Captives are back in the news. This time not because new centers are being set up, but because the existing ones are being sold off.
August: Prudential came closer to selling off its BPO centers in the U.K., Ireland, Scotland and India. TCS is rumored to be interested in the purchase. Quoted price: $1.5 billion.
July: Royal Philips Electronics sold off three of its BPO centers, in Poland, India and Thailand. Price: $250 million.
June: Barclays and HDFC sold their captive BPO to Intelenet and buyout firm Blackstone. Price: $200 million.
May to July: Speculation about Citigroup selling off its captive BPO. Potential contenders for the purchase: Genpact, WNS and Firstsource, and private equity players, 3i and Blackstone. Expected price: $700 million to $800 million.
In all the above cases, the parent is expected to continue a long-term relationship with the purchaser of the ex captive. In the case of the Philips-Infosys BPO deal, for example, Infosys will provide F&A services such as payroll and purchase order processing to Philips for seven years.
For the selling company, this means a huge check in the bank, preferential service pricing in the future and an assured service from a team of people who had previously serviced the parent under the captive. For the purchaser, this means assured business from the parent for a definitive period of time.
Captive units have always had to content with unrealistic cost models, the pressure to integrate with the parent and high attrition, and now they are opting for the captive carve-out model where the parent either sells off a stake to a strategic player in the services industry (strategic carve out) or to a private-equity firm (financial carve out).
High cost structures are compelling captives to discuss models other than carve outs. “The internal structure of captives is likely to change. They will retain some work in-house and outsource a chunk to third parties,” says Sreeram Iyer, CEO, Scope International, Standard Chartered’s captive. “But will not shut down completely.” HSBC’s captive, for instance, already outsources to Capgemini/Kanbay.
In fact, a 2007 study on captives by Forrester reveals that 20 percent captives would choose a “hybrid approach” of exit in the near future to tackle the problems of high cost of operations and attrition.
Captives, in the first place, came into existence because of the absence of mature third-party service providers. And now that the providers have attained sufficient experience and have substantial domain knowledge across industries, parents and captives alike are likely to outsource to the third-party service providers.
