Captives: The Day of the Captive?

Captives vs third-parties has long been a favorite topic of
debate with analysts tracking the Indian BPO sector, but even in 2005-06, they
have arrived nowhere close to a consensus on which model would emerge the winner
in the long run.

According to a report by credit rating agency ICRA, the
percentage of third-party vendors declined from 57% in 2001 to 36% in 2005. But
the number of captive players increased sharply from 43% to 64% during the same
period. While established giants like American Express, eServe, HSBC, SCOPE,
Dell, HP and AOL further consolidated their Indian operations, more than 30
companies set up captive BPOs in India since 2003 including the likes of
Ventura, Fidelity, AIG, JP Morgan, Prudential, 3 Global, Tesco and Reuters.

However, many analysts feel it's early days yet to crown
the captive model the winner. In fact, the consensus evolving seems to favor a
reversal of the current tide-third parties will emerge as the frontrunners
against captives over the next few years. This school of thought foresees more
and more captive spin-offs like that of British Airways-WNS, SwissAir-TCS,
Conseco-EXL and GECIS-Genpact to take place in the Indian scenario.

Best of Both Worlds

What is likely to tilt the scales in favor of third parties might be the
perception amongst many global clients, actively pursuing outsourcing, that
captives will never achieve the operational efficiency of a focused, well
managed, profit-driven third party supplier. The emergence of credible third
party BPOs, following the recent consolidation in the industry, which have moved
beyond the standard roles and demonstrated their ability to handle complex,
end-to-end processes, only helps add to the perspective. And many of the
captives like Aviva, Dell or AOL seemed to have acknowledged this superiority of
third parties in a back-handed way. Besides captive operations, Aviva processes
are also outsourced to 24/7 Customers, EXL Service and WNS; AOL had significant
outsourcing arrangement with Wipro BPO; while Dell, besides its four captive
centers, had outsourced to at least five third-party BPOs including Wipro BPO
and Sitel.

Nevertheless, the fact that captives dominated over 60% of
the Indian BPO sector in 2005-06 could be attributed to the fact that
organizations which wanted to keep all core and non-core activities within
continued with captive centers. The decision on a captive centre primarily
depended on the need to protect intellectual property for most of them. It also
hinged on the organization's security and privacy concerns. For instance, a
company operating in the BFSI space was naturally reluctant to outsource its
processes to third-party providers over data security concerns. That explained
the high number of captives in the BFSI sector. Companies who operated on a
large scale, for whom data security was critical and who needed to have close
control over processes, continued to set up their own captive units. And
incidentally, it has now become a lot easier to establish captive centers. Also,
initial set-up costs, which used to be high, had come down considerably.

Notwithstanding the model that finally emerges, any
analysis of the Indian BPO sector in FY '06 would be incomplete without a
closer look at the performance of the captives (at least the major ones). An
Infosys research team study on captives (both IT services & BPO) conducted
during the year encapsulates some interesting findings. While the average size
of a captive currently is about 1,000 persons per company, the median size is
375. Less than ten companies employ 5,000 people or more, while about 20 employ
more than 1,000. Almost half the captives operate from a single location and
another 20% from two cities. Only few of the biggest players like HSBC, Dell or
Axa operate in three or more cities. Bangalore is the undisputed leading
location for captives, while NCR, Mumbai and Chennai each have about half the
number, and Pune and Kolkata are coming up as emerging locations.

Finance Folks Prefer Captives

BFSI as a sector has seen the largest number of captive operations in this
country. Contrary to popular perception, it was not GE but American Express who
first brought BPO into India. Even in FY '06 the center in Gurgaon continued
to remain one of its largest back office operations. (Incidentally, GE pioneered
IT services offshoring to India).

HSBC too prospered with its 10,000 people BPO operations
expanding across all four locations of Kolkata, Hyderabad, Vizag and Bangalore.
Recently, it announced an investment of Rs 500 crore to further beef up
operations, primarily to service domestic operations in India. However, the
arrest of an employee in its Bangalore center (later suspected to be part of the
terrorist network) for a £233,000 fraud might have given it some bad press; but
what got missed out amidst all the hullabaloo was the internal operational
efficiency that helped in netting the fraudster and tracking down the entire
trail of the funds siphoned off.

In terms of manpower, AmEx and HSBC might be the giants
amongst BFSI captives, but others like eServe, SCOPE, JP Morgan, Axa and
Prudential did a fast catch up in 2005-06. Following its acquisition by Citibank
in FY '05, eServe operated as a Citi captive from its Mumbai and Chennai
centers servicing product lines like trade, cash, mortgage, retail banking,
cards and capital markets. Since becoming a captive, it has carried out one of
the most aggressive recruitment campaigns trying to attract people through the
Citi brand name. On the other hand, though the StanChart captive SCOPE explored
life beyond its captive status through the Cambridge alliance, it continued
servicing the parent's banking operations as well as financial and HR services
in 56 countries across the world. It also created a Global Academy for Learning
to train aspiring entrants in risk awareness and mitigation before they are
assigned to handle financial services operations.

Amongst the recent entrants, JP Morgan, who set up its
first captive shop in Mumbai in 2003, operated from two centers (the other one
in Bangalore) in FY '06; this investment banking arm of JP Morgan Chase was
involved in serious KPO work around equity research other than handling the
bank's traditional transaction processes. In recent weeks, Threadneedle
Investments of UK are negotiating to outsource its back-office operations to JP
Morgan; if the deal clicks, India would witness another conversion from captive
to third-party BPO. On the insurance front, AXA Business Service, the BPO arm of
AXA France, the largest insurance company of the world, with over 2000 employees
across two sites in Bangalore and one in Pune supported the company's
client-facing activities in France, the UK, the US, Japan, and Australia. Even
Aviva with more than 5,000 people (across Bangalore, Chennai, Kolkata and even
Sri Lanka) had become a name to reckon with, though it too came into unwarranted
limelight following the recent murder of a female employee by her colleague in
Bangalore.

Techies too Embrace Captives

If BFSI led the pack amongst captive BPOs, the technology sector did not lag
behind by much. While isolated processes, primarily helpdesks, have been
outsourced even in the 90s, the avalanche started following the arrival of HP
Global in 2000 and the subsequent entries of Dell and AOL in 2001. Strictly
speaking, HP Global was not a pure captive operation as it had moved from HP
back office to 25% BPO (going on to 50% by 2008, with 2,000 more people); it
serviced finance and admin processes of global clients like P&G during the
year. The Consumer Contact Center (CCC) part of HP's IPG, provided support for
US imaging and printing customers, while the Global Solution Center Bangalore
contact center, part of erstwhile Digital, provided tech services, such as a
helpdesk, for enterprise customers. 

Though HP was high profile, it was actually Dell which
defined the concept of a tech captive BPO in India. Dell had significant
outsourcing relations with third parties like Wipro BPO and Sitel, but it still
maintained four captive BPO units in India at Bangalore (5,000 employees),
Hyderabad (3,000), Mohali (1,800) and Gurgaon (1,000). What can be delivered out
of India was best illustrated by Dell's captive BPO operations, developing
process innovations, which are being adopted worldwide in the organization. No
wonder, therefore that Romi Malhotra, MD of Dell International Services, flew
high the flag of the captives when he told Nasscom's BPO summit in Bangalore
recently that the earlier slogan “Come to India for cost and stay for
quality” can now be changed to “Come to India for quality and stay for
innovation”. Current CEO of Sitel India, Safir Adeni, the man who pioneered
Dell's outsourcing blitz to 17 countries also endorses this innovative role
played by Dell's India operations.

Where Third Parties Fear to Tread

As FY '06 draws into FY '07, the common consensus seems to be that
captives do have an important role to play in offshoring. Understandably, many
companies were using captives to preserve control and protect intellectual
property. At a very large scale of operation, captives may even provide lower
costs than the price charged by vendors. Nevertheless, there are immense risks.
The BPO industry is in a state of explosive expansion primarily because
economies of scale are vital. Those who have set up are compelled to grow simply
to manage attrition and control costs. Those that are yet to come in or have not
achieved scale yet, risk being severely squeezed in a rush for size.

In the current environment, therefore, it is imperative
that a captive center needs great commitment. Therefore, companies must align
their view on captives with their sourcing strategy before committing to a
course of action. This alignment should necessarily involve a decision on what
must be kept in house and what can be outsourced; and a separate assessment of
the best location for a particular activity.

Rajneesh De

rajneeshd@cybermedia.co.in