Who's Acquiring?
Private-equity firms are interested in return on investment, and have been very successful at achieving it through the acquisition of captive carve outs. With the year-on-year double-digit returns experienced by the global services industry that has significantly exceeded the S&P 500, private-equity firms are able to achieve considerable returns in short time periods.
Acquisitions of significant portions of Genpact, WNS and EXL Service are trumpeted as success stories by investors such as Warburg Pincus, Oak Hill Capital, FTVentures and General Atlantic Partners.
Global services firms too are potential gainers. They gain capabilities, scale and a stable revenue stream through the acquisition of a captive. TCS, for instance, was able to enter the insurance BPO business through its acquisition of Phoenix Life’s unique home-grown processing platform. Capgemini gained an additional staff of 600 on its stated quest for 10,000 headcount in India through the acquisition of Unilever’s Indigo captive.
Until mid-2006 BA was the largest customer providing a stable revenue stream to its former captive WNS, and in July 2007 Infosys simultaneously announced a $28 million acquisition of Philip’s F&A BPO captive along with a $250 million, seven-year F&A BPO contract. This was Infosys’ second acquisition in its long history of providing global services to customers through organic growth. Assuming Infosys was able to achieve its current 27 percent profit margin on the deal, the acquisition pays for itself after three years, and expands Infosys’ capacity and capabilities to offer future customers.
Customers of captive carve outs often continue working with their former co-workers. Because of this continuity, initial captive carve out customers experience an increased understanding of their business. New customers gain the benefit of specific expertise as well as a deeper knowledge of the internal workings within a corporate environment that is sometimes missed when dealing with a company that has been exclusively a service provider.
What Does the Future Hold?
The captive carve out trend is most likely to continue. With dozens of captives being set up each year, many are likely to experience one of the above-mentioned carve out scenarios. A Forrester study suggests that of the captives that exist today, approximately 10 percent will choose a captive carve out strategy in the coming years with as many as 50 percent gradually exiting or carving out after some time.
Private-equity and global services firms looking to invest and add capabilities, scale and stability to their respective portfolios will increasingly approach companies across industries with successful captives such as Microsoft, HSBC and American Express.
In terms of the impact on market for global services, following scenarios are likely.
- Increased capabilities and scale for service providers: Through the acquisition of captive operations, outsourcers are increasing their capabilities and size. This is most likely to increase an outsourcer’s global
competitiveness and its ability to increase margins. Additionally, new capabilities will allow for cross sales opportunities and create a virtuous cycle of growth for service providers that effectively integrate carved out captives into their operations.
- Increased challenges for managers: With an increase in the capabilities demonstrated by outsourcers, a stronger case can be made for focusing on what an organization does best and outsourcing the rest. This will require captive-center managers to be more efficient and effective with their business development and operations. In some cases captive-center managers may be forced to compete directly with the external market to provide services to their corporation.
- Increased use of hybrid models: Learning from both captives and outsourcers, Genpact’s “virtual captive” at Wachovia is one example of firms that are looking to gain from the benefits of having a captive along with the benefits of management by a third-party provider.
It is likely that going forward both captives and outsourcers will need to adapt to meet the requirements of the changing global services marketplace and align themselves with the greatest value they can provide to their internal and external customers.
David L. Ross is the President of David L. Ross and Associates, a globalization investment and advisory firm. He has advised Fortune 500 firms, including HSBC, JPMC, GMAC, as well as several other global outsourcing firms.
