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.

Alok Kumar

Alok Kumar is Managing Partner of SRKay Consulting group, a private equity company, nurturing innovative ventures. Alok also serves on the board of ICCL (Indian Clearing Corporation Limited - A subsidiary of BSE- Bombay Stock Exchange) as an external advisor for technology and information security. Prior to this, Alok had been Managing Director of Sears IT & Management Services India Private Limited (SHI) since its inception in December 2009 and served in the same position till very recently. Having been in senior IT management positions in Fortune 500 companies, Alok has won several national and international awards. Alok is instrumental in planning and setting up SHI and thereafter growing it to a multi-locational thousand-plus people organization. Over the last five years, with his strategic vision, Alok helped SHI grow roots in India, develop and support technology applications and infrastructure across core mainframe, cutting edge e-Commerce and big data technologies. With his unique people-oriented transformational leadership style, Alok turned SHI into one of the most valued investments of Sears, garnering great ROIs, and creating value much beyond cost arbitrage. Under his tutelage, SHI has filed two patents and is recognized widely for its best practices in various areas, the latter, currently featured in Indian Institute of Management (IIM) case studies. SHI also became a CMMI Level 3, PCMM Level 3, and ISO 20000 certified organization. Alok is a widely acclaimed corporate leader in India today. He regularly participates and leads various forums as a keynote speaker and is an author of several books in different genres. Alok has several awards to his credit. He is particularly known in the industry for his people management skills and innovative ideas in improving the productivity of employees through unique people practices. He has been credited with the following industry awards: ¬ Emerging Leader of the Year award 2013 by ¬ Game Changer CEO of the Year 2013 (SHRM) ¬ CIO 100 - The Bold CIOs - 2008 (Reliance Infosolutions) ¬ CIO - Ones to Watch Award 2008 (Reliance Industries) ¬ Extended Manager Award - CIOL 2004 (Tata Teleservices) As an able leader of SHI, Alok got SHI recognized widely in the industry with the following several awards: ¬ CII Award for HR Best Practices in 2014 ¬ Global Excellence in Outsourcing Award - AIOP (Phoenix 2013) ¬ IT Innovation Award (Design & Engineering) - Computer Society of India 2012 ¬ Golden Company of the Year - Economic Times 2011-12 ¬ 7th Employer Branding Awards - World HRD Congress (Mumbai, India) 2013: • ‘Asia’s Best Employer’ Award • ‘Best HR Strategy’ in line with business • HR Leadership Award • Talent Management Award by Bloomberg TV India ¬ Employer Branding Awards - World HRD Congress (Singapore, Asia) 2013: • 7th rank in ‘Asia’s Best Employer’ award • Award for ‘Best HR Strategy’ in line with the business • HR Leadership Award Other recognitions: Alok had served on the distinguished panel of NASSCOM's GIC (Global In-house Centers) National Council members. The council members play a key role in major initiatives of the industry and include the torch bearers of IT industry as panel members. Books and Papers: Alok is an established author, with three books to his credit. Alok’s third and latest book, a novel, “The Spy from Unaula” is a 2015 publication. A handwriting analysis enthusiast, Alok collaborated with his wife Nandani on the book, “Handwriting Speaks” in 2006. “Value Sourcing – Future of IT Outsourcing” was co-authored with Keith Sherwell (currently CIO, Altice USA) and was released in 2013. Alok also researched and published two whitepapers: a. “Creating next generation captives” talks about the best practices that are helping generate higher value from the IT company captives.

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2 Responses

  1. Rajan says:

    Agreed. Outsourcing certainly enables cost reduction. However, would like to add, decision on the use of captive (or) outsourced will largely rely on a company’s overall strategy.

  2. Alok Kumar says:

    Hi Raajen. You are right in mentioning that it is the strategy of the company to decide on captive or outsourcing. The strategy however is made based on commercial considerations for which captives have compelling reasons. SInce there is no exclusive marketing for captive setup, awareness on how much more cost advantage can be derived out of Indian market is highly limited to end users.

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