Delhi, Sep 18, 2008 1206 hrs IST
Globalization of R&D has been broadly embraced in the last five years. The early trend was to ship an expat manager to offshore destination to setup a Captive facility with the expectation that over time predictability and savings would come. The experience of Captives tells us this is far from the truth.
From my experience running 100 of R&D Center as a Service Provider, I wanted to share with you 10 things every CEO should know about Captives.
Rome Was Not Built in a Day: And neither are most captives. Billion dollar firms like Motorola, Texas Instruments, Oracle and Adobe showed the way to successful R&D Captives. But this does not mean everyone will or can. These companies invested 10 to 20 years in mastering their Captive operations. Do you have the luxury of time? If not, finding a partner with the right capabilities, right from the start, is a better solution. Why reinvent the wheel when you can ride on your partner's!
Beware of Consultants Bearing Reports: The gap between a consulting report and execution can be significant. Developing and honing your long-distance development processes takes time and practical experience - not advice from gurus. If you're starting from scratch, be prepared for at least 5-7 years of significant product releases before you begin to see process maturity. After all, process maturity cannot be micro-waved for use.
Don't Confuse ITO and Product Development Skills: Even though India has the most mature IT industry, R&D talent with product and domain expertise is still very rare. Drive and passion to succeed is very high in India. Capitalize on this passion to transform these engineers through extensive training and hands-on experience. Be prepared to invest significantly in training by using your home employees and management. Service Providers overcome this challenge through Training department which are tried and tested across their Clients. You may want to leverage this value add and their vast recruiting network to attract the best in the first place.
Grunt Work Leads to Unhappy Employees in India and China Too: If the parent company is going to ship second-class work to the Captive, you better get ready for some serious challenges. Second- class work often results in employees feeling like "second class citizens". The result: your offshore development team is going to quickly get de-motivated and retention will become a huge challenge. Your HR team will have to work over time, recruitment will have to get turbo charged and training will need a shot of steroids. The leadership team is not immune to the effects of declining morale. They're next. Grunt work only disgruntles! Quality work keeps quality people.
Stay off the Expat Carousel: Typical Captives are run by expats on a two to three year assignment. Since they understand the culture and ethos of the parent company, they become the obvious choice. However, this is a mistake. Expats on short assignments cannot intrinsically get passionate about building a sustainable organization. Secondly, when the leader (expat) returns back the organization falters, as the next level of managers also start looking at alternatives. Creating a leadership team that's committed to the long term is critical to success. And remember "expats" are not necessarily the "experts" in managing local challenges!
The Bane of Cost Centers: Captives are cost centers and seldom develop a P&L mindset. Expect accelerated cost escalation compared to the market because the easiest justification -- "this is the market" -- typically prevails. And Centers of Excellence become Centers of Expenses soon. Incidentally, many of the highest paying captives also have the highest employee attrition in India.
Watch Out for Unplanned Investments: Captives are designed with the end-goal in mind. Typically, first year plans are much smaller than the long term objective, but companies often struggle to even reach that objective. The problem is magnified when you plan for 300, hope to hire 100 in the first year, but often only wind up with 30. This unplanned overhead expense can cripple the Captive budget. Additionally, the effort required to manage HR, IT, Facility, Finance, Legal, Compliance, etc., drain Captive focus from their core mission of product engineering. Partners, whom you pay-as-you-go, prevent this cost escalation and are able to provide seasoned support services.
Size Matters: Forrester Research and Gartner proclaim that the scale for an effective captive is 500+ resources. If companies don't think they can approach 500 in a three year timeframe, it's not worth establishing a captive. Even if you plan to get to 500, but are starting fresh, look for a partner to setup your operations under the Build-Operate-Transfer model (BOT) to speed time to productivity while minimizing costs and risks. Look for offshore partners who guarantee cost advantages, have proven operational excellence and engineering best practices, boast brand equity and are willing to work at cultural cohesion. At least when it comes to captives, small is not necessarily beautiful, it is actually painful.
Evaluate the Hybrid Model: The dirty little secret is that few captives are truly doing it alone. Almost 50% of captives are also working with providers outsourcing 30% to 50% of their work. Partners can help with flexible capacity needs, geographic diversification, specialized functions, accelerated scaling, managing facilities and talent and, not to forget, access to the partners best practices and Centers of Excellence could directly benefit your own Captive. Remember CK Prahalad's formula for success in "The New Age of Innovaton": R = G. Resources are global and partnership is the way to go!
The Captive Trend is Reversing: A recent report by Forrester Research indicated that more than 60 percent of captive centers are struggling to achieve the anticipated performance or productivity advantages. According to Zinnov Management Consulting Pvt. Ltd. the net result is a precipitous decline in the number of new captives started in India over the past few years - from 76 in 2004 to just 15 in 2007. Further, according to Zinnov, Providers are expected to outpace the growth of captives by more than 300 percent over the next four years. In fact, Forrester posits that 10% of captives will turn over their operations to Providers. Warren Buffet said, "It is only when the tides run out, you will know who has been swimming naked!" Competitive forces and need for innovation will drive captives to leverage enormous benefit from partnering with service providers!
Conclusion: The global product engineering market has changed significantly in the past five years. What was once conventional wisdom may not hold. Today, leading analyst firms are recommending that software vendors evaluate the provider model as an effective alternative to starting or growing a captive. The precipitous drop in captive development centers being started is a telling indicator that the transition is well underway. As software companies review their global R&D strategies, they should keep in mind the factors mentioned above. If their strategy doesn't include scaling to at least 500 resources quickly, investments in establishing a local brand, measuring the effectiveness of their efforts and a hard review of the overall cost structure, they may want to give that strategy another look.
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