Of late, there has been a healthy debate among outsourcing professionals about the future of offshore captive units established by several parent organizations around the world. Many claim that a majority of such units are struggling to perform (over 60 percent), suffer from high operating costs and face above-average challenges of staff attrition (above 40 percent). Integration with the parent is also a serious issue. They also suffer from poor execution and lack of scale. One estimate says that there are over 400 captive centers in India, and the rising rupee is leading to their shakeout because they are “cost-centers” with depleting margins. Parent companies are expected to finalize their exit strategies, and may soon sell out strategically and reduce their stakes significantly.

Yet, I do not think that the future of captives is at any risk; nor will captives vanish from the Business Process Outsourcing (BPO). Some assume all captives will be up for sale very soon. I disagree.

It’s important to consider that what works (or does not work) for software-development centers or technology support or product design is not necessarily the same for the BPO business in the context of a debate on the future of captives. Today, an estimated 67 percent of all BPO business in India arises from captives, and one could argue that this has been the backbone of the success of this industry. In fact, one reason why captive units were established in the first place was the absence of credible third-party providers with adequate scale. Contrary to reports, significant wins that large captives have notched up so far are actually due to:

• Deepening the alignment and engagement with the overseas parent organization
• Committing capital and huge financial investments (infrastructure and technology) to establish and grow the offshore units
• Realizing year-on-year productivity saves through automation and process efficiencies
• Migrating world-class operational practices with focus on service quality
• Providing a framework as a “talent factory” and genuine international career exposure for staff
• Enhancing people management practices in general and staff training in particular
• Managing operational risks and business-continuity challenges.

Global Services PREDICTIONS

Rising costs of running offshore captives will result in the sale of many captive BPO units to third parties. However, captive units for high-end work such as engineering services and R&D will continue to thrive

Captive BPOs that continue to exist will themselves outsource non-core functions to third parties and will perform only operations core to their units.

One of the handicaps, though, in this context is the lack of robust, credible, consistent data and benchmarks. What has indeed matured in the recent past is the emergence of some high-quality real “scale” players in the third-party service providers business, and that in itself has offered some options for captives to strategize their future models. There are some excellent examples of business practices by third parties. Smarter utilization of seats and physical infrastructure is a good example.

It is a fact that certain types of costs in captives are indeed higher, and perhaps there is more room for improvement here. However, it is debatable if alternatively, a lower-cost model on health and safety standards or on brand building is sustainable in the long run. It is more likely that international practices become mandatory for third parties to adopt to stay competitive. Here, it is interesting to learn from the traditional industries. Apparently, Wal-Mart shut more than 120 of its suppliers due to improper labor practices. It is difficult to secure international contracts if child labor is involved in, say, the leather industry in a remote offshore company.

Several captives have successfully demonstrated undertaking of higher order capabilities and processes through innovative ideas and non-conventional vibrant thinking. After all, “costs” alone are not necessarily the only measure of a successfully run unit.

But certain things will remain.
Some industries like banking are heavily regulated around the world. This in itself may prompt parent organizations to retain their captive centers. I think over the next three to five years, we will see an evolution and maturity in certain kinds of processes in the third-party area, leading to a gradual migration of simultaneous transitions from captive to third parties. Initially, this will be restricted to what captives may consider as being “non-core” for themselves and where the cost of building scale and automation outweigh the benefits of retaining them in-house. While “captives” per se is not really the issue, the opportunity through M&A deals will bring in access to better practices more efficiently.

We may therefore see multiple models in the BPO market and may follow the IT route.
So long as captives are viewed by parent organizations as being a critical and strategic enabler to their own success and a truly integral part of their organization — as opposed to a mere lower-cost supplier of offshore services — the future is truly very bright for captives!

[The views expressed in this write-up are personal.]    

Scope International is the wholly owned subsidiary of Standard Chartered Bank, and is its global outsourcing arm. Sreeram has been instrumental in the set up and growth of Scope International in India, Malaysia and China, and is a member of its Board. Under his leadership, the company has grown dramatically and now offers multiple complex services to over 5,600 of the bank’s staff in over 50 countries.