The meaning of a Captive Unit, compared to outsourcing

Frequently asked questions

How does a Captive Unit compare to normal Outsourcing and Offshore development?

Until now, there were two mainstream ways to outsource IT related work to India, namely:

1. Time and Materials
2. Fixed Price

In the Time and Materials concept, you buy technical staff’s time and the material resources from an outsourcing company who typically performs this service for many companies at once. The pricing model is usually a price per hour, for a particular type of resource. The outsourcing company is usually not responsible for the result and for deadlines. This is a performance agreement and not a result agreement. This mode of outsourcing, until now, is usually the most affordable one, due to the lack of risk for the outsourcing company. The more hours performed in a project – the costlier the end result. The technical staff is on the payroll of the outsourcing company and they are also the owner of the materials used for the projects. Their main risk is to ensure as little as possible bench time for their resources. The client has a medium amount of possible control on resource selection, development processes and build methods.

In a fixed price model, a fixed price and usually also a fixed deadline is negotiated between the client and the outsourcing company. This is a clear result-oriented agreement and most of the risk is carried by the outsourcing company. It is therefore also the costliest model. In most cases, the client has no say about resource selection, processes followed or build methodology in this model.

In a Captive Unit, everything is different. First of all, the concept of “client” and outsourcing vendor simply does not exist. Since a captive unit is wholly owned, the parent company owning it has absolute and full control over everything. Technical or productive staff are hired directly on the company’s payroll and most assets are also self owned. Development methodologies, planning, processes followed are all fully decided by the parent company. The parent company has full say about the human resources hired and their Cost to Company. The easiest way to start up a captive unit, is to use the services of a specialized local agency to handle all non-technical matters of the company. Since there is no risk as such for any outsourcing company, this model is logically also the most affordable. However, it is also the most complex to establish and run without proper local assistance, mostly due to the lack of knowledge of the parent company of the local culture and business habits.

How long does it take to be operational?

In our experience, the hardest part of the trajectory are the internal discussion rounds in the parent companies we assist. All stakeholders in the parent company usually wish to be informed and convinced about all risks and benefits . We can be of help with that.

You can be operational, with your first staff on board in less than a month after a go-ahead and be fully staffed and functional in less than 90 days. Once all decisions are made, the paperwork is a matter of weeks. With the right assistance, it is easier to own a business in India than commonly thought it is.

Do you have sample financial plans?

Our subject matter experts can assist you with our ready-to-use and fully customizable financial plans, cash budgets and operational simulations.

We have those for IT- or software development setups, BPO setups, Engineering units but we also have them for Market entry sales setups and representative offices.

Each of those can document a simulation between 6 months to three years of working and for operational staffing sizes between 5 to 50 FTEs.

What exactly is an “Assisted” Captive Unit? can you give an example?

In simple terms, an Assisted Captive Unit is a captive unit where the parent company only focusses on the core business aspect, and where all other parts of the company and business are operated and managed by a third party.

Practically, for a midsized IT company from e.g. Europe, this would mean that they can purely focus on their projects, almost in the same way as they would in Time and Materials outsourcing, with that difference that there will be full development team integration, due to the parent company having full control on how things are done. And even though the P&L and Balance sheet of the assisted captive unit will belong to the parent company, all corporate, administrative, financial, HR, legal and compliance work will be executed by the third party. This means:

Setting up the company
Finding and providing a local director
Finding or providing office space
Providing recruiting, HR- and payroll services
Providing local accounting and administration
Providing corporate compliance
Providing local operational management
Providing legal assistance if required

This model, which can be compared to a serviced apartment, is obviously costlier than when the parent company would carry out all these tasks them selves, but there will be no learning curve, no lost time due to mistakes because of lack of local cultural knowledge and local laws and therefore much less risk. The assisted captive unit can be productive and fully operational from day 1.

Is the Captive Unit service offered only in Chennai, India?

As of August 2021, we are offering the assisted captive unit service in Chennai, India and in Madrid, Spain.

Other locations in India or Spain and possibly even in additional countries will be considered, based on the size of the requirement, the type of talent required and the complexity of the core business.

Are IT Captive Units only suitable for IT companies?

No, an IT Captive Unit is perfectly suitable and even specifically suitable for any company which needs customized software to run its business. The easy to follow rule of thumb is: if you require more than 4 full time IT resources, a CU is the most effective way to go.

The only advantage for IT companies is that they usually already have systems and procedures for software development in place in the parent company.

How often should I visit my Captive Unit?

No business runs itself. And even when well assisted by seasoned professionals, it should be clear that a Captive Unit is still YOUR business.

From a legal point of view, it is useful (but not a must) to visit your Captive Unit at least once during start up, since that facilitates an easier paper & documentation process. Other than that, the only legal requirement is a once per year attendance at the Annual General Meeting. Except during the current pandemic, personal presence of the shareholders of the company is a must during those.

From a work and business point of view, our experience has shown that, for best results and productivity, there should be physical meetings between your team at the Captive Unit and the parent company every 6 weeks or so. In the past, we have often arranged that as a quarterly visit from the parent SPOC (Single Point of Contact) to the captive Unit, followed by a visit to the parent company by one of the Captive Unit project managers of team leaders. This also facilitates integration of the Captive Unit with the parent company.

What types of Captive Units do you offer?

The first type of Assisted Captive Units we offer are considered extensions of your productive team:

Captive Units for software development
Captive Units for BPO style of work
Captive Units for engineering work

A second major type of Captive Units have the specific goal of your market entry into the country:

Captive Units for sales into India
Captive Units for production cost control

What happens if it doesn’t work? How hard is it to close down a Captive Unit?

No business is ever started with the idea to shut it down fast. However, there may always be unavoidable circumstances which may lead to no other way than to close it down. And India is notorious for not being easy to close down business.

We therefore ensure that the Captive Units we assist are started up with a few extra security layers in place, so that an easy exit is assured.

What staff is needed in the parent company to ensure smooth operations in the Captive Unit?

Running any remote team requires careful planning from the parent company. It does not matter if the team members sit in the next village, working from home, or in an office in India. What does matter is clear instructions to all. And unless a project is entrusted to the Captive team in its entirety, all team, from across the globe will need to cooperate. Such cooperation effort is usually managed by a project manager, a product owner or a business analyst at the parent company side.

Other than this, the Board of Directors of the parent company or at least one of its representatives, should be able to allot at least an hour per week to discuss general administration an other operational matters with the assisting agency.

External links about Captive Units

Captive vs outsourcing | Captive offshoring | Examples of a Captive Unit | What is a Captive Unit?