Factors to consider while setting up a captive center.

There are a number of critical factors that organizations looking to set up a captive center should consider. These factors will help determine not just the approach to be adopted to set up a captive but also critical details on where and when to set up the center.

The broad categories to be considered can be bucketed under five important groups. These groups include:

  • Cost
  • Talent
  • Scale of operations
  • Flexibility
  • Regulator support.

Cost: Cost continues to be the primary driver to explore outsourcing and offshoring. Broadly, the two important attributes that organizations need to consider are capital investments and operating expenses. The capital investments are higher if one were to set up a direct presence in a country. The capital investments will go towards paid up capital to set up a legal entity, setting up a physical infrastructure including office space, interiors, telecommunication infrastructure, it infrastructure, lab infrastructure etc. In addition to the capital investments, there will be variable costs incurred on a monthly basis. This will include people costs, vendor costs, travel costs and regulatory costs- such as taxes. Upfront capital investment required to set up a center is a key decision driver for organizations exploring setting up a new center. There isn’t a fixed metric to compute this cost. It varies by the type and scale of captive and the culture of an organization. Organizations that believe in having best in class infrastructure for their teams and world class facilities will obviously have to invest a lot more on capital cost. an important attribute to keep in mind when it comes to capital investments is that the upfront costs involved will be planned with future scale in mind. That is one will have to invest for an infrastructure of 300 people, but the full capacity utilization will happen only at the end of 3 years.

Talent: Talent is an important attribute to consider while setting up the captive. It is important to define a clear charter for the captive center and then hire talent that can help deliver on the charter. The talent required in the center to drive innovation is very different from the talent that will be hired if the charter for the center is to provide cost arbitrage. It is very important to structure the center in a manner that allows one to offer a well-defined career path to individuals. The center needs to have a clear charter to able to offer a growth path to all employees. It is also important to understand the effort that will be required to groom senior management resources. Unless senior resources are groomed, it will be very hard for the center to deliver on the objectives and goals set for it.

Scale of Operations: The scale of operations is a critical attribute to setting up a captive center. It is an important factor in the decision making. If a center doesn’t have sufficient scale, then it is hard for it to be viable. A subscale captive not just impacts the cost arbitrage but also makes it hard for a captive to offer its talent a good career path. If a captive has scale, the captive center has the ability to go beyond cost and generate value. The value generation can be in the form of innovation both at product and process level. Scale gives freedom of budget for local leadership to experiment with ideas and to showcase value to the parent.

Flexibility: The importance of flexibility on a chosen approach offers is a crucial parameter in choosing the approach to setting up a captive. Going the direct route gives one the flexibility to pick the location, and organization structure. An organization can drive greater accountability and ownership with its own center. Organizations can also build centers of excellence that are involved in critical parts of the globalization roadmap. With a BOT, this flexibility is missing. The location choice is restricted by the footprint of the vendor partners. Though one could still work with a service provider to build a center of excellence, the focus areas might be very different from the centers of excellence that would be created for the in-house center

Regulatory Support: A most times the decision to set up a town center is also determined by the regulatory support on offer. If a local government were to give tax incentives and other benefits, there are reasons to consider setting you own center than go with a BOT or a vendor partner. A crucial decision factor is Labor Laws in the country an organization is setting up and its impact on ramping up and ramping down of teams. If the laws make it hard to ramp down teams in case of an organization realignment globally, most companies would not choose to set up a direct captive.

These are a few crucial factors to be considered in choosing the approach to setting your presence in a low cost location. Organizations should evaluate their business requirements and weigh the benefits of setting up a center on the basis of the parameters enumerated above to create an optimal globalization roadmap.

If you found this information useful and would like to have a conversation around the topics discussed, please contact us at info@zinnov.com

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