Captive-Site Offshoring: Is it Right for Your Company?

Computerworld - One of the most provocative trends in business today, especially in the IT industry, is the movement of U.S. jobs to low-cost labor centers overseas. Offshore outsourcing has surged, in part because of the escalating need for companies to reduce their operating costs in light of the current economic slowdown.
Traditionally, companies have tapped offshore resources through third-party providers, typically based overseas. In this outsourcing model, a company or client hires an outsourcing company and essentially pays for contract labor. These providers offer a two-tier service, where U.S.-based consultants package work for their offshore-based colleagues.
An alternative to the traditional offshore outsourcing model that's rapidly gaining popularity is the captive-site model, where a company creates its own captive site, or subsidiary, at an offshore location and staffs it with locals who become the company's employees. The upside is that the company can take advantage of some of the financial benefits of outsourcing while assuming greater resource control and security.
For Fortune 500 companies, captive sites are commonplace. Such companies have long since established that captive-site offshoring offers significant cost savings through cheap labor, inexpensive resources and tax benefits. In addition, these companies have used subsidiaries to gain access to specialized labor and resource pools and to markets that would otherwise be closed because of political or cultural factors.
However, there are challenges that must be addressed prior to jumping in overseas. The company must have fortitude, since a tremendous amount of financial investment is required from the outset. It must also contend with an unfamiliar culture and foreign accounting, legal, regulatory, operational, political and business process practices. Navigating the complexities of foreign laws drives home the importance of staffing managers and executives familiar with local practices or hiring knowledgeable contractors.
Companies of all sizes can open captive sites, but there are some barriers and benefits specific to corporate size. One of the first considerations for a company considering a captive site is the capital needed to build, set up and staff a new office building. These costs aren't a barrier to entry for large corporations with significant resources to draw upon, but they can be for smaller companies.
Nonetheless, new alternatives can be explored. For instance, instead of building its own facility, a small company can rent space in an office building specially designed to house foreign subsidiaries. Another option is for a group of noncompeting companies to pool their resources and share the costs and facility space. While it may be difficult to locate other companies considering this option,