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Virtual Captives (Un)defined...

Over the course of this year, considerable buzz was generated in the global sourcing world over the concept of a "virtual captive." With the efficacy of this concept as the subject of debate in various forums, we thought it would be useful to explore this potential trend further.

The term "virtual captive" is broadly used to refer to a new global sourcing model that aims to blend the benefits of both the captive offshoring and third-party outsourcing models. This hybrid model typically entails a buyer entering into an operational alliance with a supplier, wherein the supplier provides the assets, IT infrastructure and allied services such as recruitment and training in addition to dedicated resources to service the buyer. The buyer retains an element of control over the process and technology along with the senior management, thus enabling a captive-like environment.

Origins of the Concept

The use of the term "virtual captive" gained prominence with the announcement of a seven-year Business Process Outsourcing (BPO) agreement between Wachovia and Genpact in late 2005. The partnership involves Genpact providing a dedicated center, resources, and backing infrastructure to support Wachovia's back-office business processes globally. Wachovia in turn will retain a degree of control over the offshore operation and in the hiring and retention of employees.

Similar characteristics can also be seen in other buyer-supplier relationships in the recent past. A notable case is the recent agreement between Credit Suisse and Wipro Technologies. Signed in November 2006, the agreement involves the joint setup of a Center of Excellence (CoE) to support Credit Suisse business operations globally. The bank will lease Wipro's Pune facility to set up captive-like operations, working under the Credit Suisse brand name. Wipro will support the acquisition and training of talent, IT infrastructure, and help manage finance related processes. Apart from these, other buyer-supplier partnerships such as Aviva-EXL, Lloyds TSB-Xansa display certain characteristics similar to the examples described above.

Benefits Claimed

Proponents of the virtual captive model highlight a number of reasons why this model could be the way for the future. Among the more significant reasons is the lowered up-front financial risk with the supplier taking on the burden of initial investments. Further, the supplier's on-the-ground presence and experience can significantly lower the time required and operational risk in scaling up operations. For example, in a recent relationship between a financial services major and a leading Indian BPO supplier, the buyer was able to begin operations right away by using the supplier's premises, IT hardware, and connectivity. Besides this, they also leveraged the supplier's capabilities in recruitment, training, and transition management to hit the ground running.

The model also seems to make economic sense for mid-size buyers who lack the size to build their own operations. Other reasons often discussed include ease in hiring and lower attrition level when the buyer organization's brand is not well established in the offshore geography.

Arguably, many of these benefits can be achieved through the BOT and even in some cases pure third-party models. However, the enhanced value proposition claimed with the virtual captive model lies in its ability to garner all these benefits while yet ensuring that the buyer has a higher degree of control over the offshore operations.

Key Questions

Despite the potential benefits of the virtual captive concept, skeptics maintain that several aspects need to be understood better for it to gain acceptance as a proven model.

The key issue is whether the partnership can withstand constraints over time. Or will the potential misalignment of interests between buyer and supplier compromise the relationship in the long term? For example, does recruiting in a tight market create potential conflict? How does the supplier prioritize recruitment for the partnership versus its own needs?

Further, does the division of responsibility between the two parties create a lack of clear accountability? For example, will the supplier have room to create impact through its re-engineering team if the buyer controls process delivery? Also, how does the buyer value the supplier's contribution effectively in such a situation?

Finally, the parties need to consider other more qualitative issues such as attrition and confidentiality risk. For example, does the partnership provide faster growth paths for employees as compared to the supplier's operations? How does the buyer ensure against a leakage of knowledge gained by the supplier in the partnership with its other clients?

In summary, while virtual captives are an interesting concept, it remains to be seen whether it can be a viable alternative in the long run. Until then, the concept will continue to be viewed with guarded optimism as a tethered balancing act between the captive and third-party worlds of global sourcing.

Reprinted with permission from Global Services Media.

Publish Date: February 2007

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Copyright © 2007 - Everest Partners, L.P.

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