Let me start with a story:
Traders from far off exotic lands used to get precious gems to a certain village. These were much sought after and sold at a price to the locals. Few smart folks from the village, who liked these gems, wanted to know more about this trade and the trader. So, they found where he comes from and where he gets his precious trade. They figured out that it was futile to pay for these gems those prices when they could get it cheaper if they undertook the same journey from the far off land and brought the stuff to their village.
So they befriended the trader, went with him to his country and found the places to pick those gems. They surely could buy a lot more for the same price that they paid to the trader in their village. However after the initial euphoria of the new find subsided, they found that undertaking this journey to get the gems was taking a toll. They were not able to spend enough time in their village and so their own business was suffering due to the lack of attention. Secondly over a period of time, with some maths they found that the cost of getting the precious finds home was actually more than taking it from the trader! They had initially overlooked the local expenses and costs - the cost of stay in an unknown place, the cost of hiring labor to extract (with a comparatively smaller scale than those of people like their trader friend), cost of security, cost of travel etc. So, while the gems themselves were cheap there, the lack of volumes, lack of knowledge of local conditions, lack of core competency in that space was causing their overall costs to go up.
Finally the smart folks gave up their newfound venture and settled for buying the gems from the trader who visited their village. They could get it at better price than they would have eventually played to get themselves and they were also able to focus on their business.
The story is similar when it comes to offshore captives set up by many enterprises who find it more lucrative to set up an offshore center than to pay a provider to get offshore delivered services. So, while they want to get the benefits of labor arbitrage, they want it do it all themselves.
Over the years, the industry has seen many such captives being closed or sold off. The companies ultimately found that running offshore based delivery centers were best left to be run by companies which understand this business better. They were bogged down by high attrition, escalating cost of labor, lack of opportunities to offer to their employees as compared to service providers and other local conditions.
They still get the gems ( the cost efficiency and improved profits) while they focus on their core business and let the professional service providers run ofshore services for them.
Traders from far off exotic lands used to get precious gems to a certain village. These were much sought after and sold at a price to the locals. Few smart folks from the village, who liked these gems, wanted to know more about this trade and the trader. So, they found where he comes from and where he gets his precious trade. They figured out that it was futile to pay for these gems those prices when they could get it cheaper if they undertook the same journey from the far off land and brought the stuff to their village.
So they befriended the trader, went with him to his country and found the places to pick those gems. They surely could buy a lot more for the same price that they paid to the trader in their village. However after the initial euphoria of the new find subsided, they found that undertaking this journey to get the gems was taking a toll. They were not able to spend enough time in their village and so their own business was suffering due to the lack of attention. Secondly over a period of time, with some maths they found that the cost of getting the precious finds home was actually more than taking it from the trader! They had initially overlooked the local expenses and costs - the cost of stay in an unknown place, the cost of hiring labor to extract (with a comparatively smaller scale than those of people like their trader friend), cost of security, cost of travel etc. So, while the gems themselves were cheap there, the lack of volumes, lack of knowledge of local conditions, lack of core competency in that space was causing their overall costs to go up.
Finally the smart folks gave up their newfound venture and settled for buying the gems from the trader who visited their village. They could get it at better price than they would have eventually played to get themselves and they were also able to focus on their business.
The story is similar when it comes to offshore captives set up by many enterprises who find it more lucrative to set up an offshore center than to pay a provider to get offshore delivered services. So, while they want to get the benefits of labor arbitrage, they want it do it all themselves.
Over the years, the industry has seen many such captives being closed or sold off. The companies ultimately found that running offshore based delivery centers were best left to be run by companies which understand this business better. They were bogged down by high attrition, escalating cost of labor, lack of opportunities to offer to their employees as compared to service providers and other local conditions.
They still get the gems ( the cost efficiency and improved profits) while they focus on their core business and let the professional service providers run ofshore services for them.
It is no different than the classic "make or buy" decision - only that in this case most companies have realized that "buy" is the way to go. There may be exceptions where a "make" may make sense but then that's what they are -- exceptions!
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