As AIG, AOL, Dell, Target and other companies sold or shuttered their wholly-owned offshore IT and business process centers over the past five years, outsourcing industry experts predicted that the offshore captive center model was headed for the history books. But, according to a recent research report by outsourcing consultancy and research firm Everest Group, the captive model is staying alive-and thriving.
In fact, reports Everest Group, most large-scale captives continue to operate and have grown both in terms of scale and the complexity of services they provide. New captive set-ups are outpacing sell-offs, and divestitures are steadily declining. Last year, ten new captives were opened and 13 captives expanded, while just two were sold, according to the report.

Captive centers will continue to play a major role in offshoring for the foreseeable future for two reasons, says Eric Simonson, Everest Group’s managing director. “First, it is a large part of the market, representing about 25 percent of delivery within India. Second, the model is different from third-party models and that is not widely understood. A captive can not only deliver the typical services of a [third-party] service provider, but also many other services which are just part of the normal business. In effect, a [captive center] is a corporate campus which happens to be based offshore.”

The IT captive center in India dates back to the 1990s and was led by technology and financial services companies that set up shop on the subcontinent (see box, below). At that time, the primary motive was to attain low cost while maintaining or increasing quality, says Simonson. Some companies were also spurred by interest in expanding their businesses in the region.

The History of Captive IT Centers in India
1985: Texas Instruments establishes the first captive center in India, focused on research and development.

1990-1998:General Electric, British Airways and Dun & Bradstreet establish and grow captives in India. All are eventually converted into third-party service providers.

1998-2005: The captive model is adopted broadly across large technology, global banking, financial services and insurance firms.

2005-2008:Rapid adoption of captive model across most industry sectors.

2008: More than 500 captives are operating in India.

–Everest Research Institute

By 2006, captive operations delivered about $8 billion worth of IT and business process activities, according to Everest Group. And even as some industry watchers suggested that the model was no longer viable for most companies, captive center activities grew at a compound annual growth rate of 10 percent, to reach $10.6 billion in 2009, according to Everest Group.

Although divestitures have occurred and approximately 20 percent of captives have downsized, that does not indicate that the model itself has failed, says Simonson. Companies that sold their operations were in search of short-term cash while third-party service providers were looking for acquisitions to expand their capabilities, according to Everest.

Those captive centers that were shut down altogether tended to be newer centers that struggled to build robust operations and recruit and retain talent in an increasingly competitive market, Simonson says.
“This is a sign of some captives struggling, not the model struggling-and most of those shut down were very small and barely got started,” Simonson says. “It should be expected that not all new entities (captives or other operations) will be successful.”

Simonson points out that 30 percent of the top 20 IT service providers that Everest tracks have been acquired in the last three years, yet that does not mean that the IT service provider model is struggling. “Failures of some entities does not mean the model is flawed,” Simonson says. “The landscape continues to evolve.”

While captive offshoring success was defined in the past by meeting cost reduction goals and effectively managing risk, going forward additional value will be required.

“The value may be in terms of ability to ramp up and down resources for ad-hoc needs, create new ideas that advance the status quo, contribute talent to the global leadership of an organization, or provide an option to enter or better serve new geographic markets,” Simonson says. “Success increasingly becomes about the impact the captive has on the broader organization, not just the cost of a process or activity.”

To gauge the health of the captive center market in the future, adds Simonson, analysts will need to look not at the number of new captives established, but at the growth of existing captives. “The captive market will continue to grow, but largely by existing organizations both scaling and evolving the nature of work they perform,” he says. “[But] most firms for whom captives make sense already have a presence.”

While India remains the center of the captive universe, add Simonson, the model will be even more important in other offshore locations. “For example, large high-tech companies will see China captive operations as important for a combination of localization of products for east Asia, providing back-office support to other east Asian geographies, and supporting the domestic China market,” Simonson says. “Due to the diversity of languages, industry knowledge, and domestic market business opportunities, the use of captives outside of India is more precisely defined.”

Source:http://www.cio.in/news/research-firm-captive-model-offshoring-thriving-145272011

Because I write about IT outsourcing I often forget that the proportion of IT outsourced is only a fraction of the work that is done in-house.

There is massive potential for growth with loads of greenfield sites. This is multiplied when it comes to offshoring.

I recently met an executive at an Indian service provider. He told me that the company he works at is seeing a lot of companies, many of which are mid-sized, considering offshoring IT for the first time. This comes after a few years of outsourcing to onshore suppliers.

With this in mind now could be the time that Eastern Europe shows its hand. Nearshoring to countries such as Romania and the Ukraine could be a happy medium for first time offshores.
Computer Weekly journalist Kathleen Hall has been looking into this. See this link for an article she wrote about Eastern Europe’s IT outsourcing service capabilities.

But what has Romania got over India?

To give you a taster here are five reasons to outsource to Eastern Europe:

1. High skilled labour

The former Soviet Union had a strong educational emphasis on engineering and the sciences. As a consequence, many of the countries in this region today have a highly skilled workforce in areas such as computer science, but at much lower labour costs than the UK.

2. Cultural similarities

Some companies believe that Eastern Europe has a distinct advantage over places such as India when it comes to outsourcing because employees tend to take a more collaborative and less process-driven approach to projects.

3. Time zones

Eastern Europe covers a vast region, but most of the countries within it are just a few hours away from the UK in terms of time difference, making it easier to communicate within working hours.

4. Data protection

Eastern European countries within the EU could be a good choice for work which requires adherence to the Data Protection Act.

5. Growing labour market

While skills shortages remain a problem in the UK, growth in IT outsourcing in Eastern Europe continues to increase. In 2009, Romania was found to be the country with the highest growth of IT specialists, increasing by about 12% compared with 2008. Ukraine followed with over 9% growth.

Source:http://www.computerweekly.com/blogs/inside-outsourcing/2011/07/eastern-europe-could-benefit-from-a-wave-of-first-time-offshorers.html

In the last week, we’ve seen outsourcing hitting the headlines again, as the Public and Commercial Services (PCS) union refused to rule out strike action over Hewlett-Packard’s (HP) plans to offshore 200 jobs to India.

The jobs in question are largely responsible for providing IT support to the Department for Work and Pensions, with talks over offshoring evidently at an ‘advanced’ stage. So what does this tell us? Can we expect a deluge of offshored public sector contracts? If so, is the general scepticism around offshoring justified?

Of course, the DWP is not the only place we’ve seen the question of public sector offshoring raised in recent weeks. We’ve also seen Birmingham City Council announce that up to 100 council ICT jobs are scheduled to be transferred to India through Capita, while the £600m BPO deal at the Personal Accounts Delivery Authority to outsource the administration of the National Employee Savings Trust (NEST) scheme may see as much as 60% of the work going abroad.

I suppose the first thing to say is that offshoring is nothing new, and we’ve seen plenty of examples of public sector and local government authorities offshoring successfully in the past.

Last July, the Prime Minister even visited India with a firm promise that: “In terms of being open to [offshoring]… you will find Britain one of the most open and progressive countries.” So why has news of several recent public sector offshoring deals caused such a stir?

Clearly, there’s a fear that British jobs will be lost – despite the fact that HP has already given assurances that affected employees who are based at sites in Newcastle, Lytham St Annes and Sheffield will be relocated to other positions within the organisation.

It seems that for many, the greatest worry is that in the race to make savings, we could see the burden of increased unemployment passed onto the taxpayer, as more and more low-paid jobs are sent abroad for the sake of making savings.

In my view, however, offshoring has a role to play – although it’s clear that it must be part of a bigger overall strategy. It’s no use relocating services to India or Sri Lanka on a short-term basis just to make a quick saving on costs.

Organisations must examine their own core competencies and understand where they have a skills gap, and decide whether or not an offshore provider has both the right level of competency and the correct cultural fit to make a contract work in the long term. This is something that organisations might want to review even if they have offshored, because markets change both here and overseas.

I know this is a common refrain from me on these pages, but any contract entered into on the basis of cost alone is far less likely to succeed than one which has been carefully structured, and fits in as part of a broader, overall strategy.

This is something that the unions who are protesting against these moves could try to understand – because if it benefits the way services are provided in the long run, then perhaps offshoring isn’t the great evil it’s being made out to be?

If you’d like to hear more about offshoring, the NOA will be running an Offshoring Day in September.

Source:http://blogs.computerworlduk.com/hart-of-outsourcing/2011/06/is-offshoring-the-answer/

A major union may call industrial action over HP’s outsourcing of 200 government IT support jobs from UK sites to Bangalore in India.

The affected workers, at sites in Lytham St Annes, Newcastle and Sheffield, provide IT support to the Department for Work and Pensions (DWP). On Friday, the Public and Commercial Services (PCS) union said it was considering the industrial action in response to HP’s intended transfer of the positions overseas. However, HP insisted that the workers would most likely be redeployed into other roles.

“PCS is calling on the government to fully consider the wider economic arguments,” the union said in a statement. “It is consulting its members about the proposals and has not ruled out industrial action.”

Source:http://www.silicon.com/technology/it-services/2011/06/06/indian-offshoring-of-public-sector-it-jobs-sparks-union-backlash-39747499/