The Evolution of Captive and Outsourced Delivery Models for Business Processes
Birth of captives
Once upon a time, global and pan-regional companies operated as a collection of single country businesses. Their back-office financial support was organized in the same way, with processes and systems being developed at a local level in each country. In the eighties, new global companies such as Microsoft entered the scene and were able to quickly organize their businesses and their back-office support services in a different manner since they were able to start with a clean sheet of paper, making them appear lean and nimble.
By the late eighties, the more progressive companies, now often challenged to compete with new market entrants, began to realize that they had been diluting the effectiveness of their IT spend and, perhaps more importantly, were unable to respond consistently to their new, more global customers who were frustrated by different billing systems, account collection approaches and settlement methodologies. Similarly, on the supply side, these companies were struggling to take advantage of their global spend with
global suppliers due to their inability to easily consolidate information on spend patterns. Meanwhile, they often had resale inventories stranded in countries, with each country business unable to view that held by other countries, leading to overall inefficiency in the supply chain. In addition, country-based financial organizations were limited by their pyramid structure, typically with suboptimal spans of management and insufficient specialization due to the variety of tasks being performed by the relatively small country-based staffs.
The pioneers in this area set about creating accounting centers, usually at regional level, which eventually grew up to become fully-fledged SSCs (also referred to as captives). These centers operated with one support structure and quickly learned the value of standardizing processes. In time, with the advancement of technology and the introduction of networks, the "islands" of information became readily available in one regional data warehouse, further enhancing the value to the business. The organization structures at these new centers flattened out the structures of old, allowing specialization in the various functions and an improved management span due to the critical mass created.
Over time, these centers began to move to locations with lower cost and multilingual talent, allowing them to serve broader geographies, for example Amsterdam, Dublin, Singapore, and later India, Czech Republic, Poland, etc. Over time, internal control became strengthened as a result of "one way of working," and the most forward-thinking companies started to move their regional centers to global centers, to further benefit.
Birth of outsourcing
In the seventies, many companies realized that there was value in outsourcing functions which were not core to their business. Payroll was often the first function to be performed outside of the business. Companies such as EDS applied the outsourcing approach to IT support and so the models began to evolve. In the early nineties, British Petroleum (BP) often labeled as the godfather of business process outsourcing (BPO), entered into an arrangement with the then Andersen Consulting (now Accenture) to outsource many of its back office financial functions from its quickly developing North Sea Operations Center in Aberdeen Scotland. BPO as we know it today, was born!
Outsourcing offered many, if not all, of the benefits identified under the inhouse/captive model described above, but introduced the new notion of service performance levels being defined with the external provider. Moreover, the service provider often had greater experience hiring and retaining local talent, could offer ‘round the clock support with its global delivery infrastructure, and took on the risks associated with running remote service centers (currency fluctuations, wage inflation, local political, legal and tax issues, etc.).
Over the past decade, outsourcing providers have expanded their BPO offerings, with finance as the "hub" function, but offering HR, inbound customer support and industry-specific processes, such as insurance claims processing or clinical data management, in addition to finance support. The leading providers are also offering "hybrid" solutions that include management of the software applications underpinning the outsourced processes, whereby they can help deliver the synergies of tightly aligned IT and business processes within an outsourced model.
Many of the early BPO pioneers saw outsourcing as an opportunity to out-task non-core back office processes and re-focus their in-house staff on managing service levels, higher-value controllership activities and other functions that had greater alignment with the core business. However, as they ventured into outsourcing relationships, they also found several challenges with the model, namely getting constant, ongoing value, cost-reduction and innovation from service providers, who often provided a reactive service based solely on contractually-agreed terms. BPO adopters quickly had to learn how to manage their outsourcing providers effectively, and acquire the right skills and experience to do so.
Markets like India and the Philippines offered significant cost advantages over the typical European locations like Dublin and Amsterdam, which flourished in the early captive days. In time, GE became an outsourcing provider through the creation of its GECIS subsidiary (now Genpact), and new companies, such as Hewlett Packard, ACS, CapGemini and IBM entered the market. More recently, newly established providers have emerged from the outsourcing boom, namely Indian-owned companies operating services from India, such as Infosys, Wipro and Tata Consultancy Services. We are even seeing a further wave of offshore outsourcing providers making attempts to enter the global BPO market, for example Satyam, Cognizant and Patni.
These models can help companies improve effectiveness, reduce costs and improve internal control. Over time the functions being handled by these models have also moved up the value chain from simple accounting or transaction processing to most back and front office support functions. For those companies not quite sure about outsourcing, hybrid or "virtual captive" models have been developed by outsourcing providers, allowing for a middle ground which selects benefits from both models.
It is not unusual for companies to start with a captive model, and move to outsourcing later; others go straight to outsourcing. However, those with significant experience in developing a captive model have found the transition to a fully outsourced model less complex and arduous, as some degree of standardization is already established. The key drivers to selection of the appropriate model include the following:
Availability of talent
- Company size - is the company large enough to attract, retain and develop the best workforce in a given location?
- University access - does the company have access to the best universities to attract the new graduate population in a given location?
- Retention programs - can the company offer sufficient career opportunities either in the SSC environment or in the business, at the given location? Some outsourcing providers have 10,000+ seats and multiple clients, which almost guarantees an exciting career path for successful young graduates.
- Given their size, outsourcing providers usually have the advantage in the most popular offshore or nearshore markets, such as India and Eastern Europe, but the captive can usually hold its own in the onshore markets.
- Flexibility - many companies require a degree of flexibility, which may not be available in a strict outsourcing scenario, so propensity for control and flexibility becomes a key selection factor.
- Process documentation - although Sarbanes Oxley has helped improve this for everybody, outsourcing providers tends to be more rigid in process and control documentation for no reason other than this forms the basis for training their employees on how to support clients
- Degree of flexibility required will be the key determinant in this area.
Continuous improvement capability
- Lean/Six Sigma skills - this has become a core competency for outsourcing providers and is necessary to drive the productivity improvements and consequent cost reductions that are designed into outsourcing contracts.
- Organizational culture around improvement - while many companies have a like appetite for continuous improvement, it is not the norm for all companies.
- Best practices across client base - the outsourcing provider has the advantage of being able to draw upon best practices from multiple clients.
- The outsourcing provider usually has the advantage here.
Technology and infrastructure investments
- This is an ongoing requirement for outsourcing providers in order to drive productivity. Technologies such as scanning, OCR, etc., are easier to justify over a greater population and never suffer from the inevitable capital expenditure squeeze. The majority of today’s top-tier outsourcing providers now offer technology workflow tools that can help integrate financial data across disparate systems and geographies, and provider dashboards for in-house financial management to gain quicker access to data.
- Contingency planning and back up – many companies even with shared services models do not invest fully in this area. For the outsourcing provider, it is an imperative, otherwise reputations can suffer and costly contract penalties can trip in.
- The outsourcing provider usually has the advantage here.
Deciding whether finance back office is core
- The finance back office is the business of the outsourcing provider and since it represents its product or service, it has to be good or better to stay competitive.
- If the company decides that it does not want its employees, customers or suppliers dealing with a third party for back office support, it will have deemed these functions as reasonably core and will most likely find the captive model more appropriate.
- Decision here depends on consideration of what is core.
Service level – internal vs. external
- Capability to measure – as outsource contracts often have gain sharing or risk/reward clauses, representing compensation for the outsourcing provider, there is usually a robust set of service levels clearly defined and measured. While some companies are good at doing this internally it still marks a "luxury" for many.
- Reporting forums/mechanisms – in order to share the results of performance measurement, outsourcing providers tend to have portals and formal monthly meetings to review findings. This may not be the case with captives.
- Performance penalties/incentives – these usually help influence the right behaviors with the outsourcing provider, and may provide a stick or carrot not always available under the captive model.
- Benchmarking – although not offered or used by all outsourcing providers, the existence of such a clause in an outsourcing contract should allow the client company to stay abreast of market developments and take advantage of new practices such as pricing models or latest cost structures in a given location. This may be much less formal or appropriate in a captive model.
- The outsourcing provider usually has the advantage here.
While I am not a spokesperson for outsourcing, I do believe that outsourcing offers a distinct advantage for many companies seeking to take full advantage of lower-cost resources and the process acumen offered by many of today’s maturing outsourcing providers. However, the captive model is still a preferential delivery model for a company believing support functions are core to the business, preferring support functions to remain in the same onshore geography, or not having an appropriate plan for displaced employees. Each of these factors will need to be considered, along with the cost models and goals for productivity and efficiency improvement, internal control improvement and service culture.
(Graham Russell would like to credit Phil Fersht of AMR Research for elements of the material in the sections on outsourcing.)
About the Author
Graham Russell is the Head of Global Transaction Processing at Astra Zeneca. His earliest experiences in shared services were at NCR Corporation and subsequently AT&T Corporation where he pioneered the shared service operations in Latin America. Russell subsequently moved on to Equant (now Orange Business Services) where he architected the shared services model and implemented the global processes and systems to support it. In time, he took over the operational responsibility for the global shared services organization and after a period, outsourced the majority of the work to an outsourcing provider using locations in India and Poland.