In 2002-03, while captives grew by a staggering 90%, third parties grew by only 28%. The industry grew at a healthy 59%

Measured by any account, the growth of offshore process outsourcing to India has been extremely impressive. If Gartner projections are to be believed, it is likely to remain so in the near future. That is the good news. However, the fact that this has been largely led by the MNC captive centers, remains a cause of some concern. Or is it? We will soon go to that debate, but first a little backgrounder. 

It is well known that the entire BPO trend was started after a handful of giant MNCs took the pioneering steps to make India their base for carrying out back office and customer interaction processes. While common belief is that it was GE, which did it single-handedly, a few other pioneers are often ignored—Amex and British Airways being the major names. Of course, the scale with which GE started was far bigger. 

With that, it is not surprising that in the initial years, the captive centers accounted for most of the process outsourcing work that came to India, with few Indian players in the fray till 1999. It was expected that as more players joined, the share of Indian companies in the total business would grow. In fact, that was not an unfounded belief. In 2000-01, the third-party companies (at that time almost synonymous with Indian companies, though Convergys had started operating), accounted for a healthy 57% of the total work, measured in terms of revenue, according to Nasscom. 

Surprisingly, in 2001-02, the share of the third party companies dropped a little. What was alarming was that in the following year, it dropped drastically. In 2002-03, while captives grew by a staggering 90%, third parties grew by only 28%. The industry grew at a healthy 59%. But by now, the captives had a share of 58% of the industry. In other words, in two years, the balance was reversed in favor of captives. 

Since then, we have seen many other big captives setting up base in India with Prudential, Fidelity, Churchill, ABN AMRO, Hutchison leading the pack. It is not that the third party centers have not grown. Also, when an outsourcing contract is signed, it is not publicized. When a captive unit enters, it is accompanied by a lot of publicity. So it seems, the activity is only happening on the captive front, which may not be true.

However, as outsourcing migration normally takes more time than an in-sourcing migration, in the near future, the share of captives is not likely to go down. Secondly, the UK is becoming sensitive to the offshore model due to cost pressures. And this is a market that is not so mature in outsourcing. This has resulted in a lot of captives by UK companies. This, all observers agree, may continue for a while. 

While percentage shares do not actually matter to anyone other than analysts and journalists, what matters is the fact that each captive center is a potential client lost, for Indian third party companies. That could lead to a conclusion that the captives are some kind of threat to the third parties. 

Testing the waters
More than percentage share and captives coming in, a potential cause of worry for the Indian companies is whether the existing outsourcers would also go captive. While so far, this practice has remained restricted to overseas third parties like Convergys and ClientLogic rather than end-clients, it is nevertheless, an uncomfortable issue. 

“While many may use outsourcing to test the offshore model and a particular geography, they would like to come in themselves once they feel it can be done,” says R K Rangan, the managing director of Prudential Process Management, the captive back office unit of the UK insurance major, Prudential. 

Agrees Shiv Karan Singh of India Contact Center Advisory, a consultant who has helped quite a few companies to decide on their India outsourcing strategy. He says, “In most cases, the decision to set up a captive is made, after outsourcing programs to Indian vendors have been successful and the dynamics of working on India have been understood”. That is why the earliest captives in India are the companies who have operated in the Indian domestic market extensively—he says, naming Citicorp, HSBC, and StanChart as examples. 

Rangan and Singh, however, are in a minority. Most of the industry does not see the captives as a threat. “First of all, this is a huge market and there are huge needs,” says Raman Roy, chairman and CEO of Wipro-Spectramind. “It is not an either-or thing. Both the models will continue to co-exist,” he says.

Co-existence
Agrees Shyam Bhethanabotla, chief marketing officer at GTL’s customer management service division, “What we are seeing is a huge readjustment of the giant economy that is America. And the whole Indian economy is several times smaller. Even at our best, we cannot absorb all that. The market is too huge. We have seen hardly seen anything yet.”

Captives have certain advantages for sure. They know the processes, resulting in shorter migration cycles; they do not have to worry about business and focus purely on service delivery; and most importantly, they have a brand to attract employees.

Says Rangan of Prudential Process Management, “You may use the term captive. But for us, we are just another office of Prudential. All the employees are employees of Prudential, a globally respected name. Also, they have the flexibility of moving between functions.”

However, they have disadvantages too. Says Neeraj Bhargava, president, WNS, “Their cost structure is high, people there tend to get bored after some time as there are few new challenges and focusing on things beyond service delivery like customer retention is healthy.  It keeps you on your toes and prepares you to excel.”

Echoes Roy of Wipro Spectramind, “The cost-plus based model work against captives.” They tend to get inefficient. “That has made companies like GE explore shared-services models”, he reasons. 

In a recent interview with the Wharton School at the University of Pennsylvania, Mimi Wolfe Strouse, MD, Warburg Pincus states this very clearly. “Most customers are worried about running captive centers due to operational risks and the time it takes to manage offshore operations…. Our view is that most companies look to third-party vendors to provide outsourcing services.”

However, most feel that it is not captives versus third parties approach that is of significance. Many actually describe the captive as a catalyst for overall industry growth. 

Ambassadors for India
Surprisingly, the dominant sentiment prevailing in the industry is that captives will not only complement growth but will also act as a catalyst for third parties. As comfort levels between the two sets of service providers increase, third parties will begin to gain from the publicity and proximity. “Information about captives moving fuels non-captive growth as well,” says Neeraj Bhargava of WNS.

Agrees Zia Sheikh, CEO, Infowavz. “With the India concept getting increasingly proven as a next step to bring about further cost and operating efficiencies, captives and their parent organizations will be looking towards outsourcing many of their processes to third party BPOs.” He reasons that it is the nascence of the Indian BPO industry that has prompted many to have captive centers at this point of time and that will change. 

In fact, most agree that there is a lot to be gained from the coming up of captive centers. Captive centers are nothing but internal departments that execute some processes that are internal to the company and have been bettered and optimized over years. Indian managers and personnel who work there learn those processes and knowledge and third parties have access to this talent. “Captives bring a lot of domain and process know-how into the environment,” says Partha Iyenger, VP, Research, Gartner India. The knowledge flow is short-circuited. Echoes Shyam Bhethanabotla, chief marketing officer at GTL’s customer management service division, “Captives help in disseminating process knowledge faster. There are many senior managers today who are from captives.” In fact, many former GE managers have built BPO organizations that are today amongst the best and biggest. 

Secondly, remote captive units are an intermediate step before a company starts outsourcing. “Captives tread a fine balance between cost reduction and risk and this would trigger the need to outsource in future,” says Iyenger. Also, the need to spread their risks across centers will result in giving some work away to third parties. And guess who would get it? Obviously, the familiar, friendly neighbors in Gurgaon or Koramangala. In fact, Bhargava of WNS goes a step further. “We see the emerging captives as future acquisition opportunities. As they mature, many will be carved out.” And who would know that better than him? WNS, which was among the first captives (of British Airways) in India, has since turned independent. In fact, another airlines BPO—AFS—has also been acquired by the parent Swissair from TCS. 

“While industry growth is likely to be pushed initially by captive centers, third party-led growth will soon surge”, says Iyenger of Gartner. “My bet is that many more companies will resort to the Dell, Amex model of having a dual presence in the country”. That brings us to the question of the models that companies use while setting up a captive. That will determine going forward what approach they may take. 

The Models
Broadly, there are four alternate future growth models for companies setting up captive centers. 

n Captives as a long-term standalone model: These companies do 100% of their offshore work by themselves and may continue doing so. They may change the strategy in future, depending on the changes in industry dynamics and internal developments. But their objective at present is to keep it running as a captive. Examples include Prudential, Churchill and Fidelity.
n Captives as models to minimize risk: These companies want to outsource quickly but do not find enough vendors. So while outsourcing some part to one or two BPO companies, they start on their own as well. Over time, they like to get out by selling. 
n Captives as a benchmark: These companies want to run captive centers to benchmarks, with the twin objective of improving their non-India processes based on Indian learning as well as to keep their vendors on their toes. Over a period of time, they may decide on either captive or outsourced, though many believe that most of them will go for outsourcing.
Examples include Dell and AOL. Dell has its own center though it has also outsourced to companies like Sitel and Wipro Spectramind. Similarly, AOL has outsourced to Sitel and runs its captive center as well.
n Captives as a high-value operation: Many companies follow this model today. They outsource some part of the work and yet do some high-value or confidential processes on their own. While some of the high-value but non-confidential processes would go to third parties, once the latter acquire expertise, confidential processes would remain with them. 

Also, specialists will always be sought after. GlobalVantage, which is focused on collections and receivables has a customer who has a captive center in the country, but it still does the collections. “That’s because our client does not have the competency to do what we have to offer,” says GlobalVantage CEO Rakesh Kumar. Strouse of Warburg Pincus points to similar attributes when she defines a successful company. “Some companies can drill down into the processes to understand where technology can provide efficiency and where better and cheaper labor can provide efficiency and then marry both. Such companies can create a lot of value.” 

In the long run, the industry sees captives as a great positive force. For a champion within an organization, it is easier to do one act of convincing at a time. So, it is usually first India, then outsourcing because, offshoring offers immediate cost-saving and outsourcing gives long-term benefit. The CFO, the ultimate decision maker, is more concerned about the next two quarters than he is about the long term. So captives serve as a good intermediate step. However, as the captive momentum shows, it might not be before 2005-06 that we may see a reversal of trends.

Most customers are worried about running captive centers due to operational risks and the time it takes to manage offshore operations

Shyamanuja Das and Balaka Baruah Aggarwal

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