Captive Offshore Development Center Trends
It started more than a decade ago when software and embedded companies offshored product engineering work in order to cut costs. But today, time to market, productivity and growth stand shoulder-to-shoulder with cost as primary drivers for globalizing R&D operations.
View GraphWhat began as staff augmentation has emerged as a mainstream strategy evolving from low level tasks to the most complex architectural and development roles. Today there is virtually no aspect of the product lifecycle that isn’t being done offshore. More than 300 product companies have jumped on the offshore bandwagon and established captives in India alone as well as in China, Eastern Europe and other lower cost regions. Hundreds more have done so through outsourcing providers.
Many companies established captives out of a desire to have close control over offshore R&D operations and thought they could do it better themselves.
Captive Outlook Bleak: 60% of Captives Failing, Pace of New Centers Falling
So what is the state of captives today? A recent Forrester Research report, "Shattering the Offshore Captive Center Myth," paints a stunning picture. According to Forrester about 60% of captives are struggling. The challenges that captives are facing is resulting in a significant decrease in the number of new captives that are being introduced.
Some of the key challenges that combine to stunt productivity and performance are:
Lack of Scale
Without scale you’re doomed. Scale of operations impacts every element of a captive’s performance: cost, productivity, recruitment, attrition, etc. Forrester says that 500 resources is the magic number. It’s a big number that few achieve. One underrated factor is the impact on in-country branding. We’re not thinking about it from a sales perspective, but from a recruiting perspective. In places like India and China, people want to be associated with large, well known companies. Smaller companies with weak brands in the U.S. or Europe or even large companies with strong brands in other parts of the world have little or no brand in places like Beijing or Bangalore. So potential employees will have a preference for companies like Google, Accenture, Infosys or Symphony, who have established themselves as local leaders, rather than a company they have never heard of.
Higher Than Anticipated Costs
Many companies don’t plan to pay premium salaries to attract top talent and underestimate high G&A costs which can crush a small organization. Desperate to scale up, captives often pay well above market rates throwing the entire cost model out of whack. This is especially hurtful to startups that rely heavily on stock options to bring people on board. But that doesn’t work with offshore engineers. Forrester’s research shows that the average captive’s loaded costs are almost 20% higher than working with a provider.
High Attrition
Clearly the 4-letter word in India. High attrition kills productivity and destroys morale. Industry statistics show attrition at captive centers runs almost twice as high as the average provider rate. There are a number of factors that drive attrition:
- Lack of career path opportunity, especially at smaller captives
- Second-class-citizen status: many organizations treat their offshore teams as low-cost groups that do the uninteresting work that they don’t want to do anymore. This causes low morale and reduces any bonds of loyalty to the organization.
Poor Development Process and Integration with Onshore Teams
Many captives face difficulty establishing strong development processes and implementing productivity improvements. Very few small captives have the ability to put rigorous procedures like CMMi, Six Sigma and other measures into practice and they often lack proven processes for knowledge transfer and collaboration. All of these things and more, have a direct impact on the productivity of a global operation.
Management Attention Wanes
Success with the captive model requires companies to be experts in managing operations many time zones away taking attention away from the core focus of the company—making customers happy and wining in the market. Unfortunately, management support and enthusiasm for off-shoring tends to be short lived. Everybody’s excited at the beginning, but then the rest of the management team move on to the next thing. And a vacuum ensues. What’s worse, typically, the person who is supposed to be running everything is your best engineer, who doesn’t have the CEO-style skills to run the operation. Further, they are now ensuring the copy machine is working and managing an office, instead of contributing to the next product release. It's a tripple-whammy.
Is your Captive holding you captive?
So what should you do? Re-evaluate your assumptions and keep all options on the table – eliminate any predispositions. There are so many factors that can lead to an underperforming center. It’s critical that you understand what’s behind the poor results before you can even do anything about it. Is it a lack of scale, focus, expertise, processes? Once you’ve been able to diagnose the problem the solution will flow from there.
The main options available are:
- Close up shop: You can do it, but it still leaves you with the same set of resource issues that led you to investigate a global model in the first place.
- Reinvest and Renew:If you think that you can address all the problems that you’ve uncovered and are willing to make the financial and organizational investments – and believe you will achieve scale to make it cost effective, then this is a viable option. But can you really change key factors like the size of your company or the power of your brand in India? If not, it’s just good money after bad.
- Adopt a Hybrid Approach: A hybrid strategy – working with a provider(s) to enhance the captive’s output – is very common today. It’s hard to do everything by yourself even if you are a Fortune 50 company. There are almost no large Captives that do it all in house.
- Turn Offshore Operations over to a Provider: This sounds the most radical, but sometimes is the best solution.
Turn Operations over to a Provider
An emerging trend with underperforming Captives is to transfer operations to a provider. This sounds like a radical choice, to some it sounds heretical. You may wonder whether you can entrust your operations to a vendor? Question how they can run your captive better than you could. When you consider the issues around scale and productivity that are challenging Captive performance that often can’t be changed – and factor in that many companies simply can’t afford to dramatically increase R&D expenditures by bringing all of those resources back onshore – it is at least an option worth exploring before a decision is made to otherwise just shut down the Captive.
Want to Learn More?
Today more than half of our business comes from companies with a Captive center. This experience demonstrates that integration with Symphony Services can be managed smoothly without impacting release schedules and product quality. If you would like to talk about this further, please contact us at Captives@symphonysv.com.
