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Virtual Captives: an Emerging Sourcing Strategy

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Friday, March 12, 2010 |

A lot of buzz has been created about virtual captives sourcing model (also known as “hybrid captive and “synthetic captive”). For those unfamiliar, a “captive” operation is generally known as a subsidiary company, typically set up offshore to reduce risks and minimize operational costs. The virtual captive model seeks to bridge the world of third party outsourcing with the benefits of a captive operation – but does it succeed?

Benefits of a virtual captive operation


Among the main benefits, and yet, what is strangely argued by some as the main pitfall of virtual captives, is the sharing of responsibility between the client and the third party provider:

 “In the virtual captive space, which is one of the hybrid models---one clear issue which has not been resolved in the market, is the division of accountability between a buyer and the supplier. If it is a pure third party contract, supplier will have the mandate not just to deliver the process, but to also make improvements in the process,” comments Everest Group Research Director, H. Karthik.

Karthik may have a point, but this also means that all that must be done in order to remedy this pitfall is to simply establish a clear foundation on the division of accountability prior to the deal – as is done in any outsourcing contract. Among the most popular examples of the model is the seven-year deal Wachovia made with Genpact in 2005. By personally training its staff and ensuring that their offshore employees had a solid grasp of company culture and its standards for excellence, Wachovia was able to minimize retention and help ensure production efficiency. This was possible because of another main selling point of virtual captive models -  the level of control that a client company is given in a addition to the responsibility that the third party has over process improvement. Hence, the name “hybrid captive” - because it seeks to combine the best of both worlds. Karthik's argument is valid insofar as the initiative on both sides to define accountability is not taken. Is not the point of wanting to set up a captive operation negated if the added level of control a virtual captive offers goes unutilized?

 

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