Third-party outsourcing suppliers are typically 5 to 15 percent less expensive than captive outsourcing suppliers in terms of their total cost of operations, according to a recent study by the Everest Research Institute. However, other values are more important than cost. "A company must identify the model that works best for its specific objectives and situation," said Eric Simonson, Managing Principal of the Everest Research Institute. Free report, webinar.

A recent study by the Everest Research Institute makes a holistic comparison of costs across operating costs, productivity, transition, sales and marketing and margins. The study shows that the cost advantage of the third-party model is derived primarily from better leverage of scale, leaner operating environments, more complex overhead management associated with most captives, as well as higher investments that captives make in knowledge transfer during offshore migration and creation of a more global culture. However, best-in-class captives are observed to operate at similar and even lower costs.

Although cost reduction is important, the study advises that a company’s decision of which model to leverage must be aligned with its near- and long-term strategic goals.

“Many of the factors that drive up the near-term captive operating cost structure can be valuable investments in the long-term to create business and strategic impact,” said Nikhil Rajpal, Vice President of Global Sourcing for Everest Research Institute. “To capture the value associated with the captive model requires an investment of effort and finances, and the company moving the work offshore as a captive operation must maintain focus on cost-reduction opportunities where relevant.”

According to the study, the third-party model can be better suited for companies who value goals such as minimizing location risk, attracting scarce talent that is not core to the business, and scaling costs to match demand for processes with fluctuations in volume. Conversely, the captive model can further goals such as to gain access to new geographic markets, increase access to management talent, achieve end-to-end control, and enable greater integration with the parent company.

Said Simonson, “It is becoming increasingly clear that the third-party and captive models are differentiating themselves and should be compared based upon their unique attributes. There are unique types of value that the third- party and captive models are better suited to capture that can help a company better reach its strategic goals and, in many cases, a combination of both models is the optimal solution.”

About this study

The Everest Research Institute study, "Comparison of Outsourced and Captive Solutions for Capturing Value from Outsourcing", builds on to the results of an earlier survey of over 100 key executives who operate captives across global companies. The survey revealed that more than 85 percent of these executives believe that their captive operations are delivering on cost savings and service expectations, despite contrary opinions. Both reports are available for download free of charge. Registration required.

The related webinar will take place on October 11, 2007. Register online.

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