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.

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