Citigroup (NYSE: C) is selling majority stake in its captive business process-outsourcing (BPO) unit Citigroup Global Services in India. Barclays is planning to pull out of its Indian BPO joint venture Intelenet. Is this the beginning of a captive stake-offloading spree?

The Captive Story in India So Far
Since the time American Express and Citigroup established captive centers in India two decades
back, several global financial conglomerates have made India their back office hub. For companies that have very large volume of work to be transferred offshore, captive centers offer
economies of scale and competitive advantage.

The captive movement gained momentum only after 2002 when cost pressures increased and the scale of offshoring became more significant. However, due to the large initial capex needs, large buyers often choose a hybrid or multiple supplier model, while smaller companies tend to favor third party vendors. Setting up of a captive center and the related infrastructure and manpower management involves significant top management interest and financial outlay. Hence typically only the larger players in each segment of the BFS vertical aggressively follow the model. For many others, offshoring volumes are currently not large enough to make captives viable. However, as the number of functions being offshored increases, the rationale for captives is becoming more attractive. Via captives, corporations can minimize cost and at the same time retain control over operations, which is important, given the confidential nature of information.

Captive centers make up a sizeable chunk of the vendor pie in India with around 30 captives in the banking and financial services vertical.


Vendor Model Shifts
1)    Financial service companies are constantly experimenting with new models and their innovations are driving vendors to accordingly align the delivery models. The clear conclusion emerging from the last decade of offshoring efforts is that there is no ‘correct’ mode – but several, some better suited than others for specific processes and tasks. This is driving “hybridization” of sourcing models. This has also forced the vendors to adapt accordingly. A multiple-vendor, multiple-location, multiple-model sourcing model that symbolizes the best-of-breed approach has forced the vendors to focus on a few core functions rather than provide multiple functions across verticals. Captive units themselves are getting some specific functions outsourced to dedicated third party service providers. For example, Goldman Sachs that has a captive unit in Bangalore engages third party providers including Office Tiger to cater to specific research services.
2)    A recent trend has been captive centers in India looking to provide services to third parties. HSBC's captive unit, HDPI is exploring the option of providing cash management services to a host of mid sized banks. Standard Chartered's captive center, Scope International signed a contract with Cambridge Integrated services, the BPO arm of Scandent Solution Corp. Cambridge will use the know how of Scope to provide services to its own clients.
3)    Organizations’ pulling out of their captive operations by selling majority holdings to third party is another event that has surely set the ripple effect.

While the points 1 and 2 above portray natural service-level progressions, point 3 is a definite pointer to the structural changes taking place So why is there a shake up in the captive structural strategy?   The apparent reason for firms to pull out of their in-house back office operations is that the captive units eventually become too big, thereby diverting productive resources into managing non-core activities. Captive units have become large organizations themselves and managing them has become a full-fledged function. In such a scenario getting a third party involved make more value added sense. Moreover, a Forrester Research study reveals that more than 60% of captive centres located in India are struggling to cope and meet expectations, due to lack of management support, spiraling costs, high attrition, and a lack of integration.

Going Forward
Industry analysts including Forrester Research are of the opinion that going forward around 60% of the captives in India will adopt some exit modes driven by managing difficulties and sluggish growth.  And this is especially true for the financial services vertical. Time will tell which will be the last of the captives standing.

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