Saturday, October 17, 2009

What is the appropriate delivery model for the outsource strategy?

The appropriate delivery model for the outsource strategy of an organization depends on many things. When your objective is just short-term cost savings, or the activities under consideration are non-core, non-critical, then typically, you may simply outsource those activities to some vendor. However, in some cases captive operations can be more profitable than outsourcing. When the IT operations are part of your core competency, outsourcing may not be a suitable approach. For instance, if you are a software development firm and wants to control the entire software development life cycle, then captive operation may be a better approach than outsourcing.

In any kind of outsourcing, knowledge transfer remains an important aspect. Initially the organization may require disclosing certain information to the outsourcing vendor. Then throughout the project new knowledge may created and issues can arose regarding the ownership of the intellectual property rights. When the activities are highly knowledge based, the complex intellectual property rights situation may even outweigh the short-term cost advantages of outsourcing. On the other hand, captive operation may be a better approach to simplify these issues and keep the intellectual property rights within the organization.

When your IT operations involve access to sensitive information, outsourcing may leads to potential security issues. However, captive operations are a better approach to protect and ensure the safety of the organization’s data.

When the underlying activities either unique or complex, requirement gathering will be an extremely difficult task. The communication gap between the organization and the outsourcing vender may leads to ambiguous functionalities and invalid systems. Furthermore, when the business processes are being changed the existing systems and operations may require re-engineering, but explaining these changes to an external party usually results incomplete. In a captive operation, everybody have a better understanding about the overall operation of the company. Therefore, the communication gap between different parties is relatively low. This makes captive operations a possible approach even when the underlying requirements changes frequently.

Once you have established your own IT branch, which can perform your IT operations cost effectively, this becomes one of your core competencies. This provides you an additional opportunity to generate revenue by selling this capability to similar organizations. For instance, assume you are an accounting firm and you operate your own IT department in India, which develops all the required software and look after related business processes. In addition to provide services to your own company, the IT department may sell the developed software to other accounting firms or even act as an outsourcing vendor specialised in your domain. You will not get this opportunity if you outsource your activities rather than having your own offshore office.

Finally, if outsourcing is part of your long-term strategy of minimizing costs rather than a short-term tactic, we have to think about long-term implications of outsourcing. When we outsource our activities to a third party, in effect we are buying a service or product from them. Although the price we pay can be lower initially, it always contains some profit margin for the outsourcing firm. As in the case of any good, whenever we have an intermediary, we have to pay a higher price. Therefore, if we need to get the required product or service for the lowest possible price, we have to remove the intermediary. Therefore, captive operation is potentially more profitable than outsourcing.

Despite its many advantages, establishing captive operations is a challenging task. Either you must have enough experience operating in the target country or you should have a suitable partner having that expertise. One of the major challenges of establishing captive operations is staffing and maintaining the staff. In some cases, you could establish captive operation by acquiring a suitable local firm. However, in many cases the BOT model (Build-Operate-Transfer) approach enables you to establish captive operations effectively with relatively lower risks. In BOT approach, a third party vendor takes the responsibility of initial setting up, staffing and operation. After a pre-defined period, the organization takes over the captive centre. This approach enables you to take advantage of both outsourcing and captive operations. It lower the risks of establishing captive operations while after transferring gives you the full control and flexibility of captive operations. This also emphasize that outsourcing is more advantageous short-term while captive operations are more advantageous long-term.


1. “Outsourcing Vs. Captive Operations”,

2. “Offshoring: Explore the captive centre model” ,

3. “How to go Offshore”, Ramamani M,

4. “Captive offshore shared services: pros and cons”,


  1. However, in the absence of careful planning and coordination with the strategic plan of the company, internal services transfer implications for outsourcing an external provider can create the effect of "time bomb"..I recommend to work only with professional like to have no problems in the future.