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Captive – Evaluating Ideal Operating Model
Captive – Evaluating Ideal Operating Model

May 15, 2021

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The Covid-19 crisis has brought a lot of challenges to businesses worldwide. It has impacted all the aspects of the business, be it top line, profit margins, supply chain, customer engagement & in some cases, has even forced the company to alter the business model altogether.

And the situation is not different from the IT perspective as well. Though, the significance of IT has tremendously increased for the companies during this crisis, (moving systems to the cloud, digital collaboration tools, the surge of e-commerce models, etc..) nevertheless, the companies are evaluating how to further rationalize their IT expenditure.

Traditionally, captives have been playing this role for the companies. They not only help the parent companies to reduce their IT expenditure but also help them in value-added activities like access to better talent, focus on innovation etc.

And, with the ongoing crisis, it has further become important for the companies to introspect and evaluate the ideal operating model for their captive, as this evaluation will help them streamline their relationship with the captive and take vital decisions related to their overall strategy.

So, before getting into the discussion of ‘How to decide about the ideal operating model’ first we need to understand what do we mean by the ‘Ideal target operating model for a captive’ & It is nothing but the ideal combination of operational parameters  (as mentioned below) which defines the functioning of a captive -

  1. Organizational Design - It is a process for shaping the way captives are structured and run.  It involves different aspects of life at a captive, including team formations, shift patterns, lines of reporting, decision-making procedures, communication channels, and more. Eg. Hierarchical / Functional, Matrix, Network, Divisional Org. Structure

 

  1. Governance Mechanism - This parameter focuses on how the parent company and the captive interact with each other. What is the accountability of the captive? , What kind of leadership style is driving the captive? How much say does a captive have in the affairs of the parent company? Etc. eg. Local Governance, Vertical Governance, Integrated Governance

 

  1. Funding Model – There are many methodologies that a parent company can follow to provide funds to its captive. It can range from cost-based to strictly performance-based. Depending upon the objective of the captive, the funding model can be decided. Eg. Cost-Plus compensation, Transaction-based, Fixed, Hybrid, Outcome-based

 

  1. Performance measurement –To evaluate the kind of incentives a captive should get; it is imperative to evaluate its performance. For this, it is important to assess the purpose of the captive for which it was established. Is it supposed to run as a cost centre, revenue centre, investment centre, expense centre, or profit centre? Based on the purpose, performance metric can be finalized, which in turn will play a big role in deciding the success and failure of the captive.

 

  1. Talent Management – Depending upon the expectation from the captive, talent management of the captive should be managed. Because improper inputs give unexpected outputs.  What should be the ideal combination of technical knowledge, organizational knowledge, Functional knowledge for the captive personnel, depends purely upon what is expected from them?

 

  1. Other Best Practices – Other important areas which a parent company should evaluate -

 

  • Seamless Culture integration - A high degree of cultural integration and alignment between the parent company and its captive, leads to higher productivity and an increased sense of belonging amongst captive employees, resulting in the retention of the best talent.

 

  • An ideal relationship between the service provider and captive (both providing services to the parent) – How these two entities should work for the parent company? Should they work together or independently? Should they do similar activities jointly or do different activities separately? Should they be operating from a similar location or different? Should one be responsible for the other? Answer to all these kinds of questions will help the company in identifying the relationship between the provider and the captive.

 

  • Effective communication between a parent company and its captive - At every step of the journey, the parent needs to be communicating and managing expectations. By not investing in a communication function at the start of the journey creates challenges for the captive organization downstream.

 

  • Addressing Cost Pressures – In these challenging times, the captives must find out a way to address cost pressures e.g. Leverage emerging technologies to reduce labour expenses, monetize to generate revenue etc.

The inputs to the above parameters, combined with a meticulous methodical approach to assess those inputs, will help the company in evaluating the ideal operating model for the captive.

 


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