From below five per cent in 2003, offshoring will account for close to 20 per cent of total outsourcing market by 2008, says Gartner. Other studies, that may differ in actual numbers, also point to the same trend-that offshoring is steadily becoming an integral part of outsourcing and growing at a much faster rate than the overall outsourcing market.

Now, that is something all companies-buyers and vendors-have accepted as a fact of life. But now, comes the next big shock for the vendors. A new research by outsourcing consultancy firm TPI reveals that a significant number of large companies who are looking at offshoring their IT and business processes are looking at a do-it-yourself model.

TPI's research based on a survey of 100 senior UK executives responsible for outsourcing within large companies, reveals that large companies choosing to offshore their information technology (IT) and business processes to low-cost locations, such as India and China, are increasingly doing so through wholly owned subsidiaries or “captives” rather than external service providers (third party companies).

This is in contrast to one trend seen in major offshore location India, where some of the earliest pioneers in offshoring are changing their model. Early offshorers like GE and British Airways have started exiting from their captive subsidiaries, which have become full-fledged third party service providers. The erstwhile BA subsidiary, WNS, is now India's No 2 pure play BPO company and the GE subsidiary, Gecis, which still has got a 40 per cent stake from GE, is the No 1. There have been media reports that even American Express, another pioneering company, is looking to exit its offshore subsidiary.

“That has nothing to do with captive versus third party,” says a former Gecis manager and an outsourcing consultant. “It is a problem of growth for the company and hence for the people,” he says. That could be killing in a highly competitive labor market like India. He reasons that the older captives are turning third party primarily because of that and not because of any inherent problem in captive model.

Though there has been a lot of debate on the real benefits of outsourcing, most of the outsourcing decisions are driven by cost. Now, with offshoring delivering better on that aspect, many companies simply feel that they can avoid the complexities of outsourcing such as cultural issues and control by opting for a captive offshoring model.

Says Siddharth Pai, Partner with TPI, “The growth of captives stems from companies now being more aware of how to conduct an offshore operation and less reliant on external service providers. Buyers are increasingly employing hybrid models that mix some outsourcing with some 'do-it-yourself' offshoring, and where external providers are engaged, it is for more complex reasons than simple cost reduction.”

TPI's research suggests that captives are on the uptake, and that firms from all over the world are looking into captive operations as the preferred way to go offshore. Many also use a hybrid model of both captives (for core functions) and outsourcing (for non core).

The first adopters of this model were banking companies who are now well established, but there's a good uptake from other sectors as well.  There are now over 380 captives established in India.

The trend of offshoring to low-cost destinations is still in its nascent stage in most of Continental Europe, with the penetration of Indian BPO and KPO companies being much lower, as compared to the US and the UK markets. However, European firms have increasingly begun evaluating offshoring as a strategic option to stay competitive in global markets. To the slightly conservative European market, captive offshoring seems like the best way to get the benefits similar to outsourcing. This market could be accountable for the rise in captives.

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