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Outsourcing vs. Establishing Captive Facilities Offshore Anthony Mitchell,10/04/06   Strategic sourcing often involves large projects or indefinite quantity contracts (ICQs), managed by a primary outsourcing service provider and supported by smaller specialty firms that serve as subcontractors. Administrative fees charged by a prime contractor for passing funds through to subcontractors often range from 25 percent to 35 percent. The choice between outsourcing or operating a captive facility for call center services, non-voice customer services and back office processing, offers advantages for both approaches. Here we examine the advantages of outsourcing and two principal strategies for outsourcing. In an upcoming article, the advantages of establishing a captive facility will be detailed. There are two principal strategies being pursued for outsourcing: strategic and market-driven outsourcing. Strategic outsourcing is addressed first because it does not lend itself to the establishment of captive offshore operations as easily as market-driven outsourcing. Strategic outsourcing aims to redirect an organization's resources to focus on its core competencies. Core competencies for some organizations consist largely of strategic planning, brand management and project management. Strategic outsourcing enables organizations to quickly change course, enter new markets and access new technologies. Strategic outsourcing focuses on results. Market-driven outsourcing is often more process oriented, with greater attention paid to how results are achieved. Strategic outsourcing often involves large projects or indefinite quantity contracts (ICQs), managed by a primary outsourcing service provider and supported by smaller specialty firms that serve as subcontractors. Administrative fees charged by a prime contractor for passing funds through to subcontractors often range from 25 percent to 35 percent. In comparison, brokers generally charge a 5 percent commission for placing outbound voice work and 10 percent for inbound customer service contracts. Strategic outsourcing lends itself to process redesign and organizational transformation, but not to the relatively long-term, more capital-intensive tactic of establishing captive offshore facilities. Market-driven outsourcing, in contrast, can serve as a stepping stone to establishing a captive operation offshore. Market driven outsourcing enables buyers to gain familiarity with a location before deciding whether to commit to setting up their own operations there. Familiarity is no guarantee that a captive operation will be successful, as Apple (Nasdaq: AAPL) demonstrated by pulling the plug on its captive operation in Bangalore on May 29.  The key variables in market-driven outsourcing are the capabilities and prices of available service providers. The decision to outsource is often based on short-term cost savings from using qualified talent pools and cheaper infrastructure in offshore locations. The direct costs and levels of effort required for project management of market-driven outsourcing projects are usually greater than for strategic outsourcing ones. Full support of project management activities in market-driven outsourcing projects lowers the risks and total costs of running these programs offshore.