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2.4.1 The key challenges in setting up a Captive Center
Once the decision to establish a Captive Center is put into consideration, companies must take into account of the challenges occurred during the process of setting up their captives. Beside time zone or cultural differences, many companies find it is a much more demanding job to deal with tasks such as business registration process or finding an office. This phase will highlight those key challenges of establishing a basic Captive Center when a city is selected.
Complication of the Registration process
One of the most difficult parts of establishing an offshore Captive Center is to deal with the registration process in another language to create a legal existence for the captive.
Additionally, the various registration processes from country to country, the rapid changes in regulations and the language barrier altogether make it time-consuming and costly for companies. Also, the complexity in legal requirements and allowance and responsibilities, which differ greatly in each type of entities, add extra complication to the job. For example, the differences in requirement of the minimum share capital of a private Limited Liability Company (LLC) in Finland, China and Vietnam shall be EUR 2,500, RMB 30,000 and no requirement respectively. (Vietnam Briefing 2013; LehMan Law 2012). To ease the establishment process, some companies may hire a lawyer or other service providers to get assistance along the process regarding name availability, tax and labor registrations. It is disclosed by Fenwick that to get the best-suited services, companies must look for providers at the same cities where the Captive Centers are located.
Finding an office
When the city for the Captive Center is identified, an effort of acquiring an appropriate office is no less critical. To be considered as appropriate, the office should provide enough space to set up layout for an expected amount of personnel, relevant renting-time and cost saving. Though the leasing prices vary dramatically by places even within a city, the office typically represents for the parent company to the local city or to the local country so it is advised not to pick up a broken-down, distantly located office even cost saving is a top priority. Also, companies must be aware of the convenience of the office since it will affect every day all the working members, and the convenience could attract laborers too. Moreover, companies must pay attention to details including the
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maintenance charges, electricity supply, security and business atmosphere of the building. Luckily, the activity can be best carried by local experts such as leasing advisors or other service providers (Elixirr 2014.)
Initiative recruitment
Recruiting the right people is one of the most difficult tasks if companies want to perform this task themselves. Since the education systems differs from country to country, and if the high availability of people in different majors fulfills the current labor market, companies will probably not be able to recruit the best people when they first start their business. As the consequence, it may consume a lot of time for the managers to get familiar to the local labor pool and select the needed people. As well, it could freeze the working efficiency of the captive and bring extra costs (NeoGroup, 2005; Elixirr, 2014.)
2.4.2 Problems in managing a Captive Center
Managing a Captive Center in another country is not easy. On the daily operation of Captive Centers, managers will encounters difficulties deriving from both internal sources and external sources such as issues relating to HR, or changes in the country’s regulation and tax codes. This chapter will categorize the problems confronting the management of Captive Centers into Internal and External.
Externally, problems could be anything from the Captive Center’s outside environment that can negatively influence the captive’s performance and goals. Mostly, these threats are unavoidable and uncontrollable factors relating to legal and regulatory changes, foreign exchange fluctuations, new competitors, unstable political systems and crisis in the local country or even terrorist activities (Francis, 2010). Truly, any international organization can be impacted by external threats, however, by running a Captive Center, a parent company is more than double vulnerable to the external damages. Moreover, Captive Centers are usually located in less developed countries where those threats are more likely to appear. In addition, the unfamiliar environment at captive location weakens the responsive ability to threats when they come.
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While external threats are to adapt, internal threats can be to control and manage. These threats or issues emerging from day to day running mostly include HR related such as conflicts among the captive unit employees and other issues such as hidden costs from operating and management challenges such as misconstruction or technology problems.
For further understanding of the issues, Figure 17 addresses possible problems when the seven essential factors in HR are overlooked. Following Figure 18 will give specific recommendations for each of the seven essential HR issues (NeoGroup, 2005).
Figure 17. The Common Oversights and Results (NeoGroup, 2005)
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Figure 18. Recommendations for the essential HR issues (NeoGroup, 2005)
2.4.3 Reasons to reject a Captive Center
In some perspectives, a Captive Center is not the best option available for sourcing;
there are reasons not to establish Captive Centers such as being more expensive than outsourcing or offshore outsourcing. This phase will identify those reasons:
The highest in investment and exit costs compared to other sourcing types (EverestGroup 2010; Offshoring Institute 2010)
Higher risks than insourcing (Information Service Group 2013)
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Longest time to achieve maturity and generate savings compared to other sourcing types, which means that the highest commitment in time and management required (DresslerPartner 2010)