme cost pressure—in which realignment or partnerships won’t deliver enough value or you have taken the captive as far as you can without significant investment that could better be deployed elsewhere, and the best move is to sell or commercialize the captive. You may be able to sell your captive to a service provider that’s interested in building specialized knowledge and skills, as was the case with Unilever, which sold its Indian and Latin American captive centers to Capgemini. Occasionally, but rarely, such a sale can even form a new company—as in GE’s 2004 spin-off of the Indian captive that later became Genpact.

Captive centers can play a critical role in an offshore strategy, but organizations must assess—and reassess—operations to ensure maximum value. By carefully examining your center’s performance and considering different approaches to delivery, you can determine the best combination of models, locations and global services for your organization’s F&A objectives.