Captives & their issues

Thanks for the comments on the last article, that provided me with significant food for thought and I felt that I should address some of the points raised before delving into the key dynamics for outsourcing.

The first point was on the issue of captives and my learned friend felt that a captive is perhaps best placed to leverage the efficiencies of scale and the dynamics for change and drive superior behaviour patterns and increased profitability. I personally think there has not been enough empirical data to support this view - we do have exceptions but in most of the cases where I have had to deal with captives, the experience has been less than great. There are some simple reasons why a captive - unless of significant scale and clarity of structure - will find it difficult to work efficiently. Also at the outset, it must be noted that outsourcing to a captive is a much older and thus more evolved business model than outsourcing to a third party - the British East India Company outsourced jute articles production to their own factories in Calcutta in the eighteenth century! I believe there are essentially four issues with captives and most organizations who have utilized their captives well have managed to appreciate and resolve at least two out of the four issues well -
1. Governance model - the key issue I have often seen is the method of interaction between the two entities - often the captives are treated as another vendor which results in suboptimal results. At the other end of the spectrum there are cases where the business leaders directly control their niche portions of the operations leading to an inability to leverage common functions better. There is always the issue with the captive employees who are often looked at as 'less essential' by the front office business folks in the parent organization
2. Lack of scale - sheer size is critical - lack of economies of scale, lack of career progression opportunities, lack of opportunities to work in different systems, processes and platforms, lack of opportunities to travel / live in different cities/countries and consequent issues with point 2
3. Lack of cross skilling - one of the key differentiators with external services providers is the ability to find interesting opportunities to work in different domains, technologies, countries etc - this makes for constant learning opportunities and creates a broader appreciation of the enterprise. One would argue that working in the same domain and technology creates significant reusable knowledge and thus efficiency but often it works exactly the other way around - working in the same domain and technology creates isolated knowledge centers and dependence on key individuals increasing operational risk. Also, one needs to remember that operations should essentially be repeatable back office work and one needs to often 'dumb' the process, simply the process and need for specialist knowledge to increase efficiency - with obvious exceptions to this point.
4. Lack of cross industry learning - one of the keys to the success of the India based firms has been the ability to leverage cross industry expertise. Telcos for example are very good with managing customer churn while most banks are not. Several service providers have figured on how to leverage such cross industry knowledge to create and drive additional value. Additionally - thanks to a broad industry base - many service providers are able to drive significant efficiency by leveraging common functions and technologies across industries by essentially 'dumbing' the process and technology value chain. Simply, a DB2 administrator performs similar (though not same) tasks in a retail firm or in a logistics firm - no reason to develop an industry specific knowledge - again with exceptions
The second point made by another learned colleague was the fact that customers are constantly looking for value creation in their outsourced relations. Price, process and quality arbitrage is all standards expected from a service provider but what additional benefit are they able to create becomes a crucial differentiator in an outsourcing relationship - this probably neatly brings me back to the topic I left last month's discussion on and which I think needs to be continued in our next post!