Hybrid model for outsourcing

Recent article, Alternative offshore model emerging in India, by John Ribeoro at IDG News Service, cites a new market research by Forrester Research concluding that companies are moving towards a hybrid model of offshoring versus deciding in favor of either captive or partner model.

Forrester Research Inc. found that hidden costs raise the baseline expense per person per month at a subsidiary to $4,944, compared to the baseline cost of $4,231 per person per month to hire an outsourcer. A number of companies are shutting down their captive centers and turning to outsourcers, said Sudin Apte, senior analyst and country head for India for Forrester.

"Captives centers run as cost-centers and cannot be as competitive as a vendor offering services," Apte said. The size of the captive center also matters. "My experience suggests that generally the minimum economic size for a captive operation is about 1,000 staff," said Siddharth Pai, a partner at outsourcing consultancy firm Technology Partners International in Houston. A smaller staff means the expenses of real estate, infrastructure, and other overhead keep the cost per person at levels too high to appeal to the parent company, he added.

A number of firms inlcuding startups have opted for a captive center in last few years and are struggling to gain full potential out of their captive centers. Attrition and overheads are cited as key reasons however, when you look at a captive vs outsourced option, one of the key factors that really makes the difference is whether you have a person who can take ownership and drive your captive center or not unless you are a Cisco, Microsoft or Google. When you outsource, the vendor is hungry to make it happen; is your point man in India hungry and experienced enough to make it happen for you?

"Typically, clients tend to want to build their own operation rather than outsource when the process they are considering taking offshore is closer to their own revenue generation, such as product design, Pai said.

As a result, some foreign companies are likely to have Indian subsidiaries and also use outsourcers in the country, Pai said. Forrester expects 20 percent of captive centers to take this "hybrid" approach. Large companies, such as Microsoft and Cisco, are already using this offshore strategy in India to cut costs and to avoid hiring and managing more staff directly.

As a technology firm if the piece of product development you wish to do offshore is not too close to a technology IP then it might very well be better to opt to outsource than build a captive center. If your product is a business app that doesnt have any propritary technologies associated with it, then the argument towards a captive center might be less convincing.

I must add though that for a number of companies small and large, offshore outsourcing via partners is what makes bringing an innovative new product or technology implementation to market feasible. This I say from personal experience providing outsourced product development and prototyping to several companies.

Edit: Here is the direct link to the Exec Summary of the Forrester Report: Shattering The Offshore Captive Center Myth