Managed captives – what are they?
By definition, a managed captive service model usually refers to a set-up, wherein a company uses different levels and sources of help from the outsourcing provider, while people executing the processes remain on the payroll of the company. Services provided by the outsourcing provider usually include infrastructure, recruitment and people development, team management and IT tools. A ‘managed’ captive is different from an independent outsourcing relationship, as organizations still have to spend time and resources ‘managing’ the captive set up. This is unlike an outsourcing relationship, where the outsourcing provider ‘manages’ the set up end-to-end.
Managed captives are beneficial, but under specific circumstances:
Managed captives prove beneficial when:
It’s about IP, strategy, or core competency: Certain processes contain significant intellectual property (IP), are strategically important, or are considered to be core competencies. In the automotive industry, for instance, the sourcing of car components is traditionally seen as strategic and is normally retained in-house. However, even in this area, there are recent examples, where companies have declared an interest in outsourcing parts of their ‘direct procurement’ process. And this is after many have already heavily outsourced other areas such as their distribution networks to focus on marketing, product development and innovation.
So the line between what’s strategic for a company and what’s not is not always so obvious. Organizations should develop a broader strategic view on what are core strategic competencies and competitive strengths (and also why), as a basis for deciding which service model is the most appropriate one, and what should remain in-house, or should be outsourced. Some large sports brands have managed to figure their business process models very well. They have mostly outsourced their production processes to focus on marketing and product design. And how successful they have been!
There are prohibitive regulations: Managed captives work well when there are regulations (e.g. for data protection) which are, or at least, can be interpreted as prohibitive to a full outsourcing model.
VAT is a cost factor: In industries where products are sold free of VAT (e.g. insurance), the VAT charged by the service provider becomes a full cost factor, as it cannot be offset. In a comparable business case between managed services that are ‘owned’ by the client, versus a fully outsourced solution, the VAT has to be fully considered as a cost factor. Should the outsourcing business case still be favourable including the VAT, this argument becomes less relevant.
Emotional and cultural reasons take precedence: When emotional and cultural reasons for keeping people on the company’s payroll take precedence, and companies still want to achieve savings and gain some benefits from an outsourcing provider, a managed captive fits the business need.
Moderate benefits apart, do managed captives really add value?
If none of these reasons apply, the concept of a managed captive service center might not add significant value in my view. In this regard, it should be considered that when activities are shifted from local organizations to a centralized captive center, the need for full restructuring and the respective financial impact is very much the same as when choosing an outsourcing solution. And this is in addition to the significant hidden costs in dealing with the implications of social, political and cultural change.
Evidence also shows that managed captive solutions require significantly more management attention, compared to traditional outsourcing solutions, drawing attention away from more significant business issues such as driving growth and development into new and emerging markets. Finally, the service provider managing the captive, charges a management fee for the services delivered, pushing up the costs for the organization.
Get the best of both worlds to create real value
So am I a ‘managed captive’ sceptic? As a stand-alone solution, yes probably I am.
However, I have also discussed this with my dear colleague and friend Terry Sandiford. I am a proponent of a combination model which offers “the best of both worlds”. Once the strategic decision on the optimal operating model is taken, a “co-creation” and/or “co-location” strategy (i.e. combining the outsourcing and the managed captive components of the operating model in one service delivery centre) can be very beneficial, by creating synergies and taking advantage of the infrastructure and competencies of the outsourcing provider, whilst keeping core competencies “onboard”.
Therefore, I think it might not be surprising to see this “co-location” strategy as a next evolution in shared services and outsourcing, so let us see….