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Life Cycle of Captive Business Process Outsourcing Units

Dipu, Dipesh Kumar, "Life Cycle of Captive Business Process Outsourcing Units" . Effective Executive, April 2005 Available at SSRN:

Abstract:

    The divestiture of General Electric Capital International Services (later the name was changed to the acronym GECIS) by GE to let General Atlantic Partners and Oak Hill Partners take the majority stake has been a case worth study. The case points towards the life cycle of a captive business process outsourcing (BPO) unit. The life cycle of a captive BPO can be divided into four distinct phases based on the equity participation of the parent company. These phases can be named as:

    Start up phase: In this phase the parent company starts off with making investments for infrastructure and for hiring people. The motive for the parent company to go abroad and establish itself off shore is Cost-reduction. Cost reduction comes from lower cost of labor and lower infrastructure costs. Tax incentives given the local governments also make the destination attractive with regard to cost reduction. The scale of operation is generally small as the parent company does not have indication about the success of operations. The focus of start ups are training and task-oriented skill development. Scope of work is limited to ones that are highly rule bound. Human resources utilizations remain low, at about 30 to 40 percent.

    Value addition stage: Most companies land offshore for cost advantage but they soon find value additions coming from the contributions from such establishments. A service that could not have been possible due to budgetary or resource constraints, can be delivered to the customers leading to client delight. The value addition in terms of additional work deliverables, higher quality of work due to increased attention on review and large back up research and development make for the parent companies to continue investment in offshore unit, even at a brisker rate. Human resources become stable as the employee turnover is reduced and outgo is outnumbered by incoming staff strength. Focus on training and skill development is partially shifted towards development of managerial capabilities. Utilization levels go higher up to an extent of 60 to 70 percent. Some of the outfits may boast of even higher percentages.

    Competence accumulation stage: In this stage the captive outsourcing unit is matured and self managed. The talent pool acquired from the years of operation keeps itself self indulgent in streamlining the processes, making shifts from small chunks of task oriented works to high end process oriented works. Leadership from the parent company passes on responsibilities of operations and tactical decision making to capable people in the offshore unit. Competence levels of offshore human resources rises to a significant level. Resources progress in their analysis and knowledge. Knowledge management becomes an essential process and focus shifts from training to career development. An offshore unit smoothly transforms to a knowledge center and a talent pool whose capabilities match the staff levels of the parent company. The bits and pieces of managerial works that is off shored give them a strategic picture of the company and its operations. However, strategic decisions are taken from the parent company.

    Third party service stage: This stage marks a departure from all the three previous stages in respect that the value addition plateaus for the parent company and investments dry up. The high end work that the parent company performs can not be off shored due to various reasons - human resource, legal, customer related, business model related and others - and stage of evolution of off shore unit stagnates. The offshore unit acquires the critical mass and required capabilities to shrug off the umbrella of parent company and explore business opportunities in the local environment or with third parties. The managers at the higher levels long for taking a shot at strategic decision making as they are aware of the capabilities available with their teams.

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