Captives in India are facing lot of challenges like rising wages and higher than industry attrition — and now the rising rupee adds to their operational cost. Captive units in India now need more dollars to operate. Parent companies need to allocate more funds to run their captives in India.

 

While the parent firms of these captives are under pressure to run their captives in India, increasing options to take new business process outsourcing (BPO) services from third-party service providers is making the relatively higher capital expenditures of a captive unattractive.

 

The rupee has appreciated by 6.5% against the pound, 6.1% against the euro and 8.6% against the dollar since the beginning of the calendar year till 1^st of August 2007. The maximum appreciation has been against dollar.

 

Currency fluctuation impacts the cost-benefit equation of captives. If a company expected 18% savings by using a captive, that value is now reduced by nearly 50% due to currency fluctuations.

 

Wage difference and skills availability are the top two criteria for work allocations to captives. If the rupee appreciation continues, there will be critical impact on the wage differential between the parent company location and India.

Global firms started their captive operations in India because of tax advantages, skills availability, and other benefits they can derive from India. Now currency risk is driving these firms to re-assess the return on investment on their captives in India. Global companies with captive units are in need to add hedging practices.

  

But parent firms with operations in India can safeguard their captives. Captives operated as pure cost centers are facing difficulties to withstand the impact of the declining dollar. Parent companies with operations in India can offset the reduced benefits from their captive centers through the revenue and profits that they can derive out of that region.

 

Approaches
To overcome these challenges, parent firms of captives in India can turn to third-party service providers to manage their captive centers there. It’s an engagement model, where parent firms will have a control over key functions and third-party service providers will manage their center and take over less strategic work. Third parties can take over and manage the operations of captives for a flat fee in return. Most of these opportunities are not third-party service provider driven, but driven by the parent firms of these captives itself.

 

With strong expertise in running offshore centers in India for more than a decade, Indian offshore firms (Both IT and BPO) are well positioned to take up and run captive operations on behalf of parent firms. The cost of operations gets distributed with the scale of third-party service provider. They also have strong expertise to run an offshore delivery centers, and are well positioned to retain employees.

 

Currency risk has trapped captives and third-party service providers at the receiving end. It’s clear that the consolidation phase is on for captives in India. It’s another wave in the offshore outsourcing market, where captives are going to be managed by third-party service providers.