Reasons Why Captive Center Outsourcing Fail

It just like some old story

It just like some old story. A struggling company during the financial crisis has found a gold mine in outsourcing work to other countries. In the process, they were able to improve their operations without increasing the cost of maintaining one. With the the increase in revenues that has been generated, the company then decided to take on another strategy. One that they think will be more beneficial captive center outsourcing.

In theory, this would very much work. Set up your own branch in a foreign country, and you get to bypass third-party companies. Instead of paying for their services, you get to own the services. Instead of sharing your technology with them, you get to keep it. Instead of worrying over the safety of the information you're sharing with them, you gain full control over it. Rather than letting other people manage you operations, you have full control over the entire process. Very good idea, right?

Well, not exactly. If Citigroup or GE was any evidence, then captive center outsourcing may look like a big fail. But what exactly creates this problem? What are the reasons why captive center outsourcing fail?

First, and foremost for some experts, is that many parent companies have unrealistic expectations over their captives. They think that once they have set up their branch, then it's going to be millions worth of revenue. But that has proven to be quite a double-edged sword, since captive centers are turning out to be a drain for the parent company.

Also, some parent companies set-up their branches in anticipation of additional demand for their services. Say, for example, there is an extra 30 percent increase in demand, if a captive handles it, and then they will just be absorbed. But if it was an outsourcing company, then the parent company would have to pay an extra 30 percent. That would be a good reason to set up a captive, the only problem is that demand is actually dropping. This creates a difficult scenario for the parent, who is now faced with another problem.

The last factor would with regards to control. The company would certainly like to have a good control over the data and technology they use, so they set up a captive center outsourcing to take care of it. But that more often leads to extra costs in maintaining the secrecy. In the first place, outsourcing was supposed to be the handing out of non-core activities to others. Since sensitive data and equipment is considered a core function of the company, then it's not supposed to be outsourced in the first place.

by: Wanda Jones

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