Outsourcing or Captive? Which is the best alternative?

Published by Guntis Urtans on Tuesday, October 02, 2012 17:45

When there is need for software development capacity, you have 3 basic options: Hire locally, hire in a low cost region or outsource the work to a contractor. We have earlier discussed when outsourcing is a good plan. As many CIOs rule out a local supplier or local hiring due to the high cost, which option of Captive or Outsourcing is the best?

At a first look, own development (Captive) centre can be very attractive. At least if the capacity is needed over reasonably long time over several project cycles. Owning a team seems to have some strong advantages:

  1. We hire exactly who we need - not someone who is assigned to our project
  2. It will be easier to control execution - since we "own resources" and can communicate without layers
  3. Low costs - just a small overhead and salaries to the team members

But is this simple analysis entirely correct? Are there any additional risks associated with the Captive option? Let me develop the 3 initial points from above to a more realistic set:

  1. Hiring. The demand for high-quality resources is high so the competition is fierce. There are clear advantages to have a locally established employer brand. Absence of such brand significantly reduces your ability to hire the best and at the rate you may require. The business model of outsourcing is however directly related to create attraction of the best possible people which allows them to resolve HR issues in more efficient manner.
  2. Local supervision and Team dynamics. From case to case you may have issues in a project. Somebody is under-performing, somebody is leaving, you are getting mixed feedback from different team members. You need somebody on the ground to resolve it, but you may lack a manager senior enough to handle the situation or to discuss issues individually or collectively. The efficiency of the Captive centre drops very fast if senior staff needs to be sent over frequently to handle issues that arise. Once you have your team set, it can be very complicated to scale it up and down.  There is always a risk that your first down-scale will become your last one since you lose credibility in the local labour market. The ability to engage temporary help with the right skill-sets may become an issue as well.
  3. The low cost assumption. There are of course other costs than salaries and a low overhead. Secure office facilities with adequate infrastructure and secure communications will have to be set up. Infrastructure  with servers and computers, network, including phones and mobile devices need to be acquired along with development tools and software licenses. The management issue above probably needs a a more permanent solution, even for a small team. Administration, legal compliance, tax and accounting need to be resolved. And how about the cost for training and development of personal skills? These are all the kind of costs that are normally included in the rates from most serious outsourcing companies, which you need to manage on your own in a Captive solution.
What is the solution?

In order to set up and successfully operate your captive nearshore centre, you need to find good local manager:

  • Experienced well reputed manager with technical skills and business acumen needed to operate an independent remote unit.
  • A leader who is able to motivate and manage a team from all aspects. In fact more or less an entrepreneur.
  • A person who is very well connected in the local development community. A person that developers trust.

This can seem like a simple task. However, people with such qualities are very hard to get since they:

  • Are looking for opportunities to manage a team of at least 20-30 (unless your project is extremely attractive to them from technical prospective)
  • Persons with these qualities are very likely to be engaged in their own outsourcing firm rather than interested in running someone else's operation

Experience also shows that to find a viable economy of a Captive centre one should have a plan to run it and grow it over long term. It is also well known that Captive centres are less advantageous for team sizes below 80-90 developers.

So, if you:

  • Managed to hire a capable local management with an experienced leader
  • Your team size is 80+
  • You do not expect significant deviations in workload/team size
  • You are prepared to invest time and money to build it up

it is probably worth to consider building/developing a Captive organisation.

For everything else there is Outsourcing!

So how does an outsourcing vendor resolve the issues mentioned above?


  1. Employee referrals and connections - in most cases it is the most efficient hiring approach. 
  2. Local brand - outsourcing companies invest in building a strong image and reputation of being a high-quality employer. This takes years to accomplish.
  3. Efficient hiring process - selection and validation of candidates including training of candidates


  1. Larger pool of resources to identify and promote capable managers
  2. Existing relations to team members and a process to grow the right people
  3. Local supervisors monitor projects and get involved on per need and upon request basis
  4. Administration and related tasks are handled by people who are experienced and educated in the local systems and practices

Volume fluctuation, flexibility:

  1. A well operating outsourcing company keeps a bench to allow for fast ramp-ups of teams
  2. A larger resource pool (company wide) allows for allocating people temporarily to other projects (and circle them back later)

As a conclusion, the Captive Centre may be less attractive than you initially thought. If you are running large or long term projects, it might be an option. But even then you most likely need a local partner to set it up properly.

Otherwise there is outsourcing to near-shore locations in Europe available that provides low cost and excellently managed development organisations. On the route make sure to avoid outsourcing pitfalls that are all around!

Picture from: Freepik.com

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