Captives have been an important player in charting the Indian offshoring story. In IT, companies like Texas Instruments started way back in the mid-eighties while in BPO, captives almost single-handedly wrote the India story. Companies such as SwissAir, British Airways, American Express and GE were the pioneers of offshore BPO. Captives still account for more than 60% of the BPO exports from India, according to Nasscom, India’s association of software and services companies.
Information on captives such as the above numbers from Nasscom is rare. Though new studies involving every aspect of service providers — their revenue, market share, capability, human resource — are released almost every month, very little research has been done on captives.
A new report brought out by Infosys’ research team tries to bridge that gap by providing some answers to the so-far unanswered questions. Written by Manish Subramanian and Bhuwan Atri, the report is based on a study involving 256 companies — 183 of them based in America and the rest in Europe.
The study reveals that as many as one-third of the companies studied (81 to be precise) have captive offshore operations in India. About 61% of the IT services and software companies and 58% of the hi-tech manufacturing and design companies have captives in India. Companies in other segments like financial services; aerospace and automotive; retail, FMCG and apparel; and telecom also have significant captive operations.
“While in the overall context, companies from Europe and America are equally likely to set up captives in India, in the financial-services domain, European firms are more inclined to captives. Similarly, in the telecom domain, European firms such as Nokia, Ericsson, Alcatel, BT and Siemens have been much more active in setting up captives when compared to US firms,” notes the report.
“European captives could be a reflection of conservative intellectual-property management, data ownership or people-management practices in Europe, which prevent outsourcing (but not offshoring) of work, despite the higher financial risk of setting up a captive. However, in our experience, it is more likely that American firms have been slower of the blocks due to more stringent norms for offshoring data (rather than outsourcing it, because American financial services and telecom firms work extensively with external vendors),” say the authors.
It is Never Too Late
Almost 40 of the 81 captive companies in India were set up in the last five years, according to the report. These were established in four waves. The first wave consisted of ten captives set up by Hi-Tech manufacturers such as HP, Motorola, Texas Instruments and Lucent. These captives were focused on research and development activities.
The second wave consisted of ten captives by large software firms such as Siemens, IBM and Oracle. They set up between 1991 and 1995 and were focused on software development.
The third wave consisted of 20 captives of Hi-Tech and IT services/software firms: Microsoft, Unisys, Perot Systems, EDS and Apple, which arrived between 1995 and 2001.
The final wave, ongoing since 2001, already consists of 16 financial services and 15 IT services and Hi-Tech firms.
“These waves are indicative of India’s growth capabilities in services. Initially, captives were restricted to IT and software. More recently, they are coming for business services in addition to IT and software capabilities,” the report concludes.
Operationally Speaking
The study finds that captives of all size exist in India. While the average size of a captive currently is about 1,000 persons per company, the median size is 375. Less than ten companies employ 5,000 persons or more, about 20 employ more than 1,000 persons. Over 60 captives are below 1,000 people in size, some as small as 100 persons or less.
Almost half the companies covered in the study operate from a single location and another 20% operate in two cities. Only the biggest players operate in three or more cities. HSBC, Dell, Axa, Microsoft, HP and Oracle are some of the companies that are present in multiple locations.
“Inability to increase the number of centers is a problem because captives need to access second-rung cities in India to tap more talent, avoid attrition and circumvent stifling infrastructure bottlenecks. Companies that cannot tap second-rung towns for talent risk higher costs. But, at the same time, companies that maintain multiple centers need to scale to make each of these centers viable,” say the authors.
As many as 75% captives provide both IT and BPO (60 out of 81) services to their parents. It is not clear whether the study has counted companies that have separate units for IT and BPO. Some companies like Microsoft and HP have different legal entities for different types of work.
The study also covers the models for captives. As many as 66 of the 81 companies have standalone, Greenfield captives, whereas 13 of them have joint ventures. Just two companies have tried the much-discussed Build Operate Transfer model. About five have done acquisitions.
Bangalore is the undisputed leading location for captives in both IT and BPO. Delhi, Mumbai and Chennai each have about half the number of captives as Bangalore.
