Captives: Can Innovation Be Their Trump Card?

Traditionally, captives were viewed as older setups with relatively more flab and lighter pressures of performance, while 3rd party vendors are viewed as lean and mean outfits with an aggressive culture. However, it is important to understand the difference in mindset of companies that setup offshore captives and that of vendors. The recent report by Forrester : “Captives Re-Emerge As A Source Of Offshore Innovation” pins a lot of hopes on captives to spur offshore innovation, and some with good reason.

Captives predominantly work on a cost plus model and hence are viewed as a cost centre from the standpoint of the company. However, given that their costs represent a significant savings from the costs that would have been incurred if the same work was done onshore, it remains a compelling value proposition despite cost inflations, excess flab etc. This enables captive outfits to invest more on innovating and delivering value to its onshore parent. On the other hand, 3rd party vendors are pure play profit centres and return on investment is the primary driver for most investment decisions, in addition to customer viewpoint on such investments in innovation. Therefore, the will to invest is often limited by the ability to foresee rewards of innovation in a 3rd party scenario, especially in the short term.

More from Biztech

Future Group - Reliance Retail Deal approved by CCI RBI ban on cryptocurrencies takes effect; prohibition could force investors to tap the black market

Other than the financial aspect, the key aspect is relevance to business. When it comes to vendors, often there are multiple vendors dealing with a company, or vendors are doing only a very small portion of the overall work and mostly, this is seen purely as “back office” and non-core. Given this background, it is unreasonable to expect them to meaningfully innovate on a large scale without active customer sponsorship and involvement. On the other hand, captive outfits find it is easier to integrate and align thinking with the company. This is further supported by easier access to information, systems and key stakeholders, due to which the lines between front and back end can often be blurred. That again, theoretically puts captives in a relatively better position to innovate and eventually evolve truly into centres of excellence.

The model that has seen success in recent times is the hybrid model, which works on the ‘horses for courses’ strategy. The value proposition of a captive is different from a third party and hence, the hybrid model seeks to complement these and gain synergies. Hence, increasingly, companies are moving relative straight jacketed, low to medium complexity work with large scale to 3rd party vendors and keeping relative complex work, which is core to business in their captives. This model gives them the benefits of efficiencies of a third party setup for their routine work while providing a perfect platform, by virtue of captive setup, to innovate. This becomes a compelling value proposition for captives, especially when dealing with aspects of business which are core and/or complex.

It is important for companies to recognise that short term focus on only cost saves dilutes the entire value proposition of outsourcing / offshoring. Some of this saving needs to be ploughed back into the business as investment in innovation. It is only when companies actively start balancing these two aspects, which initially seem mutually exclusive, will they truly realise they are actually complementary.

The author is MD, Protiviti Consulting.