CAPTIVE CENTER: An operation that is owned by an off shoring company having full control over the business processes.

The activities are performed offshore but are not outsourced to a third party. Why do companies form captives? The reasons for forming a captive are varied. Some of the common reasons cited include: a. b. c. d. Greater availability of insurance coverage at a reasonable cost or any cost Use of a captive may have significant tax advantages Greater control of their insurance needs Better service for their insurance exposure. A captive can tailor its insurance program to meets its own specific situation. This can involve better loss control, better underwriting and more control over the handling and settlement of claims Ability to obtain broader coverage In general, the ability to have greater stability in the cost of insurance Potential for improved cash flow. The premium collected by the captive earns investment income which accrues for the benefit of the captive owner(s) Direct access to the reinsurance market More immediate reward for controlling the cost of claims

e. f. g.

h. i.

Captive center models have been in play since the early 1980's, and since then, they've changed and evolved. As captive centers become an increasingly important part of offshore work, sourcing and vendor management professionals must work with to showcase the benefits of a hybrid approach; here are four common offshore captive center models in use today. Across vendors, there are four common offshore captive center models in use today: Ex-pat model. This is the "technology-light" version of a captive center. In this model there are typically only a few senior leaders located at the captive center, either permanently or temporarily. Augmentation Model. This is a traditional time-and-materials (T&M) arrangement, run completely from offshore locations. Typically, in this model, the

client will provide the project leadership and manage the deliverables, while the vendor provides the skilled resources and manages the recruitment and training process. This model works well for companies doing large numbers of product upgrades and other standard system integration work that is straightforward and repeatable. Captive +1. In this model, the captive center and the vendor's ODC are mirror images of each other, meaning recruitment and training of all resources is done at each site. Also, each site provides equal leadership and corporate headquarters manages each relationship independently. Because all technology work can be equally accomplished by both teams, the work is assigned based on ability, synergy with ongoing or previous work, and resource experience. This model works well for software companies that need to do product development and testing, because it doubles the company's capacity. It is also an effective disaster recovery model. Noncore model. This model falls between the Ex-pat and Captive +1 models. In this model a core set of senior leadership is located in the captive center to direct both the work of the captive center and the vendor ODC. Proprietary or competitively sensitive tasks are done completely in the captive center, while all other work is done in the offshore ODC. This model works well for companies with a fair amount of steady proprietary applications and products, but a significantly greater amount of standard, no differentiated work suitable for outsourcing. Going forward, these new models could represent between 15% and 20% of the total work that is currently outsourced to offshore vendors. Companies with successful captive centers and strong relationships with offshore vendors will be most successful in using one of these hybrid approaches, while companies with no captive center should consider establishing a small satellite office in locations where their vendors have an ODC. As captive centers become an increasingly important part of offshore work, sourcing and vendor management professionals must work with the rest to showcase the benefits of a hybrid approach, including bringing the work back to the captive centers and providing new opportunities for offshore vendors. (Note:ODC-Offshore Development Center)

PROS AND CONS OF CAPTIVE CENTER: Many variables dictate whether captive offshore (i.e., buyer owned and maintained) shared services operations are a preferred alternative to internal domestic shared service centers or third-party outsourcing, according to a new report. Assessing the Role of Captive Operations in Global Services Delivery Models , from sourcing advisory firm EquaTerra, states that global organizations must assess a broad range of factors, including operating costs, attrition rates and economies of scale, as well as industry-specific factors and the competitive landscape, when evaluating their captive center operations. Failure to adequately account for these factors frequently results in an underperforming captive center that becomes a catchall for nonessential work sent piecemeal by managers with short-lived interest in using the center. Further, captive centers that operate without a strategic goal fail to cultivate a culture of continuous improvement, which not only negates their value to the corporation but also might cause significant and costly operational challenges. This bundle of services will change over time. In some cases, outsourcing might become preferable for routine activities while the captives handle specialized services, they add. "The bottom line is that buyers must carefully examine their offshore outsourcing strategies to determine the route to maximum value.

Captive Growth EquaTerra estimates that over 300 Western organizations have captive operations in India alone, and it expects the growth of offshore captive operations to continue to grow upward of 30 percent annually. Given these growth levels, buyers must determine how to assess performance levels, identify the best means to drive performance improvements or seek alternatives to existing operational models. These alternatives include: Realignment: When starting a captive operation, organizations sometimes extend existing processes and their inefficiencies to the new office. Instead, they should seek to improve performance by realigning the organization to use the captive center more effectively.

Partnerships: A partnership with a third-party service provider can create opportunities for product or service innovation that are beyond what many captives can achieve independently, given skills or cost constraints. Hybrid partnerships :The captive center partners with one or more third-party service providers that offer some of the captive center activities (e.g., infrastructure, HR services, process management) to enhance the centers performance. Virtual captives: In this more expansive version of the hybrid partnership, the buyer partners with a service provider that will provide nearly all of the captive center operations. The buyer typically retains ownership of key personnel and processes, though this is not always the case. Divestiture: Buyers in industries exposed to extreme cost pressures could be better served to sell their captives. While realignment or specialization can boost performance, the costs to do either and the time before benefits are seen could prove to be too costly, particularly if there is the opportunity to sell the center.

Case Study.1. The Captive Center Re-Emerges As A Source Of Offshore Innovation EXECUTIVE SUMMARY Sourcing and vendor management (SVM) professionals have become skeptical of using captive centers, primarily due to their mixed history of providing return on investment (ROI). Although many companies "stubbed their corporate toes" when attempting to replace or substitute their third-party offshore vendor with their own captive centers over the past six to eight years, we can now look back at the details of those cases and see clear flaws in the traditional captive center model. Most importantly, cost reduction was often the only reason behind many captive center initiatives and when cost savings were negated by high attrition and hidden costs, business and IT executives gave up on the approach. There are, however, strong reasons to revisit the captive center model, particularly for companies that are balancing the need for cost savings with innovation objectives. The captive centers of today and the model for the future will be a hybrid of senior technology

leaders partnered with their existing third-party offshore vendors and will breathe a new life of innovation into some existing captive centers. Case Study.2. Allianz Insurance's Captive Subsidiary ACIS in India An offshore captive centre is set up as a subsidiary of the parent company and hence the overall management responsibility of the offshore captive centre lies with the parent company in the West. In my book "Intelligent IT Offshoring to India. Roadmaps for Emerging Business Landscapes" (Palgrave Macmillan, 2010), I examined and compared the captive centre approach against external service providers. The book reports on several case studies for captive centers (pages 9299) and here the one on ACIS, Allianz Insurance's captive subsidiary in India. Allianz Insurance plc is the UK subsidiary of Allianz AG, which is Germanys largest insurance company and one of the worlds leading financial service providers. The net written premium (NWP) of Allianz Insurance (UK) is around GBP 1.4 billion (2008). In 2003, Allianz Insurance was looking into cost-effective growth of its IT function and decided to set up a software offshore development operation as a captive subsidiary in the Technopark in Thiruvananthapuram, Kerala: Allianz Cornhill Information Services Pvt. Ltd. (ACIS). John Knowles, CIO of Allianz Insurance, consciously decided on a tier II location on the subcontinent, against the advice of consulting companies and the trend to go to established locations in the Indian IT triangles. He was interested in attracting employees seeking a long-term, in-depth career in the insurance business, not the quick job-hoppers who would soon begin to emerge in Indias IT hotspots in the years to come. He also did not want to compete with the industry giants for talent and growth, but being a smaller company, wanted a smaller pond to play in. Thiruvananthapuram offers an established infrastructure, a good university system, and a quality of life that is probably unique among Indias state capitals. At the same time, John Knowles knew that his UK employees would need to go on frequent business trips to India in order to continuously build up and expand ACIS. He wanted to make these visits attractive and Thiruvananthapurams beach location definitely helped in this regard. Another pillar of success was the hiring of an experienced Indian management team with Rakesh Kumar Gupta as chief operating officer (COO). The ramp-up of ACIS built on the principle of steady growth and non-mandatory offshoring, so Allianz Insurance did not stimulate demand for its offshore services by dictating which functions should send which percentage of work to India. Instead, various parts of Allianz Insurance worked with ACIS to develop the required services at very attractive internal cost rates. The quality of its

deliverables then did the internal marketing. Allianz Insurance in the UK seeks to work with ACIS in a very integrated way in the so-called one-team approach. As a part of it, ACIS took responsibility for the IT knowledge transfer process. The standard way of Westerners teaching Indians about an IT application was found not to work too well. Hence, ACIS took the lead and introduced the knowledge acquisition process (KAP), which puts the Indian team entirely in charge of it. Now motivation and responsibility were aligned properly. What started with application development and maintenance (AD&M) services was soon complemented by sales and back-office processing support (BPO) in summer 2004, and later by infrastructure maintenance (IM). The venture into new areas was made successful by starting a small number of separate seed projects in parallel. Allianz Insurance was ready to give them time to be successful, even let some fail if necessary, but most importantly, collected the learning from different business areas to inform the next stages of development. By mid 2009, ACIS had 400 employees in BPO, 150 in AD&M, and 50 in IM. All application maintenance work from Allianz Insurance UK is already offshored to India, the quality management function is well established, and ACIS is accredited at CMMi-Level 5. ACIS is already starting to extend its reach into the wider Allianz Group, including the start of SAP application development and maintenance in India as well. My book contains other write-ups on Texas Instruments, HSBC, and Deutsche Software India. I am very keen to research this field further. What are the success factors of captive centers as compared to external provider operations? What is the best-practice captive critical mass, i.e. starting with how many employees does the captive approach pay back? Please let me have your thoughts about this if you are working in this area: wolfgang.messner@globusresearch.com Wolfgang Messner, Dr. rer. pol., M.B.A., Dipl.-Inform., is the founder of GloBus Research Ltd., established 2011 in London. He brings to the table a unique portfolio of business consulting, strategic marketing management, offshore service delivery, and global executive training. Internationally educated at some of the world's best universities, he has worked with leading companies in Europe and has spent four years on expatriate assignments in India. Wolfgang has published five books, contributed more than 25 papers to journals and edited book volumes, is a regular guest lecturer and speaker at international conferences, and frequently interviewed by the media.

Case Study.3. Reducing a Financial Organizations Captive Center Provider Portfolio by more than 80 Percent Executive Summary With more than 50 IT and business process outsourcing providers in its portfolio, a global banking and financial services organizations captive operation was experiencing significant portfolio management, governance and project allocation challenges. By clustering and classifying demand requests, evaluating all the providers in the portfolio, and identifying those best positioned to meet the parent companys strategic requirements, Everest Group helped the captive reduce its provider portfolio by more than 80 percent, yielding cost savings and improved alignment with corporate goals. The Clients Challenge The India-based captive operation for a global banking and financial services organization was using more than 50 IT and business process outsourcing providers a mix of global majors, Indian providers and staff augmentation players to support services delivery throughout the enterprise. Personnel within the captive were devoting an inordinate amount of time to vendor management, governance, and coordination of such a bloated and highly fragmented portfolio. The situation was exacerbated by the massive volume, and disparate, undefined, data-light types of demand points requested of the captive by five different business units in four geographies around the world, which in cases resulted in ineffective allocation of requests to providers. To eliminate these challenges, the client needed to better understand all types of demand requests it received, and strategically rationalize its portfolio to a smaller set of providers capable of providing long-term value. Insight to Action Everest Group began by addressing the captives demand requests issue. Utilizing a two-by- two matrix-type methodologies, Everest Group thoroughly analyzed the available data to form reasonable hypotheses to cluster and classify the demand into four categories based on the level of predictability and strategic importance to the parent company. Everest Group then evaluated and identified the providers in the portfolio that were best positioned to handle the demand in each category. Leveraging data from its supplier intelligence practice, Everest Group ranked and rated each provider against a variety of five factors including capabilities, alignment of provider to scope, presence in the BFSI vertical, and ability to enter into a managed service

relationship. This component of the engagement resulted in rationalization of the clients provider portfolio from 50 down to less than 10. Next, Everest Group helped the captive organization define a sourcing portfolio that enabled mapping of the demand categories to specific providers. And finally, Everest Group assisted the captive in development of a thorough, strategic implementation roadmap. This roadmap served as the foundation by which to structure the entire demand portfolio, with the selected providers brought on in a systematic manner. Impact The new provider portfolio, which Everest Group helped the client reduce by more than 80 percent, is currently being implemented by the captive operation. The provider rationalization engagement will enable the captive to move toward a more managed services approach, and in the longer term enable it to more closely align with the parent companys overall business strategy and growth plan. The new provider approach will also result in better talent resources from the providers, which will further enable the captive to improve delivery on projects that impact overall business outcomes. Finally, although cost savings wasnt a primary project driver, the rationalized provider portfolio is expected to yield a savings of five to 10 percent in vendor management and governance costs.

Case Study.4. Offshoring Strategies: Evolving Captive Center Models In todays globalized economy, firms often consider offshoring when confronted by rising costs and fierce competition. One mode of offshoring has continued to grow despite the current global economic turmoil: the captive center. Captive centers are offshore subsidiaries or branch offices that provide the parent company with services, usually in the form of back-office activities. In Offshoring Strategies, Ilan Oshri examines the evolution of the captive center. He identifies basic captive center models, examines the captive center strategies pursued by Fortune Global 250 firms, describes current captive center trends, and offers detailed individual case studies that illustrate each model. His analysis highlights the strategic paths available to firms that want to maximize the returns offered by captive centers. Oshri outlines six models for captive centers that range from the basic wholly owned branch office to hybrids and joint ventures and identifies evolutionary paths

along which the basic model develops. He analyzes firms strategies during initial set-up, and then tracks the changes as strategies evolve to meet different business needs. The case studies, all based on the Fortune Global 250, include the development of a basic captive unit into a complex hybrid structure; the evolution of a captive center into a shared service center offering services to other international firms; the divestment of a captive center to a private equity firm; and the migration of a captive center to a location where costs were lower.

Case Study.5. Captive Center Setup and Management Case Study Our client delivers the proven, comprehensive, enterprise-scale energy information management solutions for utility mass market, commercial & industrial deployments. They provide a central data warehouse & state-of-the-art data logging, transmission. TekMindz started their captive center from grounds up & is managing on-going SLA based service management in India. Our Services Includes: Recruitment, Selection, Retention, Training Salary and Compensation Planning, Career Planning, Appraisals HR Policy design and implementation Payroll Processing, Expense Management Book Keeping, Accounting Manuals, Taxes and Statutory Requirements Management of Audit, Tax and Legal Firms Liaison with states agencies like customs and income taxes. Front Office and General Office Management Facilities & Security Management

Design, Procurement, Set-up of Telecom, IT and Network Connectivity Information Security, Backup/Disaster Recovery & Remote Management Ongoing Management , Collaboration Process , Support, Helpdesk, etc Staffing & Human Resources Finance & Accounting Administration and Operations Technology Infrastructure, Process & Methodology