Technology companies such as GE, Texas Instruments and Motorola pioneered offshoring initiatives more than 15 years ago. The focus of these companies was building technology from their Bangalore Centers. Thousands of technology companies have followed that example and are working in various parts of India from their own development centers and through vendor partnerships.
Since 2002, the demand for high technology workers in India has increased with the increase for offshoring services. This has resulted in considerable cost increase. Companies that started their India operations in early 2004 are starting to see a cost escalation of 20% to 30% in the last six months especially for engineering talent with five or more years of experience. A continuation of this trend could rapidly reduce the cost advantage in urban Indian centers creating serious doubts about the viability of such activities in India.
Zinnov looked at various captive centers of US-based companies in India and compared their cost savings to analyze how these operations make a larger impact on their organization’s bottom line. We found that the organizations that use their captive centers not just for engineering but also for support functions such as marketing, finance and human resources see a larger cost savings.
In this article, we analyze the significance of reorganizing the relationship of the captive center management team with the parent organization, and correlate that to an increase in the cost savings from Indian operations.
Current organization structure at captive centers
Due to the engineering focus of most of the captive centers in India, typically, the India center head reports to the engineering director or VP of the parent organization. This limits the visibility of the India center only to the engineering department. The management team in charge of the India operations is from an engineering background and focuses on building technology from their India centers and not on supporting other departments in the organization.
When running at an optimal size, the captive center’s engineering organization is able to bring only a 3.3% to 7% saving to the organization’s bottom line.
The optimal organization structure at captive centers
An optimal captive center will not only work on technology development but also focus on support to all other departments in the organization. This approach would have the potential to double the cost savings.
|Cost savings Calculation||Max Range||Min Range|
|% of R&D expense without offshoring||25%||22%|
| % of R&D at ||70%||50%|
| % of cost savings/resource in ||40%||30%|
|% of R&D savings due to offshoring||28%||15%|
|% of Organizational saving||7%||3.3%|
Here are three best practices to improve the impact of your captive centers to the organizational bottom line.
- The center head of the development centers should report directly to the COO or the CEO of the company and not to any specific business unit. This will ensure that the senior management has complete visibility into the possibilities of the India development center.
- The country head ideally should have experience of running an entire organization and not just the engineering aspect of it.
- Every department in the organization should be encouraged to use the captive center for some of their operations.
Additional Projects at Captive Centers
Following is a snapshot of the projects that can be executed from the captive center, provided the processes and organization structures are streamlined.
Marketing and Sales
- Pre-sales and post-sales support.
- Database creation and maintenance of potential customers.
- Weekly/Monthly newsletter creation and distribution.
- Development of marketing material such as brochures.
- Design, development and maintenance of Web pages.
- Competitor and market analysis.
- Recruitment support for various locations.
- Benefits and payroll administration support.
- Compensation and benefits management best practices research and analysis.
- HR best practices research and analysis.
- General accounting and bookkeeping.
- Accounts payable and receivable.
- Billing services.
- Technical support.
- Customer support.
- Professional services.
Additional Cost Savings
Most technology organizations spend around 50% to 60% on sales and administration. Even if only a part of this entire activity is undertaken from the India center, it will result in significant cost savings to the organization.
|Sales and Administration Cost savings||Max range||Min range|
|% of Sales and Administration without offshoring||60%||50%|
| % of activities at ||20%||10%|
| % of cost savings/resource in ||70%||60%|
|% of Sales and Administration savings due to offshoring||14%||6%|
|% of Organizational saving||8.4%||3%|
The cost /resource is much lower compared to engineering resources as the supply of personnel for sales/administrative tasks are much higher than the demand.
By following the optimal captive center model, organizations can double the bottom-line cost savings for the organization when compared to an engineering-only captive center.
When the center is initiated, organizations should look at India not just from an engineering perspective. This will ensure that the right organizational structure and management team is selected to run the India center.
Informative, practical blog on offshoring