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The Resurgence of Captive Centers


It is being widely acknowledged in the Financial Services Industry that outsourcing of end-to-end back-office processes is an effective solution for improving operational efficiencies. The financial Industry is fast recognizing the advantages of outsourcing certain operations relating to human resources, customer management, procurement and accounting among other specific back office functions. What still remains to be further developed however, is an efficient outsourcing model that can maximize operational returns.
 
Resurgence of captive centers:

Recently, the captive model has been observed to have gained an increased popularity. This model, which was decelerating till 2008, has now revived and has subsequently made a strong come back on the captive landscape. This trend is forecasted to continue in 2011 and further. The numbers reported by Everest, an outsourcing consultancy, indicate that captive center set-ups have grown by over 70 percent in 2010, compared to 2008. Everest also reported that there were around 35 new captive launch announcements in the fourth quarter of 2010 alone. Most of these new captive set-ups were located in Asia, while the rest were in Eastern Europe and Latin America.

Parameters evaluated for an outsourcing model: 

Most firms while looking for an outsourcing model to select face the common dilemma between choosing a captive center and a third-party service provider. It is important to keep in mind that both these options have their own particular pros and cons.

While third party providers offer their services to financial institutions on a contractual basis, captive centers on the other hand have to be built from the scratch and so require comparatively larger initial investments. This also causes a delay in starting operational services till the set-up, sometimes up to a year, depending on the availability of infrastructural and human resources.

However, captive service centers offer a much higher degree of management control and a tighter security than third party providers, which is required for certain operations.

Although it might seem that outsourcing to service providers has an immediate cost advantage, but in the long term, captive centers are easier to control and also more flexible during changes in operational processes or service levels when required.

Another point to note is that more and more firms are now opting for captive centers as there is an observed lack of maturity in service providers while handling complex operations. According to ilan Oshri, Associate Professor of Strategic Management at Rotterdam School of Management Erasmus, captive centers are much more preferable for business processes and technology functions that are too critical to be trusted to third party providers.

Industry players are also ideating on new hybrid outsourcing models that can leverage on the strengths of both the captive as well as the third party model. Such a collaborative model would be able to minimize the risks during the initiation phase of the captive model.