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Captives in India: Is the Honeymoon Over?

02 November, 2009

The recent announcement of UBS, a global financial services firm, selling its captive in India to Cognizant Technolgies is the latest in a series of such sell-offs. This only reiterates what Evalueserve had predicted way back in 2007 that the capacity addition by third-party service providers (‘Buy’ option) is likely to surpass additions by captives (‘Make’ option). After a study of about 100 captives of western companies in India, Evalueserve confirmed that a majority of these captives are in serious trouble. 

Sixty-one percent of the captives studied have faced significant issues, with many of them already shut down.  Smaller captives have been the worst hit; many of the larger ones are not in good shape either. 

Captives across all segments—Information Technology (IT), Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO)—have fared somewhat similarly.Smaller captives Captives across all segments—Information Technology (IT), Business Process Outsourcing (BPO)

In contrast, third-party service providers have been scaling up during this 
 period. Access to new markets and increasing maturity of the service providers have helped them stay ahead.
 
 Majority of Captives Face Serious Issues 
In April 2007, Evalueserve predicted in a report titled ‘The future of KPO – Make or Buy? that the capacity addition by third-party service providers (‘Buy’ option) is likely to surpass additions by captives (‘Make’ option). The report also identified three distinct phases in the lifecycle of offshore units in the ‘Make’ model: the set-up phase, the honeymoon phase and the stagnation period. 
As a follow-up, Evalueserve studied 100 captives, not only from KPO, but also from BPO and IT segments that have been in operation since January 2006. These included 30 BPO, 38 KPO and 32 IT captives, from the 300-odd captives in India. In cases where the captive catered to overlapping areas (which was the situation in 34 percent of the sample), the predominant area of operation (i.e., IT/BPO/KPO) was selected to classify the captive.
 
The captives were selected randomly and were of varying sizes with 54 percent of them having more than 500 employees. The current study confirms the earlier theories. Sixty-one percent of the captives studied have gone through varying degrees of turbulence in the past four years—27 percent of them either shut down or were sold to third-party service providers.
 
For example, Citigroup sold its BPO arm, Citigroup Global Services, to Tata Consultancy Services and its technology captive, Citi technology Services Ltd., to Wipro technologies. HCL Technologies bought Adaptech’s India technology centre, Symphony Service bought biotechnology firm Biolmagene’s India R&D centre and the AOL contact centre in India was sold to Aegis BPO. Besides, companies such as Bose Corp., PowerGen, Riya, Inc. and BelAir Networks shut their captives in India.
 
Thirty-four percent of the captives studied either remained stagnant or have scaled down. These captives are under great pressure, and we may see many of them exiting in the next 1–2 years. However, small captives cannot be sold off at a premium, and they will find the exit much harder.

 Small Captives Worst Hit; Larger Ones Also Not Spared 
It is well established that smaller captives with fewer than 500 employees are likely to face greater challenges to survive. In fact, 74 percent of such captives have gone through a difficult time in the past four years. Employee retention is a serious issue in small captives since they are unable to provide good career opportunities. 
An interesting finding from the study is that many bigger captives (with more than 500 employees) have also been under tremendous pressure to survive in the past four years. It is evident from the fact that only half of such captives have been able to scale up during this period.
 
What Led to The Decline of Captives? 
The change in the position of captives from a seemingly ‘enviable’ position to an ‘unviable’ condition can be attributed to several factors. The most prominent of them are the following: 
Significant management involvement is required while setting up a captive. If the support is sporadic, the transitioning and ramp-up process slows down, leading to cost escalations. In case of third-party providers, the parent company can manage the vendor as per pre-agreed Service Level Agreements (SLAs) and engagement terms, which does require some effort, but is much less than what is required for a captive. 
 
 

 


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9 Comments
Kumar . 6 years ago

It’s sad to note that research houses cannot even get the names of companies right. It’s Cognizant Technology Solutions Corp. and not Cognizant Technologies. If they cannot get such simple things straight, how can one depend of the accuracy of their research.

Muralidhar . 6 years ago

I agree with you Kumar. The captives sell off was due to short term vision and mostly the Investment Banking industry had huge financial losses due to mis management and passed the bug to India by liquidating their assets. This is like a mini filing of Bankruptcy but bailed out in India by Pvt companies.

Also, I do not agree with the last paragraph where it says that captives find it difficult to manage SLAs. The concept of SLAs came from captives and not in 3rd party service providers. The culture in 3rd party environment is so sad that it is almost like slavery in old days.

I think one should write carefully with a lot of maturity and not like any other journalist who keeps writing to get attention of people around.

So please do an investigation ask captives why they are going down and then analyse and write on such articles.

Amey Bhide . 6 years ago

I believe what is important is the long term plan for starting any captive? Here the vision of the parent organization should be evaluated in terms of where it visualizes the captive after 5 and 10 yaers. The management vision for the captive is extrememly important if you want to reap the true benefits from it. Also, I don’t see any reason why selling the captive to a local service provider is seen in a negetive light. Adding more capacity without comensurate increase in work will lead to diminishing returns (Law of diminishing returns).

Also another reason for this is Captives will be managed better if the management control is local. I have a feeling that since captives are strategic for any organization, the person heading the captive should be a member of the top most management committee.

Manish Rathi . 6 years ago

If the captives whole purpose is based on cost arbitrage – sooner or later this had to happen.

I agree with Muralidhar above – this article seems to be at a very superfluous level without bringing in the analysis after talking with the Captives directly.

Gayatri . 6 years ago

The article very conveniently overlooks the facts that 3rd party vendors are in even deeper trouble, trying to balance between vanishing clients and rising employee dissatisfaction with the job. Market knows how these 3rd party venders treat employees, Eval is no exception, with regular 12-14 hour days. Captives like confidentiality and control which most of 3rd party vendors cannot provide. New captives are coming in with at least three opening soon, including Credit Suisse, Wells Fargo and StanChart. Only those captives will sell for whom raising cash is a major concern and their business is doing badly, UBS is one of them. BPOs will be sold, KPOs will remain captive or will increasingly go captive as is the case with Credit Suisse. IPR and confidentiality is the key to decide, but financial compulsions take precedence over everything else.

Sudhanshu . 6 years ago

There are publicly available where captives are scalling up. I also understand the European firms are setting up captives in the offshore locations like India.

There may be cases where captives can be a failure, or the parent company is getting excellent valuation for the captive. But generalising that captives generally fails doesnt hold good.

Business has a cycle. All BUs cant be profitable at all the time. Last 12-24 months werent good for most of the firms. But generallizing that wouldnt be good. Decisions at the face are taken strategic.

Sudhanshu . 6 years ago

There are publicly available where captives are scalling up. I also understand the European firms are setting up captives in the offshore locations like India.

There may be cases where captives can be a failure, or the parent company is getting excellent valuation for the captive. But generalising that captives generally fails doesnt hold good.

Business has a cycle. All BUs cant be profitable at all the time. Last 12-24 months werent good for most of the firms. But generallizing that wouldnt be good. Decisions at the face are taken strategic.

mrityunjay . 6 years ago

I think you guys are being unnecessarily harsh on Manoj. He is talking on the basis of the research done by them. And what he says is true in most of the cases. Captives essentially function as a cost center and are not micro-managed for performance or costs compared to a 3rd party service provider. Speak to anyone who has worked in a captive and he will nod his head.

What would have made this article interesting is an analysis on why JP Morgan and DB are doing well whereas citi and UBS collapsed. And I am not talking in terms of the market collapse but rather on their best practices etc in their captive arm.

mrityunjay . 6 years ago

Kumar,

Let’s not get into the nitty gritties of names etc. Everyone refers to Cogni as Manoj did and there is no harm in that.

Captives in India: Is the Honeymoon Over?

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