Captive Centers: Back to the Future

You might think that captive centers have had their run. The news about several well-known multinationals divesting their captive centers in 2008 and 2009 has spread the rumour that the days of the captive center are over. Well, that is not completely true. Everest Research indicated that late 2009 and early 2010 witnessed a significant increase in the number of new captive centers set-up around the globe. The results of my recent study confirm Everestâs findings. The bottom line is that captive centers are here to stay, despite the various challenges they face. But can we predict what the future entails for captives?First, we need to try to understand what the captive sector has gone through since its inception, i.e. to examine its history in order to understand what factors shaped its evolutionary path and therefore be able to say something about its future. Together with research student, Bob van Uhm, I have evaluated captive data from 1985 onwards (spanning 26 years), studying its evolution in light of the strategy pursued by the parent firm.For this, we specified four strategies (see my previous blog: Whatâs Your Captive Center Strategy?):Basic -- in which the captive provides services to the parent firm;Hybrid -- in which the captive provides services to the parent firm but outsources non-core activities to a local vendor;Shared -- in which the captive provides services to both parent firm and external clients and;Divested -- in which the captive is divested to a 3rd party.Our study also considered the following aspects: major changes in the captive sector in terms of functions offshored, geographical locations and the number of new captives per annum. Our sample was the Fortune 250 global firms.The first thing we have learned from our data is that there are four phases in the life of the captive sector:1985-1997 the early years,1998-2002 the early maturity phase,2003 â 2005 the expansion years, and2006 â 2010 the slowdown and recovery yearsWhen we examined the number of new captives per each strategy and phase, we discovered that Basic captive strategy is the most popular among the largest firms in the world. However, since 2006, the number of Basic captives has fallen while the other captive types (Hybrid and Shared) have been making a steady growth. This indicates that captives are maturing and multinationals feel more comfortable establishing captives that are looking for growth opportunities by acquiring external clients (Shared) or outsourcing non-core activities in order to streamline operations (Hybrid).When we examined the functions offshored through captives (e.g. IT, BPO, Customer Support and R&D) we found that the number of captive centers that provide R&D services has steadily grown since 1985. In particular, we found out that China has become a power house hosting more R&D captive centers than any other country. Similarly, the number of customer support captives has grown since 1985, however, these were pretty much evenly spread around the world. The number of BPO captive centers grew until 2005, but since 2006 we have seen a continuous decline in these numbers. The simple explanation for this trend is the level of maturity achieved by 3rd party vendors which allows client firms to consider switching from the captive solution to a 3rd party outsourcing arrangement. Our data suggest that this scenario is in particular relevant to the Indian BPO landscape.IT as an offshore function has not witnessed growth in the number of captive centers since 2003.When examining the attractiveness of some geographical locations for captives, we observed a decline in Indiaâs position as the most attractive location for captive center in favour of Central and Eastern Europe, in particular since 2006. We have also noticed that the Indian captive sector suffered from a sell-off in 2008 and 2009 as a result of the financial crisis.On the other hand, Central and Eastern Europe has emerged as the most attractive location for captives, in particular for BPO and customer support functions. Second tier attractive locations are China and Central/South America, which have been attracting multinationals to set up captives since 2006. Unlike India, the global recession did not significantly affect the captive landscape in these locations.Emerging locations are the Middle-East and North Africa, which have attracted captives -- in particular since 2008; but these regions have not managed to develop a wide range of BPO and IT offerings. Instead, they specialize in some of the BPO and customer support functions.So based on this historical review of the captive sector: what can we say about its future?The Professorâs verdict:First, the concept of the captive as providing services only to the parent firm (i.e. Basic) is facing death. As multinationals become more experienced in running captives around the globe, they realize the potential in these service units, which goes beyond just the simple cost cutting value proposition. More multinationals now understand that captives provide them access to skills (at the ârightâ cost) and new markets.Second, As Indiaâs attractiveness for captives is diminishing, so Central and Eastern Europeâs or Chinaâs emerging position will eventually be eroded by newcomers. Some of the factors that shape "country attractiveness" are:Access to talentLow labour costsGovernment incentivesGood infrastructure, andLocal market growth.Many countries are massively investing in improving the performance of these factors with the hope they can attract foreign direct investment from multinationals. As some countries become more attractive for captive facilities, multinationals will either decide to set up their next captive in that more attractive location -- but more interestingly, some multinationals will migrate their existing captive from a less attractive location to a more attractive location. Switching between locations will eventually become a common tactic.Last but not least, which functions are candidates for offshoring through a captive center will eventually be decided by the maturity level demonstrated by vendors as an alternative route (and the impact the function has on the firmâs strategy/operations). The BPO captive landscape is a good example, with the on-going decline in the number of new start-ups and the growth in the BPO market as an alternate route. We also think that R&D is more likely to be kept in captives, though with more emphasis on partnering with local/global players and joint ventures.

Captive Centers: Back to the Future

Upcoming Events

Intercompany Service Charges and Allocations in SAP

Automation You Can Audit: Invoicetrack

Beyond Engagement: Driving Behaviour at Scale with Employee Recognition

Future of Finance & CFO Select

HR Shared Services & Outsourcing Week

Agentic & Applied AI for the Enterprise

Follow Us

Latest Webinars

Germany’s 1 January 2027 E-Invoicing Deadline: Timely Guidance for Time-Crunched Leaders

Why Shared Services and GBS Transformation Stalls and How to Overcome Change Fatigue

Through Trust and Governance: How AI Agents are Redefining Accounts Payable

Recommended

Egypt: The Next Country North American Shared Services Should Consider IT and Bu...

How Do Sourcing Objectives and Criteria Determine the Sourcing Approach ?

The Outsourcing “Conundrum”: Securing the Benefits You Expect

EP17 The critical link between digital transformation and GBS (Global Business S...

BPO = Business Process Outcomes [not Business Process Outsourcing]

5 Ways Your Business Process Management System Could Be Failing Your Back Office

"Parts Is Parts" - The Key to Differentiating Yourself

Tech Demo: Accelerating Invoicing to Overcome Workload, Speed and Regulatory Cha...

What Will Save BPOs?

Shifting to SaaS may not eliminate the “Technical Debt”

Offshore Engineering R&D Centers Will Continue to Flourish in Current Crisis

Play Nice, Outsourcing Providers. There will be life after COVID-19

FIND CONTENT BY TYPE

SSON COMMUNITY

ADVERTISE WITH US

JOIN THE SSON COMMUNITY

Captive Centers: Back to the Future

Upcoming Events

Follow Us

Subscribe to our Free Newsletter

Latest Webinars

Recommended

FIND CONTENT BY TYPE

SSON COMMUNITY

ADVERTISE WITH US

JOIN THE SSON COMMUNITY