- July 3, 2008
- Posted by: admin
- Categories: Blog, Commercial Models for Agile Outsourcing, Outsourcing & Agility, Outsourcing Advice
I came across a nice comprehensive comparison of the Captive and Outsourced business model in an article from Graham Russell, who leads Global Transaction Processing for pharma giant AstraZeneca. He has compared the pros and cons of each model as applicable to different indsutries, processes and business scenarios. My stance on the topic is:
Based on how things have changed and are continuously changing in this arena more and more companies will require the best of both the models.
Captives have some definite advantages such as control, speed of change management and less inter-organizational SLA barriers to cross. However the downsides are the lack of entrepreneurial ownership, innovation and MUST-WIN attitude in the remote company.
In case of an outsourcing provider, with the company ownership residing fully or majorly with the person running the show remotely, you get the MUST-WIN attitude which can offset the impedance caused by cultural conflicts and localized issues – this is where the outsourcing model looks much better.
There are many advantages/disadvantages of each of the 2 models, but I’ll highlight just a few key ones for the sake of comparison:
- Stronger Control
- Faster change management since it has no impact on SLAs and commercials
- One-sided agenda driving the operation
- Less Motivation/Incentive for the person running the captive operation
- Less Innovation due to lack of Entreprenuerial Attitude
- Higher Attrition – Person heading the captive center at the end of the day is an employee (who can easily switch) as a result causing lower sense of ownership and higher attrition throughout the operation.
Outsourcing Provider Advantages
- High Incentive to go out-of-the-way to make things Happen
- High Innovation and Service Improvement (with atleast no direct/upfront cost to the customer)
- Better Attrition Rates
Outsourcing Provider Disadvantages
- Less Control and more barriers to cross for change management (SLA revisions and commercial negotiations)
- Two-sided (possibly conflicting) agendas driving the services and operations (Outsourcing provider may have an agenda in conflict with that of the customer e.g. more hours being put in on a task/process would mean more money earned by the outsourcing provider BUT less productivity and higher cost for the customer)
However, as I mentioned, competition and other disruptive pressures will drive customers to ask for best from the both the worlds!
What’s the Solution? Agile Outsourcing!
In my opinion the business models around this arena are poised to change fast as we move in to the next decade. We’re more and more in need for hybrid business models which take out best from both the ‘Captive’ and current ‘Outsourcing’ models. We term this new breed of business models as ‘Agile Outsourcing’
A key component to enable ‘Agile Outsourcing’ is a team-structure which we call ‘Power Team’ (for the sake of understanding you can call them ‘captive teams’ but we don’t like using the word ‘captive’ as it gives a connotation of reactive, restrictive and enslaved resources ,which in turn can limit innovation and energy required for success).
So an agile outsourcing model is where the customer works with the outsourcing provider on dedicated resource models outlining a very basic high-level SLA which is subject to change without change in the cost-structure or cash-flows. Wherever the changes do not impact the cost-structures, why fight on renewing the SLA commercials each time that quick change in the SLA is needed to meet key objectives. The trust, partnership and long-term commitment to each other’s business success is what fuels and drives such a model.
Best of both the worlds!
This gets closest of getting the benefits of both the worlds. With a dedicated team and a reasonable contract duration, 1 year plus you can negotiate a good monthly rate per resource. This relieves you from worrying about the over-head costs and local administrative issues of the outsourcing provider… and at the same time have stronger control and flexibility in how you would like to use the resources on multiple projects or processes.
Allows for Agile and Change-friendly Delivery Models
Further, it allows you to utilize the more dynamic delivery models such as Agile to smooth out the frictions which are caused due to change management during the delivery. Outsourcing provider likes this model even at a lower price per resource, as it provides them firmer cash-flow projections… which in turn keeps them motivated to provide more flexibility to the customer.
Win-Win for Both!
It’s almost always a win-win for the outsourcing provider and the customer… Ephlux has experienced working in almost all the 3 models (Fixed Price, Dedicated Resources, T&M)… and we’ve found this Agile Outsourcing model to be the best in terms of a good win-win balance between both the parties.
Finally, such Agile Outsourcing models in turn enable the much-sought after IT/BPO bundled service models which further add to the competitiveness and agility of the customer.