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Captive vs. Offshore Outsourcing: The Best Choice for Your Company

January 10th, 2019

Captive vs Offshore

When the concept of outsourcing was first born, companies looked to it as the ideal solution to cut operational costs and increase revenue. As is often the case though, this solution was not without its limitations. The early days of outsourcing was marked by low levels of regulation and a lack of transparency between a company and their outsourcing partners. These issues led to the rise of a third option: opening captive centres in low-cost countries. In this model, countries fully owned the centre and were able to control its operations. But in parallel, the outsourcing industry was also becoming more sophisticated, implementing tighter regulations and making huge strides in technological innovation. Today, the choice between engaging with an outsourcing partner and opening a captive centre overseas is difficult for most companies.

Here are the biggest factors to take into consideration when making the decision.

captive or outsourcing

Total budgets available for investment

When opening a captive centre overseas, a company is typically faced with a high capital expenditure. They need to find and fund a physical office space, acquire skilled staff, invest in technological infrastructure and more. Clearly, these expenses can add up to a very large amount that most companies might not be able to afford.

In the outsourcing model, however, all of these requirements are already in place. Outsourcing centres today are equipped with the best human and technological capital, eliminating the need for companies to build it from scratch. When entering into an outsourcing partnership, companies generally only need to pay for the number of hours they require. This reduction in overhead costs makes it a much more affordable option when compared to building a captive centre.

Timeframe of projects

When opening a captive centre, apart from the monetary investment, companies should also be prepared to invest a larger amount of time into it. Each country has their own regulations, so submitting the necessary paperwork and getting the required approvals can take an indefinite amount of time. Even after the legal formalities are completed, setting up the captive can be very time-consuming as companies need to find physical and human capital before commencing operations. On time-sensitive projects, opening a captive centre might not be a realistic option for companies.

With outsourcing partnerships, on the other hand, companies can hit the ground running. Since the infrastructural requirements are already in place, companies can start working on time-sensitive projects immediately. All they need to do is outline the nature of services required and reach an agreement regarding the scope of services and costs with the outsourcing partner. Once this agreement is signed, work can start almost immediately.

Returns on investment

The high investments, both monetary and time-wise, that captives involve can still be justified if they offer high returns. If your company has a long-term growth plan, then the high capital expenses that opening a captive requires shouldn’t act as a deterrent. But you should be prepared for the possibility that it could take at least 4 years, usually longer, for the investment to start paying off.  Even this number isn’t always predictable as the returns most often fluctuate depending on the economy (of both the home country and the captive location).

captive vs outsourcing

With outsourcing, companies can be certain of greater stability and faster returns on their investments. Since outsourcing requires no capital expenditure, companies can expect to see a high ROI in a much smaller time frame. While the exact time period will depend upon the nature of your work, the country you are outsourcing to among other factors, companies can generally expect a profit in under 2 years. This is why outsourcing can be a fail-proof strategy for accountants to build a profitable practice.

Access to a highly-talented pool

In captive models where companies need to scout for employees, they might not always be assured of getting the best talent the market has to offer. This is especially difficult for smaller companies as affordable labour markets are extremely competitive spaces.

Companies who aren’t a well-known brand might not attract highly-qualified employees, which can directly affect the quality of work and return on investments.

Outsourcing companies, in comparison, have already established a presence and developed a highly-skilled workforce.These factors are often overlooked, with the common perception being that outsourcing companies are just a tool for cost-reduction. In the years following their inception, the differentiators for these companies have evolved from merely cost-cutting, to providing access to a pool of extremely talented individuals. Since they have a longer presence than captive centres, outsourcing companies have developed industry best practices, greater efficiency in operations and more advanced technology. With technology enabling better communication between companies and a remote workforce, they can also be assured of greater coordination with their outsourcing partners.

Scale of operations

The scale of operations that companies plan on outsourcing from their main office is a very important factor to take into consideration. Companies that plan on  offloading only a small amount of work might see no benefit in opening a captive centre. Since the volume of work is unlikely to contribute significantly to the company’s overall revenue, it might not justify the high capital investments required in setting up a captive centre. If a company plans on scaling up their operations, however, opening a captive can be a viable option, as the ROI will be greater. Having said that, companies should remember that scaling up operations can sometimes mean increasing the number of employees and sometimes even having to open a larger office.

For work that is unlikely to scale up, outsourcing is undoubtedly the better option as the investments are low and monthly expenses are stable. But if a company is planning to scale up operations, they will need to pay for more heads and re-visit their contract. In many cases, however, the additional cost is still low enough to provide a steady ROI. Before choosing the best option, companies need to conduct a thorough cost-benefit analysis between both options, taking their long-term forecasts into consideration.

Data security and compliance

Companies dealing with a high volume of sensitive information often prefer to open captive centres rather than outsource. Because they will be in complete ownership of the centre, they can enjoy full visibility and control of data and ensure compliance.

But it isn’t always this straightforward. Most outsourcing companies today have tightened security and employ industry best practices when it comes to protecting private information. At Sundaram Business Services, for example, we use stealth logins to prevent employees from learning login credentials and accessing dashboard from anywhere outside our secure premises. In the wake of GDPR especially, outsourcing firms have become vigilant about data security. It isn’t unusual for them to have higher security than captive centres since they often have access to more advanced technology.

Both captive and outsourcing models offer several benefits for companies. In the end, the best fit will depend upon a company’s goals, both short-term and long-term. If quick returns on time-bound projects are a priority, outsourcing can undoubtedly help companies achieve their objectives.

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