Alternative Offshore Outsourcing Structures

In these troubled times, offshore outsourcing retains an allure for businesses. There are still significant savings to be attained from leveraging the benefits of lower offshore operating costs. But offshoring still comes with risks attached and neither of the two main approaches - full outsourcing to a local provider, or wholly-owned captive entity - is seen as a universal panacea. So, increasingly, companies are looking for smarter ways to access the offshore market while mitigating risks.

Risk mitigation comes in many forms, but it can start with the earliest, most basic decisions in an outsourcing process: that is, how to structure an offshore relationship to reduce risk. This article looks at some of the main alternative offshore outsourcing structures - from virtual captive, to joint venture, to "build-operate-transfer" models - and assesses how they compare in terms of benefits, flexibility and long-term operational suitability.

Traditionally, companies looking to send services offshore consider two main options: they do it themselves, probably by setting up a "captive" entity in the chosen country; or they engage a third-party specialist to do it for them by entering into an offshore outsourcing contract. Of course, India has led the way as a number of Indian companies have grown into large global businesses by tapping into the desire for, and benefits of, offshore outsourcing.

Captive or Full Outsource

Both models – the Captive and the Full Outsource – have their pros and cons. The Full Outsource means putting yourself and some of your key services into another company's hands. You may be comfortable with this if the service provider is based close by or in the same country or is a well-known global name, but it takes more trust and more relationship governance to make that work in a foreign country where you might not fully appreciate all the inherent risks.

Equally, the issues with a Captive stem from the fact that the company provides service back to itself via a ring-fenced entity that is more or less free-standing and self-financed. This can have short-term control benefits as well as long-term investment benefits, a few companies have used Captives to go offshore and have ended up lucratively selling off the Captive (e.g., GE created and spun-off GECIS (now Genpact) and British Airways spun-off WNS).

But the Captive model really requires a customer that already knows the offshore market and how to operate there. Many companies have felt that they don't have that knowledge and don't want that risk – but nor do they want to go to the other extreme and send all their services to a third party via an arm's-length Full Outsource.

And so the search has been on for hybrid models part-way between Captive and Full Outsource that offer some of the benefits of a Captive in terms of control and governance, tap into the local service provider's inherent skills and knowledge of how to operate offshore, allow customers to up-skill in offshore operations management, but don't involve simply putting one's entire faith and trust in a single offshore provider.

Build-Operate-Transfer

As a concept familiar from project finance and major infrastructure projects, the first hybrid offshore model to gain traction was the "build-operate-transfer" (BOT) model. The BOT model developed as a hybrid that inhabits the space between Captive and Full Outsource. As its name suggests, the BOT model involves the customer engaging a...