The Inevitable Demise Of Captive Off-shore Centres
posted in Outsourcing News and Top Outsourcing deals |Captive centres are facilities set up by MNCs at off-shore locations to take advantage of their cost advantage and skilled manpower boast. And, a story doing the rounds of the IT industry, whether based in fact or fiction, tells of the CEO of an European firm, who on visiting the impressive tech campus of an IT giant in Bangalore – complete with manicured lawns and artificial bodies of water, was provoked into asking: “Are your clients, including us, paying for all this?” The story encapsulates the angst many MNCs feel about the very high profitability of Indian IT service vendors i.e. Tier I vendors like TCS, Infosys and Wipro. Vendors, for instance, who have an average net profit margin of 24%, compared to 6 – 8% of their multinational competitors. It is not surprising then, most MNCs come to the conclusion that they will be better off setting up their own ‘captive centres’, thus making huge savings on vendor margins.
IPR protection and end-to-end control over processes for quality assurance is another argument that sways them in favour of captive centres in India, which has led to more than 300-such captives popping up in India, in the past two years alone, as Ford, Bosch, Lear Schneider Group, Honeywell, JP Morgan, Morgan Stanley, Tesco and HSBC, all jumped on to the bandwagon.
However, a recent report by Forrester Research Inc., a research and consultancy firm, titled Shattering the Off-shore Captive Centre Myth, states captive centre reality differs sharply from company perceptions, as 60% of captive centres in India struggle for survival.
Forrester’s findings show, Dell, SAP, Microsoft, Honeywell and others with captive off-shoring centres need to outsource operations to third-party BPOs, if they wish to avoid running the risk of huge loss accumulations. Sudip Apte, Research Head – Forrester (India) who authored the report, affirms: “Unrealistic cost models, attrition among employees, lack of process integration and inadequate management support are the key causes for captive centres getting into trouble.”
As lack of scale, process maturity and integration, leads to captive centres failing, poor morale and unrealistic costs compound the problem. Apte believes: “As a result of these issues, firms quickly realise that setting up a captive centre is not an end point in itself, but just a stage in their off-shoring and outsourcing evolution.” Consequently, when number of early entrants realised this, they sold off their captives, and instead, opted to outsource work to third-party vendors.
A number of companies have logged out after setting up captives, and prominent amongst them are Apple Inc., which shut its development centre in Bangalore, Sykes Enterprise, UK-based BelAir Networks and Powergen, both of which cited high operation costs and staff attrition as high as 80%, as major factors that ate into parent company margins, and caused them to shut down their Indian call centres in 2006. As well, Pervasive has sold out its operations to Aztec Software & Technology Services.
The CEO of a Tier II Indian IT services firm responds to all this and states: “What they don’t realise is that there are huge challenges – like the ability to attract and, more importantly, retain talent, given the high attrition levels prevailing in the industry. Also, the systems and process maturity that we have developed is difficult to replicate. The (high) fixed costs are also spread across many clients. Many firms don’t realise this, set up captives and then regret their decision, later.”
The Forrester report also cites other examples of firms, such as, Google, Yahoo, Seagate and others, who have partnered Indian BPOs on a model that builds, operates and transfers, wherein third-party BPOs, on behalf of parent firms, take all the risks that involve the running and maintenance of operations. “This enables a captive centre to scale up, making it sustainable and cost-effective, the way Genpact is managed,” says Avinash Vashishta, Chairman of Tholons, an off-shoring advisory company.
As well, unrealistic cost models seem to be a cause for concern, too. “Our research shows that captives spend more on salaries because they hire more senior staff, spend lavishly on buildings and furnishings, and end up spending on head-hunting to compensate for attrition,” says Apte. “Costs like these build up for captives over a period of time and the advantage is negated,” affirms A. Saravanan, founder of Allsec Technologies.
It is also the lack of delegation and non-involvement of off-shore staff in strategic projects, such as, new product releases that leaves employees dis-illusioned. “As a result, attrition at captive centres is in excess of 45%, higher than the industry average of 35%,” according to Apte. “This results in delays in launches of new products,” confirms the senior executive of a Bangalore-based BPO that works with information technology product vendors, globally.
The Forrester report predicts the shutting down of 5 – 10% of captives, even as 20% embrace a hybrid approach of captives plus outsourcing, while 40 – 50% adopt what Apte calls the termite strategy. “Here, the third-party vendor ‘hollows out’ the captive centre, and slowly takes the existing staff onto its own rolls. All that then remains of the MNCs captive centre is the Project. This model provides a unique combination of close monitoring and low-cost execution,” he says. And, the remaining 10% of firms selling out, will go the whole hog in to outsourcing.
This failure of the captive model means, within the next three years, the demand for third party vendor services will accelerate, especially in product development. The good times, it seems, will continue for the Indian IT sector. That puts me in mind of Chuck Berry’s famous rock ‘n roll number: “Roll over Beethoven and tell Tchaikovsky the news! Let’s take some liberty and make that “Roll over MNCs, it’s third party vendors in India that rule!” Yet again, ‘BPO Queen’, India continues to retain the Off-shoring / Outsourcing crown!
