As COVID-19 continues to disrupt all aspects of life, companies are re-evaluating how they get work done. For many large enterprises, reassessing their use of, and future investment plans for, shared service centers (frequently called “captive” centers — we use both terms) is a key part of this strategic planning.
Working with ESI ThoughtLab, we recently surveyed C-suite leaders representing 1,500 organizations worldwide regarding their plans around captives. A clear message stands out: the business logic behind captives (standardization, economies of scale, lower cost labor) is still compelling, but the associated risks (geopolitical and business continuity concerns and the risk of diminished innovation) are increasingly pressing issues. (For more information on our research, including its methodology, see “Shared Service Centers: Risks & Rewards in the Time of Coronavirus.” Also see our associated position paper, “Shared Service Captive Centers: Assets or Liabilities in the Post-COVID-19 Era?”)
Captives have historically been thought to offer many of the benefits of outsourcing while mitigating some of the risks of working with external service providers. But in the time of coronavirus, the nature of this tradeoff must be recalculated. Globalization, though currently out of favor, will continue to be a motivating force for large enterprises everywhere. However, the tactics used to operate globally are set to change profoundly.
Businesses evaluating their captive center plans should consider 15 findings that emerged from our research.
1 The main benefits of captives include economies of scale, lower costs, and financial and tax advantages.
All were cited by more than half of respondents, regardless of industry or company size. Greater productivity and high quality of service are also common benefits, which more than one-third of executives mentioned.
2 For most companies, high capital investment and inability to innovate are major drawbacks.
Many of the biggest drawbacks of captives relate to costs, from large capital investment and long payback periods to opportunity costs and high cost of service.
3 The pandemic has hurt captives in three main ways: slowed service, disrupted work and heightened risk.
COVID-19 curtailed service from captives in several ways: It slowed down service, made it difficult to complete manual processes and disrupted the delivery of IT services. Working became more challenging, with productivity declining as staff moved to remote work and resources were constrained by illness and layoffs.
4 More than 40% of companies intend to decrease their use of captives; fewer than 20% expect to use them more.
The pattern is different, however, for the largest companies in our sample — those with more than $10 billion in revenue. Of these, only 36% plan to decrease their use of captives, while 31% plan to increase their use. The following figure illustrates the reasons cited.