Captive centers have been in existence since the early 1980s and there are so many debates among the experts about the pros & cons they have to offer. The main consideration for opening a captive center is the significant cost advantage in the form of lower resource wages, cheaper infrastructure, favorable exchange rates and government policies. However there are always two sides to a story. In this blog, I would like to discuss the hidden factors of a captive center that is always overlooked.

Cost, as mentioned earlier is the primary reason that prompts big multinational companies to set up shop in low cost talent rich destinations like India. While many of them take into account the tangible, easy to determine fixed and variable costs like startup and employee recruitment costs, equipment and infrastructure costs, operating wage expenses for employees and support functions, the intangible costs/factors tend to get ignored which can adversely affect the outputs of the captive. There have been many such instances where the parent companies notably Citigroup among others have realized that they have burnt their fingers with their captives and have been forced to shut shop by either closing down operations or selling it to an offshore based service provider.

The hidden factors that captive centers tend to ignore/overlook are:-

1)  The amount of management time and supervision required: – A captive is perceived as a cost centre and the management has to spend considerable time running it. The travel and stay costs of managers between parent and captive, deploying full time managers handle the day to day operations of the captive; There could be multiple managers operating from a parent and captive centres which could lead to ideological conflicts which adversely affects decision making

2)  Less exposure to high technology work: There is a tendency to underutilize the captive by pushing work that is non-critical: – Product companies only tend to give customization and enhancement related tasks to the captive while keeping the active development with the parent. This could again be due to lack of trust on the capabilities of the captive. Especially in cases where high technology is involved this behaviour becomes more & more prominent

3)  Control from Parent centre: – The processes and practices followed by the parent are forced on to the captive ignoring local, regional and cultural factors

4)  Attrition and resource replacement costs: – The resources in a captive normally perform some niche functions and their growth is confined to getting better at that skill which after a point of time becomes stagnant. This is detrimental to both the resource and the captive itself. The resource, finds it difficult to adapt when being called upon to learn new skills. As mentioned before about the rise in salary, the captive need to pay more year on year for the same output at the same time, the replacement cost of finding a resource with similar skill set is high

5)  Resistance from parent centre: – There is a growing fear on the employees of the parent organization when the captive starts performing well that more work will go to the captive and there may be job cuts in the parent centre. This speculation breeds discontent and lowers overall productivity.

6)  Relaxed SLA norms in a captive: – The captives will not have the same SLAs to deliver when compared to an outsourced centre. The output from the captive will be therefore lower

7)  Lack of scale: – For getting small chunks of work or ad-hoc work done, a captive cannot be used. The outsourced centers have the luxury of deploying resources for a short time and move them to other assignments when the task is completed

If the captive has to deal with so many challenges, when does it make sense to go to a captive? Let’s discuss about the best captive model in the next blog.Webinar