Ten Truths Every CEO Should Know About Captives
By Ajay Kela
Delhi, Sep 18, 2008 1206 hrs IST

Globalization of R&D has been broadly embraced in the last five
years. The early trend was to ship an expat manager to offshore
destination to setup a Captive facility with the expectation that
over time predictability and savings would come. The experience of
Captives tells us this is far from the truth.

Dr. Ajay Kela, MD and COO of Symphony Services, tells us 10 things
every CEO should know about Captives.

*Rome Was Not Built in a Day

And neither are most captives. Billion dollar firms like Motorola,
Texas Instruments, Oracle and Adobe showed the way to successful R&D
Captives. But this does not mean everyone will or can. These
companies invested 10 to 20 years in mastering their Captive
operations. Do you have the luxury of time? If not, finding a partner
with the right capabilities, right from the start, is a better
solution. Why reinvent the wheel when you can ride on your partner's!

*Beware of Consultants Bearing Reports

The gap between a consulting report and execution can be significant.
Developing and honing your long-distance development processes takes
time and practical experience - not advice from gurus. If you're
starting from scratch, be prepared for at least 5-7 years of
significant product releases before you begin to see process
maturity. After all, process maturity cannot be micro-waved for use.

* Don't Confuse ITO and Product Development Skills

Even though India has the most mature IT industry, R&D talent with
product and domain expertise is still very rare. Drive and passion to
succeed is very high in India. Capitalize on this passion to
transform these engineers through extensive training and hands-on
experience. Be prepared to invest significantly in training by using
your home employees and management. Service Providers overcome this
challenge through Training department which are tried and tested
across their Clients. You may want to leverage this value add and
their vast recruiting network to attract the best in the first place.

*Grunt Work Leads to Unhappy Employees in India and China Too

If the parent company is going to ship second-class work to the
Captive, you better get ready for some serious challenges. Second-
class work often results in employees feeling like "second class
citizens". The result: your offshore development team is going to
quickly get de-motivated and retention will become a huge challenge.
Your HR team will have to work over time, recruitment will have to
get turbo charged and training will need a shot of steroids. The
leadership team is not immune to the effects of declining morale.
They're next. Grunt work only disgruntles! Quality work keeps quality
people.

*Stay off the Expat Carousel

Typical Captives are run by expats on a two to three year assignment.
Since they understand the culture and ethos of the parent company,
they become the obvious choice. However, this is a mistake. Expats on
short assignments cannot intrinsically get passionate about building
a sustainable organization. Secondly, when the leader (expat) returns
back the organization falters, as the next level of managers also
start looking at alternatives. Creating a leadership team that's
committed to the long term is critical to success. And remember
"expats" are not necessarily the "experts" in managing local
challenges!

*The Bane of Cost Centers

Captives are cost centers and seldom develop a P&L mindset. Expect
accelerated cost escalation compared to the market because the
easiest justification -- "this is the market" -- typically prevails.
And Centers of Excellence become Centers of Expenses soon.
Incidentally, many of the highest paying captives also have the
highest employee attrition in India.

*Watch Out for Unplanned Investments

Captives are designed with the end-goal in mind. Typically, first
year plans are much smaller than the long term objective, but
companies often struggle to even reach that objective. The problem is
magnified when you plan for 300, hope to hire 100 in the first year,
but often only wind up with 30. This unplanned overhead expense can
cripple the Captive budget. Additionally, the effort required to
manage HR, IT, Facility, Finance, Legal, Compliance, etc., drain
Captive focus from their core mission of product engineering.
Partners, whom you pay-as-you-go, prevent this cost escalation and
are able to provide seasoned support services.

*Size Matters

Forrester Research and Gartner proclaim that the scale for an
effective captive is 500+ resources. If companies don't think they
can approach 500 in a three year timeframe, it's not worth
establishing a captive. Even if you plan to get to 500, but are
starting fresh, look for a partner to setup your operations under the
Build-Operate-Transfer model (BOT) to speed time to productivity
while minimizing costs and risks. Look for offshore partners who
guarantee cost advantages, have proven operational excellence and
engineering best practices, boast brand equity and are willing to
work at cultural cohesion. At least when it comes to captives, small
is not necessarily beautiful, it is actually painful.

* Evaluate the Hybrid Model

The dirty little secret is that few captives are truly doing it
alone. Almost 50% of captives are also working with providers
outsourcing 30% to 50% of their work. Partners can help with flexible
capacity needs, geographic diversification, specialized functions,
accelerated scaling, managing facilities and talent and, not to
forget, access to the partners best practices and Centers of
Excellence could directly benefit your own Captive. Remember CK
Prahalad's formula for success in "The New Age of Innovaton": R = G.
Resources are global and partnership is the way to go!

*The Captive Trend is Reversing

A recent report by Forrester Research indicated that more than 60
percent of captive centers are struggling to achieve the anticipated
performance or productivity advantages. According to Zinnov
Management Consulting Pvt. Ltd. the net result is a precipitous
decline in the number of new captives started in India over the past
few years - from 76 in 2004 to just 15 in 2007. Further, according to
Zinnov, Providers are expected to outpace the growth of captives by
more than 300 percent over the next four years. In fact, Forrester
posits that 10% of captives will turn over their operations to
Providers. Warren Buffet said, "It is only when the tides run out,
you will know who has been swimming naked!" Competitive forces and
need for innovation will drive captives to leverage enormous benefit
from partnering with service providers!

Conclusion

The global product engineering market has changed significantly in
the past five years. What was once conventional wisdom may not hold.
Today, leading analyst firms are recommending that software vendors
evaluate the provider model as an effective alternative to starting
or growing a captive.

The precipitous drop in captive development centers being started is
a telling indicator that the transition is well underway. As
software companies review their global R&D strategies, they should
keep in mind the factors mentioned above. If their strategy doesn't
include scaling to at least 500 resources quickly, investments in
establishing a local brand, measuring the effectiveness of their
efforts and a hard review of the overall cost structure, they may
want to give that strategy another look.


(The author is the MD and COO of Symphony Services)