Captives are adopting different directions of growth as they strive to enhance their role and significance within their parent companies. While some are growing by employing a significant proportion of the parent’s global workforce, others are functioning to facilitate the parent’s entry into the local market. Below are some examples of how captives are growing.

Building scale: While initial growth in the captive is often driven by one business unit or geography, captives grow by increasing penetration across business units and geographies. Everest research indicates that over 40% of captives in India have large-scale operations (>1000 full-time employees). One way to gauge the significance of their scale is to view it in context of their global workforce. These captives employ a significant proportion of the global workforce (~5%–15%) of their parent organizations.

Offering multiple and complex functions: Captives have had different entry points into the market in terms of functions offered. However, many of them have grown to offer multiple functions. For example, the captive of a large global bank started its operations by providing transaction-processing services, but has now evolved to offer multiple functions, including customer care, IT, finance, human resources and analytics.

Providing entry into local market: Captives are providing a footprint for the parent’s entry into local markets. For example, they facilitate entry by providing a talent pool for the parent and customizing the parent company’s products for the local market.

Serving as re-engineering centers of excellence: Captives are building significant expertise in the functions they offer, resulting in them being seen as centers of excellence for those processes in the global organization. Teams from
these centers of excellence are leading large process re-engineering efforts in their parent organizations.

PLANNING GROWTH
Given these multiple growth paths, Everest believes that captives need to view these options in the light of the value created for their parent entities. The type of value created by a captive for its parent can be viewed across three levels: Cost, business and strategic. The results delivered and the key stakeholders impacted by a captive vary across these three levels (See Chart 1).

It is important to note that cost/business impact can also be “strategic” for the parent, especially if these are critical market differentiators for the industry in which the company operates. Some examples are:

• Captives providing significant cost savings in industries such as retail with significant pressure on margins 
• Captives enhancing customer satisfaction/retention in a high customer-churn industry such as telecom.

The evolution of captives can be viewed across three stages on the basis of impact delivered to the parent entity. In the first stage, captives typically operate as low-cost providers. Here, the primary focus is on establishing credentials (usually through successful pilots), and thereafter on delivering cost savings while maintaining base service levels. As the captive operation grows in scale, the focus typically shifts to becoming an internal partner for the parent entity. This is usually achieved by building expertise in specific processes and delivering value beyond cost savings in the form of quality or productivity impact. On further maturity, some captives gradually evolve into strategic entities by taking on end-to-end ownership of processes, establishing global centers of excellence, driving profit impact, or driving innovation. (See Chart 2).

CHANGING OPERATING MODEL AND CULTURE
Captives that have been successful in their evolution,  have significantly changed their operating model (e.g., performance management, talent management, demand creation, leverage of third parties) as they evolved. Chart 3 describes some key operating decisions that captives need to take in the process of their evolution. These decisions will vary depending on the dynamics of the parent organization.

In summary, while there are significant opportunities for captives to expand the scale and scope of functions, they need to prioritize their growth paths in terms of value created for their parent organizations. Captives can deliver strategic value beyond labor arbitrage. However, this requires them to operate differently and to integrate better with their parents.

The parent entities also have a significant role to play in the evolution of their captive. Parents first need to clearly define what value means to them and to their captives. They then need to provide direction to their captives in prioritizing growth paths. Parent companies also need to help drive cultural change within the global organization to facilitate the evolution of their captives.