Tuesday, June 9, 2009

WSJ Article on "Shedding Their India Support Service Centers"

On June 8, 2009, the Wall Street Journal published an article entitled “Firms Shed India Center to Cut Costs ”.

There is an important distinction in this article that appears to be missed by many people. This is not a backlash to outsourcing; what these companies are discovering is that to run a captive center in India, or any location, is not just about a cost-effective solution for leveraging low-cost labor, it is also about performance.

First, the article discusses that several companies have “shut down” their captive organizations by selling them to outsource providers. Captive organizations are effectively offshore shared service organizations. The captive is part of the company; its employees are employees of the company; the company manages the work and hence, the results. As mentioned in the article, it has been proven that captive organizations are not in themselves cost-effective solutions; performance standards must also be set and managed. Both Forrester Research and TPI, Inc., have done studies to substantiate the fact that captives unto themselves are not cost-effective.

Second, the companies which are selling their captives are setting up long-term relationships with the outsource provider to whom they sold their captive. The jobs are not coming back to the US. As of today, it is still a) more cost-effective to get the work done in a low-cost labor market, and b) the outsourcing of non-core transaction work enables companies to focus on their core business.

We at CandidAdvisors believe that outsourcing of non-core work is here to stay, whether onshore or offshore. Companies are starting to increase their implementation of hybrid solutions, which are a combination of outsourcing and shared services. This approach, with the establishment of the right oversight and governance from a performance perspective, enables companies to manage the support service (i.e., non-core) areas efficiently and effectively, in providing cost-effective solutions that meet statutory requirements, provide key information for decision-making and meet key performance standards

We expect that the trend of leveraging the most cost-effective and efficient way to provide support services will continue and even escalate. But while cost is critical, companies must focus on managing integrated performance to provide better, more reliable information on a real-time basis. This performance point is critical, and will not be achieved by taking solely a cost-savings perspective.

We believe that the industry has reached an inflection point, and needs to start addressing their support services areas holistically, tightly coupling them to their retained organization (support services customers), in order to achieve the desired benefits and be positioned for the future.

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