Companies continue to evaluate ways of increasing their operational efficiency while providing meaningful services to their internal stakeholders. These enterprises have used a variety of strategies to achieve this, including deploying a captive shared services organization, engaging with outsourcers, or deploying a hybrid strategy. While determining the best operating model for your enterprise requires extensive care and evaluation, recent trends indicate that companies are increasingly choosing a captive shared services approach. In SSON’s 2014 State of the Shared Services Industry Report, 43% of companies surveyed identified themselves as operating in a captive shared services organization, while only 9% fully outsourced their operations. Additionally, 20% of respondents operated in a hybrid environment, with only 4% operating as a hybrid with future plans to shift to a fully outsourced environment.
While the value obtained from captive shared services and outsourcing are similar (e.g., economies of scale, cost efficiency, etc.), it is important to understand the primary differences when determining which is the right strategy for your organization. In an outsourcing relationship, a third-party provider is entrusted with the service delivery, but also owns and operates the infrastructure (e.g., facilities, technology) where the services are performed. Within a captive shared services organization, the responsibility and ownership is completely retained, which significantly alters the risk profile and complexity of both implementation and operations.
In the past, capturing cost savings (mainly through labor arbitrage) was the main motivation to establish captives, however recent trends suggest that organizations are now also implementing captives as a strategic value discovery exercise emphasizing benefits beyond labor savings. When done properly, implementing captives are not about “lifting and shifting” existing processes, but innovating and rationalizing these processes to expand a company’s in-house capabilities and enabling the use of its human capital in a more strategic manner.
Organizations embark upon the captive shared services journey for a number of reasons, including the following:
- Greater integration and strategic support with the company are enabled by better alignment with the company’s culture and philosophy.
- Better risk management with the ability to maintain end-to-end control of complex processes which an outsourcer may not be able to provide. This decreases the chances of compromising proprietary information, process and technology.
- Ability to develop specialized capabilities through direct access to the company’s knowledge base and customized training for improved talent retention. Over time, captive resources acquire industry-specific skills and expertise that the company can leverage throughout the organization.
Why Isn’t Everyone Doing It?
In addition to providing a platform to deliver strategic value, establishing a captive enables the attainment of economies of scale and cost savings, as well as streamlining and standardizing processes. However, when complex process transformation projects (such as deploying a captive) are undertaken, these benefits are not easily achieved. It is not uncommon for organizations that have not achieved their targeted savings within two to three years to either scale back on the size and scope of the operations, or divest these captive delivery capabilities to outsourcing providers.
There are numerous challenges that prevent an enterprise from realizing a captive‘s full potential. Because developing a captive may require a high upfront capital investment and significant transition costs (including a temporary increase in operational personnel to achieve stabilization), those economies of scale and cost savings may remain unrealized if not properly planned for and managed.
Reasons why captives underperform include the following:
- Organizational misalignment and poor change management lead to a lack of support and buy-in for the captive strategy among senior leadership. This lack of support then permeates the organization resulting in apathy, misunderstanding, and lack of momentum that ultimately jeopardizes the project.
- Poorly defined processes impede efficiencies and true economies of scale. This is frequently driven by a focus on obtaining labor arbitrage savings quickly, rather than building or investing in more-efficient processes.
- Poorly executed transition and knowledge transfer result in captive resources not having the requisite skill and knowledge to provide services at the right service levels.
- Minimal emphasis on continuous improvement and sustainable value that hinders a captive’s ability to demonstrate value and maintain strategic fit with the organization.
- Talent acquisition problems, like attrition and poor leadership, are difficult to manage. Often, sourcing for appropriate candidates and filling leadership roles can be especially difficult in low-cost and remote locations. Establishing a captive and managing the operations are two very different activities, which require different skills and leadership qualities.
Is a Captive Right for You?
Deciding to develop a captive shared services organization requires considerable thought and diligence. Consider the following as you evaluate your options:
1. What processes are you looking to manage within your captive shared services organization?
It is important to evaluate current-state processes and identify which can be successfully executed centrally within a captive, since not all processes or functions are good candidates. Specific criteria that can be used to evaluate processes include repeatability, volume, input and output requirements, level of judgment required, external communication requirements and process risk profile.
Next, define the evaluation process (e.g., establish weights and score ranges for each of the criteria) and identify the stakeholders who will perform the evaluation. This objective, quantifiable evaluation methodology will allow your company to determine which processes are good candidates for management within a captive.
2. Where do you plan to locate your captive shared services organization?
Building a captive in an onshore or offshore location, even if you already have operations in the potential location, requires significant costs. Once the captive is built, it can be very difficult (and expensive) to change or reverse course. Consider the following when evaluating captive locations:
- Define the location criteria including access to talent, government regulations, physical and network infrastructure, the location’s economic and political stability, etc.
- Define an objective evaluation method to assess the location, by establishing weighting and scoring ranges for the location criteria, and identifying the stakeholders who will perform the evaluation.
- Get access to local expertise that can help you navigate the country-specific requirements of establishing and maintaining a captive.
- Develop robust business continuity and disaster recovery plans as part of your captive shared services strategy.
- Build a comprehensive business case (with appropriate financial analysis) to determine the impact of establishing a captive in the selected location.
3. Have you considered the talent required to support a captive?
Captives compete for talent with outsourcers in frequently considered markets. This creates a demand for talent that often outstrips supply. As mentioned, this supply and demand disparity is apparent even more when attempting to fill the shared services leadership roles.
While captive shared services personnel often have higher compensation packages than their outsourcing counterparts, the intense resource demand can result in many professionals moving from company to company (outsourcing or captive), perpetuating high levels of attrition. The high attrition level impacts a captive’s ability to deliver consistently and requires an extensive training program to offset the loss of intellectual capital.
4. How will you ensure integration and alignment with the captive?
Once a captive is established, maintaining alignment and integration with the broader enterprise can become challenging. A captive not attuned with the organization’s overall philosophy and culture will deliver sub-optimal results. A comprehensive governance strategy (e.g., steering committees, periodic process reviews, service delivery scorecards, etc.) and well-defined service levels are required to ensure that alignment is obtained and maintained.
5. How will you continually assess and monitor your captive’s value?
While cost savings is a significant portion of a captive’s value, determining other value drivers and how these will be measured is crucial for evaluating a captive’s total value and maintaining alignment with the overall shared services strategy. Other business impacts you may want to capture include loss reduction or cost avoidance, expansion of services offered, enhanced business continuity and prevention of revenue leakage.
In addition to regularly monitoring the captive’s total value, it is important to continually monitor the captive’s internal operations, HR (e.g., talent retention, training, etc.), regulatory compliance, and processes against industry best practices to improve performance and ensure continued strategic fit.
6. What is your organization’s capacity and appetite to undertake such a large transformational change?
Establishing and maintaining a captive can be daunting. Consider your firm’s culture, risk profile, leadership style, impact to internal resources, and change management capabilities as you pursue this strategy. Take steps to evaluate your organization’s capacity and appetite to start this journey, including the following:
- Determine the organization’s senior leadership alignment with this endeavor and confirm that the stakeholders are supportive of implementing a captive shared services strategy.
- Determine the number of management resources needed to manage this complex transformation project and prepare them to better manage the impact of the organizational change.
- Determine the impact to internal resources and the level of organizational restructuring required to ensure that processes will be effectively managed within a captive.
While establishing and managing a captive shared services organization is certainly challenging, it can provide significant value beyond just labor arbitrage. Ultimately, it is important to invest time and effort to fully understand if pursuing a captive strategy makes sense for you. Conducting a comprehensive evaluation upfront to gain an understanding of the benefits of a captive strategy, and more specifically how that strategy will align with your organization’s goals is a necessary first step. Once completed, you will be in a much better position to determine whether embarking on the captive shared services journey is right for you.