The Captive BPO Blowout That Never Happened

Offshore centres of multinationals were considered unviable some years ago. But today they have not just outlived the prediction, but are also thriving

Published: Jun 28, 2010

THE STRUGGLE
In April 2007, global technology research firm Forrester Research published a report that scared the bejeezus out of most multinational “captive centres” — company-owned offshore centres that provided services like software development, back office support and R&D to their parents. Titled “Shattering the Offshore Captive Centre Myth”, the report said that 60 percent of the 375 captives in India were struggling with a host of issues including cost escalations, skyrocketing employee attrition, lack of adequate processes and sporadic headquarters support. Most were therefore failing to meet their setup expectations and would have to pick one of four exit options: Shut down operations; sell out to third party outsourcing vendors like Infosys or Wipro; hollow out their operations and then “termite” it by filling it with vendor employees; or work in partnership with vendors.

“Why are captives imploding?” asked the authors.

 mg_29372_captive_bpo_280x210.jpg

 

DODGING THE BULLET
Three years later, there is a surprise in store. NASSCOM tells us that the number of captive centres in India has shot up to over 900, collectively employing over 390,000 and chalking up export revenues of $10.6 billion for the financial year 2009. “Captives are here to stay,” says NASSCOM vice-president Sangeeta Singh.

Would a better question today then be, “Why didn’t captives implode?”

“The issues Forrester raised were spot on, the predictions may be not,” says Karthik Ananth, a director with offshore advisory company Zinnov. In his opinion the single biggest reason captives survived was the global economic meltdown that began in the second half of 2007. As jobs dried away, attrition became a non-issue. A crash in real estate prices made commercial rentals more affordable. And steep cuts in global R&D budgets meant MNCs had no option but to make their India captives produce results. The local captive leaderships, in turn, pulled up their own socks to become more proactive about their work. That, he says, gave many captives the breath of life and the time to evolve their strategy.

 mg_29342_captive_bpo_280x210.jpg

MNCs that faced stagnation in their home markets also found hope in India’s growing economy; and these turned many captives into either base camps for exploring the Indian market or laboratories for creating new products.

But Sudin Apte, a principal analyst with Forrester Research and the author of its bombshell report, says he stands by most of his report. Apte says there are just 450-500 captive centres left in India today, down from 600 a few years back.

PARTNERING TO SURVIVE AND THRIVE
Everyone — Forrester, Everest and Zinnov — agrees that more captives are increasingly partnering with local service providers. This helps captives either farm out low-end work that many of their employees would get bored with or rapidly add resources for temporary spurts in demand. For instance, Texas Instruments India, set up in 1985 and arguably India’s oldest MNC captive, started handing out some of its R&D work to local partners in 2000. “From an ‘either-or’ choice between captives and third party providers, the market has now matured to an ‘and’,” says Amneet Singh, a VP with Everest.

(This story appears in the 02 July, 2010 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)

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  • Best Bpo In India

    Hello, That is amazing and nice post.

    on Apr 9, 2011
  • Johnson T

    Few years ago a large bank set-up a hybrid model in India, a joint venture. The benefits of the model of course was speed to market, stringent and better service delivery standards, lower management bandwidth required for hiring, training, retention, cost management, infrastructure development, local registrations etc The control and governance that could be engaged was similar to that of a captive as the internal audit teams, regulators and clients all viewed the JV as a part of the bank. Over the period the MSA has been renegotiated for better terms to include productivity demands and improved claims settlement process to overcome any financial losses. Having said that the vendor has never been better placed with continued pipeline of new business from the bank with a track record of exceptional service delivery. Captive vs. Vendor model always lacks these benefits and hence are likely to be face hostile weather. The option to outsource is not available any more, it is more a selection of the right model. Hybrid model will benefit large enterprises and vendor models will benefit smaller ones.

    on Oct 15, 2010
  • Sujit Ranade

    Having hands on experience with setting and running a captive of 500 plus resources, I find that research analysts just work hard to fill papers with some good guess work. Any company if not well managed will fall flat. Every company faces same issues on attrition and career growth for not so bright employees. The flat fact is that a well run captive can easily give more than 50% savings over any other Indian 3rd party service provider. It is not just comparing of $/hr rates alone but also how less resources of Captives can do much more job than a 3rd party. Bad management can ruin ay compay and not just captives.

    on Jul 23, 2010
  • Paritosh Sharma

    As a matter of fact, captives have a much higher set up cost; talent attraction and retention continues to be a big challenge. Job value improvement and stagnation remain issues. Being a captive, industry & cross industry best practices are difficult to come by. Overall operations costs are also higher and annual escalations steeper than 3rd parties. The costs are also fixed vs various commercial constructs available in 3rd party set ups. I have dealt with many senior executives at captive set ups and deduce that many mid/senior management join captives for an easy or rather cushy work life. 3rd parties address all of the above and are heavily invested in progressive technology and process to enable clients staying ahead on multiple parameters.

    on Jun 28, 2010
  • Ved Vyas

    The captives have inherent weaknesses, which have been correctly identified in Forrester reports, and have limited shelf-life. Increased number of captives may be because: a) more and more companies are using captives to test India strategy b) companies using captives as fallback options c) wants to set up captives to get immediate cost advantage etc. But over the period of 3-5 years, captives start finding it difficult to manage attrition, provide career path to employee, and cost advantage starts eroding. So, captives are not a long-term solution for multinationals.

    on Jun 28, 2010
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