Businessworld: No More Captivating

GUEST COLUMN
Reasons why captive units of software firms are floundering can be traced to their parent companies

AJAY KELA
11 July 2008

It is hard enough to build software products two buildings apart, let alone when your teams are continents apart. Nascent captives are learning this the hard way. Today, barely 4-5 years after more than 600 companies set up captives in India, the warts are starting to show. But before we try to understand what is killing subscale captives, let’s try and understand what drove the idea of captives.

In early 2000, after the dot-com bust, software companies, with escalated cost structures and reduced revenue streams, decided to offshore for strengthening their financials. Venture capitalists encouraged the trend within their portfolio. But these companies experienced an enormous nervousness about giving their crown jewels and revenue-generating activity to an offshored outsourced partner. So, they did the next best thing: they set up offshore captives, believing that their in-house practices combined with labour arbitrage would produce the cost benefits. But something has obviously gone wrong. A Forrester study says that 60 per cent of captive centres fail to meet expectations. Not surprisingly, many captives are reconsidering their strategy.

Not all captives flounder. Those that look at offshore centres as strategic and give time to scale have succeeded. The truth is that companies such as Motorola, Texas Instruments, Adobe and Oracle gave themselves 10- 15 years to succeed, during which they underwent multiple significant product release cycles, giving them a chance to achieve process and operations maturity through hands-on experience. Contrast this with companies that want to succeed in 3-4 years’ time. Given that a typical product release cycle is long, is it realistic to expect any kind of process hardening? In young captives, productivity usually is a fraction of onshore productivity leading to increasing impatience.

Meanwhile, young captives begin to feel the heat of other factors. Process immaturity, fear of the unknown and IP (intellectual property) concerns lead to tactical thinking, and safe and uninteresting work gets offshored. My observation has been that this tactical thinking and second-class work results in building an organisation where employees feel like ‘second-class citizens’. You can see where a situation like this is headed: micro management becomes a way of life and the employees in the captive facility begin to lose interest leading to more trouble, chief amongst which is dealing with plunging morale and motivation, a lack of ownership of the products and negligible innovation — the bread and butter for any software company.

It’s a domino effect from here — attrition and senior management churn due to increasing frustration leading to a vicious cycle of product delays, higher investments in HR and retention programmes; the leadership spends an inordinate amount of time and energy on recovery and travel; and communication costs escalate. Also, during early years, support processes ranging from facility, IT, HR, finance, legal and compliance drain captive focus from their core mission of product engineering. Finally, since captives are cost centres and do not necessarily have a ‘profit and loss’ mindset, they continue to raise salaries to retain talent.

Many of these enterprises are looking for ways out. One of the more obvious options is handing over their subscale captive to seasoned service providers. The primary goal is to preserve the investment in captive employees, while increasing the productivity and effectiveness of the team. They achieve this by combining their expertise in working with hundreds of other companies with the inherited experience of the best within captive employees, which are then dedicated back to the client organisation.

I believe this is the right path to take for subscale captives with no near-term plan to scale to 500 people or beyond. Service providers who ship one product each day across their client base have their processes honed through execution and invest heavily in developing best practices and technologies through centres of excellence. All this leads to creating an offshore centre that is on a par on productivity, quality, ownership and innovation with parent organisations.

On the cost side, using a partner can also provide a critical pay-as-you-go opportunity. You don’t have to set up a facility for 200, if in the first 6-12 months your head count is going to be just 100. Next-gen companies have begun to find experienced partners to manage their development and, to me, this spells a serious trend that is going to shape the future.