The economic uncertainty caused by the COVID-19 pandemic is making many enterprises question the logic of owning a captive service delivery center for non-core business activities, namely IT, F&A, procurement, HR and engineering. The fact is, many captives have not stood up well to the crisis. Some have struggled with business continuity plans (BCP) that provided insufficient solutions when the workforce was ordered to stay at home. Many captives have struggled to scale operations up or down in the face of dramatic and swift changes in demand. Workforces that were not trained or well versed in best practices for working remotely have seen a short- to intermediate-term reduction in productivity. Even captives that were able to configure remote operations but took weeks to do so now have a backlog that has still not been eliminated.
At the same time, many captives have seen a devastating drop in demand for goods that have left some employees idle while others are experiencing a spike in demand for order cancellations, refunds and customer contact. Many captive operations are not as strong as service providers in scaling resources up or down in the short term. That lack of scalability makes resource costs quasi-fixed during an economic period in which the enterprise is looking for increased variability in its cost structure – not increased rigidity. Meanwhile, the captives’ need for more bandwidth, always-on connectivity and greater access to collaboration software has exploded.
Many enterprises, especially those from hard-hit industries like brick-and-mortar retail, travel, hospitality, airlines and oil and gas, are experiencing substantial “losses” at their captives; volumes dropped more quickly than the companies could restructure the costs. The pain of getting services back up and running – even just to emergency levels – has been difficult, and, in some cases, the captive no longer offers the advantages it was built to offer: high quality, low attrition and cost savings. In these cases, the strategy that drove companies to build captive operations instead of outsourcing the services is no longer viable. This realization is driving enterprises to consider the possibility of monetizing their captive operations.
Is Now the Right Time to Monetize a Captive?
In the past, service providers have been interested in buying captives when they needed a leg up in a specific industry. Whether the vertical had unique processes – think joint revenue accounting in oil and gas, for example – or some unique industry context like closed-book accounting in the
insurance industry, providers have sought to acquire intellectual property by buying a captive rather than building the capability themselves. Many service providers today have a particularly strong appetite for acquiring struggling captive operations with special interest in enterprises with intellectual property or a strong resource pool.
For the enterprise owner, monetizing a captive can be a practical and smart way to adjust the risk profile and protect against future pandemics or far-reaching events. Because enterprises often sell their captives to a service provider and then buy the services back from that provider, they can retain knowledge and resources in a way that traditional outsourcing wouldn’t allow. And, because the provider is likely to leverage that intellectual property and experienced resources for other clients, the enterprise can now convert quasi-fixed costs into variable ones.
Why Sell a Captive?
When an enterprise is considering selling a captive, service providers are a go-to buyer. They have the ability to redeploy resources in an agile manner and use different resourcing models with part-time resources and contractors to increase their flexibility in scalability. In fact, providers have done a good job enabling remote workforces in short order and are experiencing improved attrition rates. They also are technology-driven with a considerable head start in finding business value with artificial intelligence, automation and emerging technologies.
Since providers have already mastered the art of applying best practices across clients and industries, they know how to leverage their investments in centers of excellence, digital capabilities, governance and tools. Delivery centers in locations where providers do not have a presence or those that offer a mature process model are even more attractive.
Assessing Your Monetization Potential
Several factors can support or inhibit a successful monetization strategy. One is knowing how to assess your operations’ value. Assessing the monetization potential will depend on the following criteria:
- Value as a true internal service provider to the business
- Industry share of wallet for a given provider
- Ability to scale
- Attrition rates
- Processes or tools that are valued as intellectual property
- Geographic location
- Degree to which the captive operates out of a culture of continuous improvement
- Rate of success or failure with BCP in the face of COVID-19
ISG guides enterprises through captive monetization in a way that optimizes intrinsic value and realizes speed to value. We understand the role of captives, the potential for divestiture and the available acquisition market better than anyone in the field. If you are interested in understanding more about your captive’s potential value, ISG has developed a valuation model that can quickly create an indicative valuation and a list of service providers that have expressed interest in captives that share the same characteristics as your captive. Join me for a webinar Assess the Value of Your Captive and Improve Your Risk Profile or contact us to discuss how to think through the possibilities and come out ahead.
About the author
Mr. Furlong is a Partner at ISG and has over 25 years of experience in assisting companies transform their general and administrative functions including finance and accounting, human resources, and procurement. He has expertise in formulating strategies and designing alternative service delivery models (Global Business Services, shared services and outsourcing), transforming processes, driving organizational change, and implementing emerging technologies such as advanced analytics, mobile solutions, cognitive computing and cloud based solutions. Mr. Furlong leads ISG’s Business Advisory Services practice and serves on the Americas Leadership team.