Summary: Even companies that might have a global footprint already can struggle with creating a balanced global delivery capability to control costs and access the right talent. Their experience and familiarity with their current situation can often cloud the decision as they are often too close to the problem to develop an unbiased and well-rounded strategy and, in the operational phase, lack the team to dedicate to the selection, setup, and scaling of a program that could take 8-24 months to implement.
Evaluating the Options to Build the Capability
As companies battle to remain competitive in an increasingly globalized market, the attraction of consolidating back-office and other functions to lessen expenses can be a significant strategic play. Many companies continue to turn to outsourcing and to outsource service providers for Technology or Business Process Outsourcing in countries with high labor arbitrage to rapidly leverage any price improvements, great talent pools, and best-in-class processes.
Nevertheless, only some companies wish to outsource. This might be for political or philosophical factors or because of viewed dangers about intellectual property or client perceptions. Or they want to maintain control yet benefit from a lower cost highly talented global labor force. Captive Shared Services can prove to be a better choice over outsourcing. For those companies, consolidating services and functions into offshore Captive Shared Service Center (SSC) is frequently the selected course. While the benefit of SSCs is enormous, the difficulties creating one is a challenging job to perform alone.
The risk of executing a plan to move the company offshore is significant, and with continual changes in tax and other multi-country risks never been more daunting. Confronted with such threats to their career, execs appointed the complex mission of consolidating back-office functions to look for trusted expert advisors and guides with proven experience to assist them through the labyrinth of choices and guide them to a fully operational and dynamic center that can support the company’s global operations.
Companies now expect their business leaders to generate high-value operations and next-generation captives that work seamlessly with the business in such a way as to drive cost efficiencies and operational improvements and add value to the company as a purpose and way of doing business. A careful design of the process and center is required to allow for continuous improvement and seamless operations. McKinsey reported 13% annual growth in captive operations over the last decade, which places the captive strategy at a slightly higher growth rate than outsourcing which has seen growth in the high single digits most years.
And the choices of where to locate your offshore captive have grown annually, with countries ranging from Morocco to India to Vietnam and the Philippines. The essential decision of where to find is nuanced and unique to your company’s specific requirements. No one location fits all, or ALL operations would be moved to the lowest-cost zip code in India.
But leading the process of making the global location decision and configuring the work process to fit the culture and time zones is a complex decision that needs to be given a thorough evaluation.
Without the benefit of a skilled outside advisor, the company could end up with an uncertain plan without insight into the range and depth of decisions required to move work to an offshore location and risk the chance of delays and loss of value. There is a range of options to augment your management team. These range from high control, outside expert-driven advisory-driven plans, hybrid with an outsourcing provider allowing you to collocate with them, or a build, operate, and transfer model.
Each of these could be right for your company based on your specific strategy driven by the correct location, configuration, and scope for your offshore operations. You should choose your advisor well and be thoughtful as you think through these options. There are a few ways to proceed:
Advisor – In an advisor model, typically led by an experienced consultant and team who have advised in multiple moves to create offshore centers. As consultants, they are usually spread across the world; there would be a mix of offshore experts with either onshore in-person experts or some that are flown in, with the idea of keeping costs as low as possible for the client. This is a range of boutique consulting firms like the Outsourcing Center, who would have the breadth of experience to guide the overall transformation while relying on the provider to provide some subject matter expertise. If you are considering this option, you need to be mindful that you have total control, and keeping to a plan with rigor and depth is very important.
Hybrid Center with a Proven Provider – This is a great way to leverage an outsourcing provider’s infrastructure, expertise, and resources while maintaining control over the operations. By partnering with an outsourcing provider, companies can gain access to specialized skill sets and technologies that would otherwise be too expensive or difficult to procure. Additionally, companies can benefit from economies of scale by sharing costs with other customers of the same provider. With the right strategy in place, establishing a hybrid center with an outsourcing provider can help organizations reduce costs and increase efficiency. If you are considering this option, you should assume that your operations are not 100% separate from the provider, and if not planned carefully, it may be difficult to fully separate from the outsourcing provider. The cost of the move will most likely need to be expensed in the year of occurrence.
Build Operate Transfer (BOT) is a model that allows companies to work with a consulting firm that will take on the role of a general contractor who will form a unique legal entity to create a turnkey offshore center to fit your needs, hiring all the staff, designing the operational process required to support your needs, then the consultant operates the center for a specified period of time and then transfers the whole operation to you via a pre-arranged sale or joint venture buy-out. With BOT, companies can benefit from the expertise of an external provider who will Build and Operate the shared services environment and, after passing tollgates, a set period of time, or a combination of the two, transfer that operation over to the client. BOT also can have favorable tax treatment depending on the risk and reward structure of the agreement.
For Fortune 500 companies, captive sites are commonplace. The market has moved on, and companies across a wide range of sizes and maturity with operational centers of 100-300 can benefit from an offshore and global model. With significant cost savings through cheap labor, inexpensive resources, and tax benefits, this is an option you should consider. As a company matures its captive offshore center, it can move to more advanced delivery models and, as needed, expand its scope.
Regardless of your path, it’s wise to get advice on considering these options and the total costs of moving to offshore savings. The Outsourcing advisor can help you through the decision process to evaluate your options to outsource or engage in various captive solutions, including Build, Operate, and Transfer. Please contact us at bestpractices@outsourcingcenter.com to set up an appointment today.