Outsourcing - Captive Centers and Third Party Outsourcing

Captive model, now known as Global-in-house Center, had attracted much of controversy in the outsourcing sphere.  There were rumors during the recession period that the captive model was dead, and many expressed doubt about the continuance of the model in the light of the thriving business by third-party service provider model.  At the same time, there were Analysts who supported the view that Captive centers were growing and maturing to form a different and more important component of organizations’ global sourcing model.  

Currently, there is an estimated 750+ global captives accounting for US $ 10.6 billion in revenues and employing 400,000 professionals.  The revenue contribution is estimated to be over 20 per cent of outsourcing industry export revenues and employment as of now.  Such captives operate across all service lines - BPO, Engineering and software product development.  There are more than 100 BPO captives in India accounting for 20-25 per cent of exports and 12-15 per cent of employees.

Recently, National Association of Software and Services Companies, (NASSCOM) convened the first ever summit representing only the captive companies in India in March 2011. NASSCOM observed that the captive sector in India is maturing and is being characterized by increased depth of services.  In the meeting NASSCOM acknowledged that the Global captives have experienced the fastest growth in India and have played a stellar role in shaping the emergence of global outsourcing as a phenomenon, establishing best practices, proof of concept and delivery methodologies.  Captives have led to the development of India as a global hub for ER&D services.


There are reports which mention that many Global-in-house Centres were established with lesser planning in a hurry without getting full commitment from the parent organization. Many such captives struggled, and ultimately their operations were either outsourced or brought back in-house and such Captives created such flutter in the market.

According to a few Analysts, the sell out in the captive segment happened not out of failure but due to the attraction of selling such Captive to third party providers. The report says that the third-party service providers — e.g., Genpact, WNS and EXL — wanted to buy Captives to secure an accelerated growth and to increase their customers in different geographies.  This will be true in the light of thriving business by such third party providers in the recent past and obviously such companies accumulated enough fund to buy out such Captive centers.

It is difficult to rate one model as a “winner” in the “battle” of captives versus third-party outsourcing; the reality is that both models may co-exist.  But, most of the sell outs happened in pure play BPO than the technology sector.

As far as the parent organizations have a definite plan on its Captives it continues to exist.  The plan from parent organization comes out when there is a return for its investment.

Outsourcing Partner International - You will be automatically redirected to EXL Service website in the next five seconds

One more outsourcing website has been re-directed now.  EXL Service which was founded in India in 1999, and now listed with NYSE has taken over another giant in outsourcing – Outsourcing Partner International (OPI).  OPI was founded in 2002 through the merger of a big four accounting firm's business process outsourcing (BPO) division.

There are some commonalities between the two companies.  Both are pure-play BPO providers with FAO and analytics capabilities, and serving financial services clients.  Everest Global, an outsourcing analyst firm has given a warning note to other players  saying that now Capgemini, HP, Infosys BPO, TCS, Wipro, and WNS – need to sit up and take note of this acquisition.  There is now a new kid on the block with the scale and capability to give them a run for their money.

Is it going to be true?

Will this acquisition tempt buyers more towards the combined entity? 

As far buyers are concerned their ultimate goal is to get value for money.  In pure-play BPO, the selection of a Buyer is no way better than your selection of a restaurant for your lunch.  As far as your get value for the money with good ambience combined with good taste, you continue to go to the same restaurant.  Sometimes you look for variety and look for nearby restaurants also.  Unlike in software outsourcing where the buyer ultimately gets tied up with technology and its complications, pure-play BPO is more of temp jobs.  This is the true vagary of this segment.  In pure-play BPO, buyer is not concerned about the volume of your business but looks for the value of the money spent.

It almost looks like that the investors of OPI has abandoned the outsourcing trend initiated and now look for better value of their investment elsewhere.  There is a remote possibility that the increased scale will tempt buyers to go for a provider in pure paly BPO segment.  If the combined entity could have increased its portfolio of services definitely it would have increased the market value.  All looks like a Gay marriage.

Buying or Building Outsourcing

Deloitte in a survey in 2003 predicted that 75% of Global financial institutions worldwide are increasingly interested in sending IT work to lower cost countries.  That was the key finding of a new Deloitte Research study, which surveyed 27 global financial institutions including 11 of the top 20, based on their market capitalization about outsourcing.

The report says 33 percent of the respondents told Deloitte that they already have sent IT work offshore and 75 percent said they will have work offshore within the next 24 months, and thus there was a great potential for outsourcing in 2003 for outsourcing destinations like India.

Prime reasons behind outsourcing were intense cost pressures, lower share prices of publicly traded companies and the general economic downturn.  In summary, the fundamental principle behind outsourcing was to increase profit and reduce operational cost.  What does outsourcing mean to end customers? Ultimately, it will keep costs down for end-users

Deloitte had estimated the average saving out of outsourcing was in the range of 39 – 50%.  The crux of the outsourcing is that if you do not outsource you will face a big competitive disadvantage even though you don’t achieve a big competitive advantage by outsourcing.

Deloitte further envisaged two business models.  One where the company fully owns up the outsourcing center and the second where a third party manages the operations and the entity holds control over the outsourcing process.  The entity may own the facility and hire the people.  The outsourcing service provider runs the operation and owns 55 percent of the venture.  

Now, eight years have passed since the above survey and  predictions.  Global economies have undergone ups and downs, and the market witnessed a major recession.  Outsourcing business model drastically changed.  Now, there evolved a new outsourcing model.  Market accepted that you need not keep your liabilities in India to make the outsourcing process happens.  If you invest heavily for outsourcing it is not savings but an additional cost.  Deloitte which started fully owned outsourcing center in India in the year 2000 now proposes to start a University.  This will cost Deloitte an additional investment of $.8 – $1billion.  This investment is to impart training to meet for its outsourcing needs.  Unlike other major outsourcing outfit, scouting for talent turned out to be a major challenge for the Deloitte which got stuck in Hyderabad. Whereas Accenture, Fidelity and other firms operated in multiple locations, Deloitte chose to stay back in Hyderabad which ended up the accounting firm to think in terms of opening University.


Meanwhile, the companies like GE which invested heavily in setting up outsourcing in India has come out of its investment in the beginning itself.  GE Capital Services which set up its back office in 1997 had sold its BPO for $500 million in 2004, after reaching a staff strength of 12,000 people in eight sites in India in.  Later, the outsourcing entity was known as Genpact. Citigroup's captive BPO arm Citigroup Global Services (CGSL) was sold to Tata Consultancy Services (TCS) for $505 million.  This deal marked as another largest buyout of a foreign captive BPO in India.  Prior to that WNS's took over Aviva BPO for $230 million.  Wipro Ltd had acquired Citi Technology Services Ltd, Citigroup Inc.’s technology arm in India, for $127 million in 2008. Cognizant acquired UBS’s India Service Center subsidiary for $75 million.  UBS had developed KPO, BPO and IT Outsourcing services through 2,000 staff from its Hyderabad offices.  UBS admitted that it had decided to opt for a buy rather than build strategy for its outsourcing needs, to improve efficiency, reduce costs and increase flexibility.  This was an open admission of outsourcing strategy by a financial giant.  Now, it is the question of buying outsourcing or building outsourcing, which concept will prevail in the market in the coming years.  

If you are going to buy outsourcing your profit can be calculated from Day One. You can dictate terms to the provider and can always look for a profit band of 50% – 60% from outsourcing.  Small and medium outsourcing firms are a good option for company’s which look for outsourcing with the above targeted line.  The first step is to have a proper agreement on non-competition and data security.  Then next is imparting training to staff members.  Rest will be taken by the local outsourcing provider.  Initial cost of discussion, training and the annual inspection cost are your additional cost.  Video conferencing and discussion on weekly basis will ensure that the outsourcing wheel is running smoothly.   This would help the company to really reap the benefit of outsourcing.