What is Captive Offshoring?
With increased competition and changing customer expectations, businesses today need to stay ahead every step of the way and consider cost-effective moves that bring in higher ROI and foster growth. Captive offshoring is a cost-effective method of establishing an entity on an offshore site, hiring employees from the local talent pool, and continuing the parent company’s work.
This model helps parent companies reduce their labor costs, have increased control of the dedicated facility, and generate revenues with maximized return on investment. This article will provide an overview of captive offshoring in detail and help you understand how organizations benefit from this model of operation.
How Does Captive Offshoring Benefit Organizations to Run Smoothly?
With greater control over resources and optimized business operations, captive offshoring can facilitate enterprises to run smoothly and bring in profit. Let’s look at how captive offshoring benefits organizations to operate seamlessly:
Understanding Newer Markets
When a company sets up an entity in a foreign market, it is surrounded by the opportunity to learn about the local market trends and gather experience. The company also gets the chance to make newer connections and implement cost-effective strategies that ultimately help in minimizing long-term costs and business expansion.
Exclusive Access to Talented, Low-cost Labor
One of the most significant reasons most companies have captive offshore setups is the low labor costs in developing countries. For example, while the cost of labor in the US is extremely high, in developing countries, US enterprises have the opportunity to hire employees with higher qualifications at a comparatively lower wage.
Increased Knowledge and Resources
When an enterprise works on an offshore site for long periods of time, it creates a big network of connections and has access to qualified employees who can contribute to the growth of the enterprise. The business has access to suppliers and resources that are available at a price conducive to the business.
How Does Captive Offshoring Work?
While captive offshoring is a brilliant method to cut down on labor costs and resources and prepare for higher returns on income, it comes with its own set of criteria and challenges. Let’s look at some key pointers to understand how captive offshoring works:
- Captive offshoring requires establishing direct control on a remote team in a foreign land and having high levels of business knowledge sensitivity. The parent company must ensure that it has the resources to train the employees from the local talent pool on the offshore site and provide a consistent delivery process.
- The parent company must have sufficient capital investment to streamline the captive offshore setup processes and be prepared for globalization. They must take into consideration the management of the subsidiary company and the seamless incorporation of the local talent pool in the company.
- Companies with captive offshore subsidiaries must have long-term processes and control management levels chalked out. This is why these models are preferable for continuous projects instead of projects that are one-time or on a contractual basis.
- These companies must have the capacity to tap into talent pools that are not readily available in native branches and make the most of the workforce.
Now that we have learned about how captive offshoring works, we will explore the advantages and disadvantages of captive offshoring for better understanding.
Advantages and Disadvantages of Captive Offshoring
ADVANTAGES:
As the parent company has complete control over the subsidiary, the levels of productivity are much higher.
The reduced cost of labor and resources is one of the biggest advantages of this model of operation.
In captive offshoring, the parent company has complete authority over the captive setup, which strengthens the security of the enterprise.
By having an offshore entity, the parent company can transfer some of the processes to the remote team, reducing the burden from the business operations in the main enterprise and saving time for more efficient tasks.
DISADVANTAGES
Setting up a captive offshore enterprise demands a huge capital investment and is a long-term process. Focusing on different areas of operations and setting up a fully functional entity can distract the parent company from the core operations, leading to significant losses.
A captive model is not ideal for startups or small-scale businesses. A business that has established itself over a few years and has sufficient funding can only seek to establish such a model.
The parent company has to build everything from scratch and work with a workforce with the least knowledge about the parent company, which is from a foreign place; therefore, the challenges of streamlining business operations in a captive offshore model are always a level higher.
Scale Your Business with the Right Approach in Captive Offshoring!
According to a McKinsey study, several enterprises with captive subsidiaries in low-cost countries have been scaling new heights in terms of productivity, profits, and quality of deliverables. Therefore, if executed with strategic optimization, captive offshoring can bring huge benefits, enabling organizations to operate smoothly and efficiently.
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