Captives – Impact on Outsourcing to India

July 20, 2016 5:11 pm | Updated 3 months ago.

There has been significant growth in the number of Captive Centers of global customers in India, a trend that has been blamed for causing pricing pressures and also affecting the volume of outsourcing to India. In this article, we analyze the evolution of Captives or GICs (Global In-house Centers) and what impact they are likely to have on the outsourcing space relative to India. We will also indicate what in D2E’ opinion needs to be done by the Indian Outsourcing vendors to protect the client confidence in 3rd party outsourcing, rather than the customers aggressively moving towards the GIC option.

The growth of Captives in India has been led by Global Commercial Banks as they were at a competitive disadvantage compared to other banks due to changes in the global business environment and had to find ways to reduce their costs by leveraging technology innovations and also labor arbitrage. The process got further accelerated due to several compliance violations at large banks like HSBC and Standard Chartered by well known third party vendors. Over the years this space has matured significantly.

  • Evolution of Captives:

  1. Industry adoption: The companies in Airlines, Financial services, Hi-Tech and Telecom industries took the lead in establishing Captives in India. However, today there is a broad based adoption by all major industry verticals.
  2. Services: The captives started with providing services mostly in the areas of ADM, Tech Support, Testing and Package implementation. However, they now provide high end services in the areas of Analytics, KPO, LPO, Consulting, Engineering Analysis and even Product conceptualization.
  3. Engagement Model: Captives started with being a service provider to their parent company, but have now evolved to become a business partner to the parent company providing array of services including vendor management and program management.
  4. Capability: Captives have expanded their capabilities to provide end to end solutions focusing on the needs of the parent company and value creation.
  5. P&L impact: Captives no longer run as a cost center of the parent company. They now run more like a SBU (Strategic Business Unit).
  6. Talent: Captives are continuously upgrading their talent base to provide more and more value added services, similar to what the Indian offshore vendors are trying to do.
  7. Operations: Very similar to the Indian Offshore vendors, the Captives are now focused on SLAs, continuous improvement, innovation and automation.
  8. Location: Once again, similar to the steps taken by the Indian Offshore vendors, the Captives are expanding into multiple locations either to reduce cost or to attract talent.
  9. I2I (India to India) Sourcing: The captives are also taking up additional responsibility of managing other vendors on behalf of their parent company, including, contract negotiation, contract management, Program management of the 3rd party vendors etc.

In spite of several significant steps being taken by the Captives to enhance their relevance to their parent organizations, the Indian Outsourcing Vendors can continue to maintain customer confidence by managing the following perceptions:

  1. Risk: One of the primary reasons for the US Customers to invest in Captives has been the perceived risk of transferring critical processes and data outside the organization. The Indian vendors need to demonstrate their track record of healthy data protection and security and can possibly even get into some risk-reward arrangements to address this perception.
  2. Supplier maturity: Many Indian Software vendors can now provide domain and process maturity specific to customer’ business in line with or even surpassing the capability of the Captives. This needs to be demonstrated.
  3. Control: Indian Software vendors can get into some specific arrangements with the customers to give them the desired control for the outsourced business functions.
  4. Value proposition: This is one area where the Indian Software Vendors can truly demonstrate their leadership as most captives tend to stagnate to show their value proposition to the parent company beyond the first few years.
  5. Regulatory: This perception may be the hardest one to overcome as there may be restrictions to outsource certain specific functions. The Indian Software vendors need to explore possibilities for the customer to outsource within these restrictions.