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Offshore Captive Centers still Seen as Cost-efficient

by: Sarah Joson

Thursday, June 12, 2014 |

A study done by outsourcing consultancy firm Everest Group found that even though the use of captive offshore centers loses its credibility in terms of cost competitiveness, it is still a feasible solution for most global in-house centers to save money.

Salil Dani, Practice Director in Everest Groupís global sourcing team, said the changes in currency valuations and inflation resulted to speculations that having a managed operation offshore would not be as effective as the fully outsourced ones thriving today. For instance, the 20-percent wage inflation in India for certain processes is affecting the perception of the sustainability of cost arbitrage in captive center operations. 

On the contrary, Everest Groupís study showed that company-managed captive centers save 30-70 percent including office space, wages, IT infrastructure, and capital expenses brought about by integration and business continuity. 

The executive said the number of global in-house offshore centers declined in 2014, noting that this year, the first quarter presented a lower demand for global services in general. For the current quarter, Dani said new captive transactions are stable. In addition to that, 70 new in-house centers were opened just last year with only two divestitures.
Details of what actually affects cost of savings from company-managed offshore centers were recently posted at CIO.com

According to NASSCOM, location and function are the initial factors that directly affect the cost of savings. If a company decides to set up a captive in India, they will be able to save 65-80 percent, or 60-70 percent if they chose the Philippines. In China, savings are pegged at 45-54 percent, and in Poland, cost savings are 35-45 percent. It was also identified that transactional roles are better done in-house.

Data also showed that more and more countries are preferred for captive center incubation. Some of these locations are Latin America for bilingual English and Spanish support and Central and Eastern Europe for European clients. Other reasons driving likeability of captive centers outside India are risk management and increased diversification.  

It has been observed that more and more companies are becoming more cautious in cultivating their company-led offshore managed operations. Some of the factors they are looking into are scalability, administrative expenses, innovative processes to improve attrition rates, and maximizing tier 2 locations.

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