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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.

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 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.

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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.

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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.

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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.

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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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