Best strategy for Cost savings – Combination of Captive and outsourcing
After working on various models from completely in-house to completely outsourced, I have come to an understanding that to get the best cost advantage for any organization, there has to be a combination of in-house and outsourcing. In case of US and Europe based companies would be better termed as a combination of Captive and Outsource companies working together to give the highest amount of flexibility and cost advantage.
In most of the successful captive companies in India, the strategy to get flexibility is to hire cost neutral contract resources from third party vendors along with their own captive staff to work for a project for their overseas parent companies. This gives dual advantage of cost and high level of flexibility in getting staff when needed.
It is a proven fact that any product or process has a shelf life and the same is replaced as soon as a better product or process emerges. IT industry globally and particularly in India has been offering standard services along with more specific domain based services. There is virtually no company in India which is exclusively product based like Microsoft, SAP or Oracle. The revenue model for them is based on age old method of selling the available manpower to clients based on the skills. The risk of keeping idle resources and cost of selling these skills add as an overhead on the cost of the third party service provider.
This model will come under threat primarily due to two reasons. IT is slowly getting commoditized and several of the customers are also toying with the idea of having their captive IT Company. It is also seen as a standard trend that customers are not willing to commit any vendor resource for long term as cost is becoming a major factor. Recession has pushed all other criterions to a back seat and cost will continue to be the driving factor in outsourcing decision.
Last year Income Tax department in India raised an objection against a large IT company asking them to pay taxes which were being asked for being exempted as they have been providing IT services to overseas clients. Income Tax department instead put an objection stating that the company is not doing IT services but only supplying manpower on an hourly basis. None of the vendor’s resources are engaged in delivering any IT service, but are just as added manpower for the client.
Taking this incident, it is becoming evident that customer are actually not getting any additional value by just getting outsourced employees. These employees must be closely monitored and managed to get the best results. Manpower being expensive in US and Europe, leads to a many of these companies to operate such outsourcing through their own captives. Nevertheless the importance and skills of these third party service providers would be difficult to ignore under any circumstances. Their business will continue to grow, but not at the pace which they experienced over last two decades.
Ultimately, having own captive company and that company working with third party contract resources at Indian rates would be the best cost and flexibility proposition for coming several years.