Captive offshore operations centers — company-owned delivery units located in low-cost countries such as India and the Philippines — have come a long way. Originally designed to provide labor cost arbitrage, they are now on the brink of being a source for strategic advantage.
Since 2008, we’ve benchmarked the performance of nearly 250 operations centers working on both core operations (e.g., bank account opening, claims) and support functions (e.g., accounting, payroll) on dimensions such as cost, productivity, customer experience and ability to increase revenues, using our proprietary methodology, P360.
We found what everyone would expect — that these centers are pushing the boundaries of efficiencies. But we also found that they’re helping to deliver superior customer experience, by providing consumer insights and decision support to product managers, and are orienting operations to grow revenue. But that’s not by accident. Making this happen is challenging, and it requires a disciplined set of practices and a new mindset in how to deploy these critical capabilities.
As part of the benchmarking effort, we surveyed more than 1,200 onshore business stakeholders in the past 12 months, who are either part of the business leadership or are involved in day-to-day process management. When asked how satisfied they were with the overall performance of their offshore operations, 83% of them said that they were either satisfied or highly satisfied. Nearly 65% of them indicated their intent to increase the scale of their offshore operations by 15% in the next two to three years. Perhaps more important, almost 70% of respondents said that they were likely to increase the skill complexity of the work done offshore.
While that all sounds promising, our research also indicated that there are three counter-forces at play that have the potential to affect the performance trajectory of these offshore centers. First, business stakeholders had conflicting agendas for their offshore operations. On the one hand, they were asking the centers to continue to reduce cost and improve productivity. On the other, they wanted their at-scale offshore operations to own and drive business outcomes like revenue and customer experience. Second, their operations networks have grown more complex. Four years ago, 70% of offshore delivery centers were located in one or two cities per country. Now, nearly half of them have three or more locations in multiple low-cost countries. In terms of ownership, there is a clear intent by more than 40% of the respondents to use a mix of captive and outsourced models. Lastly, we mapped more than 3,000 offshore processes (e.g., account opening, customer servicing, receivables management) end-to-end and observed high levels of fragmentation and multiple cross-border hand-offs. Driving meaningful performance shifts in such a set-up will be challenging.
Captive offshore centers must rethink their core value proposition. Our research estimates that the centers can deliver an additional 4-6x value above labor arbitrage by capturing the opportunity on four dimensions: 1) rapidly scaling up and establishing business decision support capabilities (e.g., pricing, consumer analytics); 2) realigning operating priorities to own and manage end-to-end processes in order to deliver superior end-customer experience; 3) identifying opportunities in the operations that impact top-line growth by extending services to new segments or building new services for the enterprise; and 4) continuing to push the envelope on cost efficiencies and productivity.
This is too big an opportunity to miss and calls for concerted efforts from leaders both on the enterprise side and in the offshore operations centers. Leading enterprises and centers are already making shifts in terms of governance by elevating the organizational reporting of the offshore delivery centers, enhancing leadership skills and redefining the performance contracts of the leadership teams to drive greater business value. Given the scale, mix of operations and quality of the talent pool in the offshore locations, it is now incumbent upon the enterprises and leadership teams in the offshore centers to evolve to be strategic assets as opposed to cost centers. This may not be a choice anymore, as failing to capture this opportunity may well be a question of survival.
The authors would like to thank the following McKinsey colleagues who contributed to this report: Puneet Chandok, Hiren Chheda, Shailesh Kekre and Jonathan Silver.
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