Charles Darwin once said, “It is not the strongest of the species that survives, nor the most intelligent; it is the one most adaptable to change.”
Darwin had no experience of global-in-house centers (GIC) or captives (as they were first called), but his idea definitely applies to this species of IT strategy. Offshore centers gained popularity in the late 1990s, as companies sought to arbitrage labor costs by tapping into a skilled talent pool in areas like Mexico, India, eastern Europe, and Philippines. However, two decades later, COVID-19 has brought about seismic changes in the way captives operate, and its effects will last for many years. Captives must adapt to the new realities – and enterprises must address the challenges of balancing control over operations versus increasing margins and converting captives into new engine of innovation to leverage the new age of AI, ML, and automation.
Today’s Challenges for Captives
Even prior to the COVID-19 pandemic, captives were facing cost pressures because of large investments in infrastructure. Additionally, captives were historically less engaged with newer technology work (AI, machine learning, and deep learning); captives were the place to push non-mission-critical work while most cutting-edge work remained with the parent.
One result has been high attrition rates at the captive centers. Captive utilization rates swing between periods of underutilization (more resources in anticipation of an upcoming project) and the inability to scale (fewer resources due to cost constraints or improper planning), which lowers morale and contributes to high attrition. This high turnover rate, coupled with unclear mandates (are we a low-value services arm or a product-development function?), traditionally dampening innovation within captives.
Another consequence of COVID-19: Many captive centers have been hemorrhaging revenue because of additional work-from-home (WFH) costs such as reliable laptops, desktops, and security for these devices. The pandemic has created a perfect storm for cyberattacks: an uncertain environment coupled with an employee’s remote access in a public setting. Low-cost captives cannot deploy state-of-the-art cybersecurity controls, nor can they resort to splurging on insuring against the security gaps. As a result, many captives are at an inflection point and are looking to break out of their inflexible infrastructure that makes innovation difficult.
The research firm ISG has reported that approximately 40% of captive centers today have fewer than 500 people. Everest Group reports that dealing with volatility, the uncertainty of the post-COVID era, complexity, and ambiguity are forcing captive exits with the number of new captives declining. There are several reasons for this:
- Captives are facing stiff competition from a growing pool of local talent who are working from home, especially in product development and services.
- The role of AI and automation to replace the tasks of staff in these captives has accelerated this trend.
- The power to attract top talent at captive centers has significantly reduced compared to top-tier IT services companies.
The COVID-19 pandemic has forced CFOs to look for alternatives to optimize costs and increase operational flexibility while ensuring minimum business impact. As a result, there is an uptick in the number of organizations re-evaluating their captive strategy and considering relocating ancillary functions including finance & accounting, customer management, and IT to top-tier IT services companies.