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Captive 2.0 - The Next Generation

In their relatively short history, Indian captives — foreign-owned operational units — have experienced a mixed record of success and failure. A new set of studies by ISG finds that both legacy and new captives are embracing emerging business models aimed at unlocking previously untapped business value. We call this trend “Captive 2.0.”

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Captive 2.0 - The Next Generation

  1. 1. CAPTIVE 2.0The Next Generation of Indian IT and BPO Captive OperationsViswanathan Krishnan, Manager, ISGwww.isg-one.com
  2. 2. INTRODUCTIONIn their relatively short history, Indian captives — foreign-owned operationalunits — have experienced a mixed record of success and failure. A new set ofstudies by ISG finds that both legacy and new captives are embracingemerging business models aimed at unlocking previously untapped businessvalue. We call this trend “Captive 2.0.”The same analysis finds that parent companies are still struggling to properlymanage captives, and the report discusses effective governance options alongwith recommended steps to address performance issues.CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 1
  3. 3. EXECUTIVE SUMMARY units to service providers and private equity houses, as well as by routine media reports on the problems ofThe captive model is evolving and is sustainable. smaller captive units.Company-owned captive operations hold broad appealbecause of persistent concerns about intellectual ISG has worked extensively on consulting engagementsproperty (IP) and security in outsourcing, the both with parent organizations and with their captiveopportunities to build domain knowledge globally, and units and recently completed several comprehensivethe prospects of driving standardization and studies of captives and global delivery.reengineering without potentially conflicting commercial Across the last quarter of 2007, ISG carried out ainterests. comprehensive captive benchmarking study together with the Indian School of Business. ThisCaptive units based in India have emerged as strong bench-marking study was done across IT andoffshore delivery vehicles for businesses, primarily for business process outsourcing (BPO) captive unitscontact centers, back-office processes such as finance covering 51 key parameters — including businessand accounting, research and development, and IT- model and financials, people metrics, shared andrelated work. For many companies, captive centers support services and operational metrics.represent an opportunity to tap into the global talentpool in order to on-board skills that may be in short We also studied characteristics of 74 globalsupply elsewhere in the organization. However, many of financial services captives, including 26 captivesthe captives face daunting internal and external being operated in India.challenges that are causing some to consider significant In this paper, we have drawn heavily on these studies asstrategic changes. well as our consulting engagements in order to developAs the initial savings from labor arbitrage have an informed opinion on the future of captive units anddiminished, parent firms are increasingly asking for perspectives on their evolution.additional value as well as for operating models that are Going forward, ISG predicts three key trends for captives:comparable with those of third-party service providers. 1. Both “value addition” and “efficiencyHowever, captive units are unable to achieve economies enhancement” are critical drivers for captives.of scale for their shared and support services, nor are Existing captive units will increasingly evolve intothey able to flex or spread fixed costs across multiple specialty captives, hybrid captives or superclients. captives, (which follow captive thought processesAt the same time, captive units are encountering strong in adding value but increasingly behave like a thirdheadwinds from the external marketplace: party in their operating model and “squeeze the Cost pressures: Due to year-over-year salary lemon” around current costs). increases and other inflationary pressures such as 2. A new generation of captive units will be set up in a devalued U.S. dollar. the next 24 months — several of them by firms Workforce issues: Compared with other with existing outsourced operations. However, the employers, many captives are perceived as not era of starting new commodity captives is over. By offering a good career path; this results in high contrast, startup captives will largely be hybrid or attrition. specialty captive units housing knowledge Technology/process issues: Because of the narrow processing or program management/vendor area in which they provide their services, captives management functions. are generally behind the curve in terms of 3. Some captives that have reached a large scale of technology and process maturity. operations represent a significant monetization Operational visibility issues: Parent organizations opportunity for their parents and will be sold in the in some instances do not have complete next 12–18 months. The current credit crunch will operational visibility into their captives; this gives only serve to add impetus to such monetization rise to significant value leakage. efforts. We believe that only a select number of captives will follow this route. In parallel, sub-scaleThese concerns have prompted various stakeholders, generic captives, which will not make theanalysts and market observers to question the transition, will atrophy and be bought by third-sustainability of the captive model. This debate has been party players at par value.further intensified by the sale of several large captiveCAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 2
  4. 4. EXAMINING THE DECISION TO SET UP A CAPTIVE UNITWe define a captive unit as a facility that is domiciled outside of the home country of a parent organization or affiliates towhich it provides services. In India, the earliest captives were set up in the 1990s by global firms such as Citibank, GeneralElectric and British Airways. These companies were seeking to capture labor cost arbitrage but did not have sourcingoptions with mature offshore service providers or sufficient confidence in the security and IP protection provided by serviceproviders.THE CAPTIVE LANDSCAPEISG analyzed more than 300 captives in India with information gathered through primary and secondary sources —including interviews, published reports and our repository of historical data — in order to arrive at the following profile. Industry Profile of Captives BFSI Functions BPO CRM BPO Back Office BFSI Aero/Auto Technology IT Software IT Back Office Telecome Others Asset Management Bank Operations 20% 21% 17% 34% 13% 9% 25% 12% 12% 21% 16%The banking and financial services industry (BFSI) accounts for 34 percent of the total captive space. Within BFSI: 25 percent of the captives in BFSI offer BPO back-office functions; captives that offer banking operations are the next 1 largest segment (21 percent). Prior to 2000, the BPO back-office and BPO CRM functions were the predominant functions in captives. These functions have maintained a fair level of growth. Banking operations started in earnest in 2000 but have shown slower growth since 2003.Over the past decade, we have continued to see organizations set up captives. Beyond the cost arbitrage opportunity,organizations set up captives to: Access new sources of management, technology and process expertise globally. Build a foothold in a high-growth region prior to setting up a local presence. House processes and applications that are core to the business, are complex, or re-quire very strong regulatory or IP controls. Leverage the captive as the global serving back end of the organization by creating a platform that can standardize, consolidate and reengineer global processes while also integrating the parent’s new businesses into the fold. Increasingly act as specialty units housing: ‒ Knowledge-intensive processes or knowledge process outsourcing (KPO)1. Technology category does not include R&D captive units. “Others” category includes captives in healthcare, pharma, retail, oil and gas,chemicals and transportation.CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 3
  5. 5. ‒ Vendor management units to manage the performance and increasingly the entire contractual relationship with vendors ‒ Program management offices for supporting global programsTHE CAPTIVE LIFE CYCLE Start-up Growth Restructuring Phase Phase Phase — Captive unit with costs/operating metrics out of sync 2 vs. market – will atrophy eventually 1 — Exit option is a people (and assets without premium) transfer to a 3rd party. PE/VC firm shave Reverse BOT – 3rd no interest in such units 2 Party 1 Sub-scale 4 — Captive perceived as “strategic” part of the Captive 3 enterprise – ongoing growth as captive adds higher value added work and FTEs 2 — Costs will be higher than median – a “premium” the 1 enterprise will be willing to pay in the medium term Evolved Captive 1 4 — Best in class captive – has reached scale and Inception 3 operating efficiency of large 3rd party units 2 — Serves as global servicing arm of enterprise driving 1 standardization & consolidation and reengineering Super Captive 4 Captive morphs into two operating entities: 4 Captive — The “strategic captive” housing higher-end/KPO 3 3 work/ PMO and the VMO to source lower end work 2 via “hub and spoke” model 2 1 — Entity performing low-end work with people(and 1 i2i assets) transfer to a 3rd party/domestic contracting Evolved Captive Hybrid Captive for people (and assets) — With slowing growth, cost arbitrage stops – 4 enterprise does not see captive activities as “core.” 3 With stable operations, captive represents a 2 monetization opportunity 1 — People and asset transfer at premium – to ensure Reverse BOT – 3rd operational stability, transfer to a 3rdparty or 3rd Party/ PE party/ PE combinationHaving decided to set up a captive unit, firms follow widely varying paths in terms of how they structure the captive entity,the types of work they house in the captive unit, the level of decision making they devolve to the captive and, ultimately,how they perceive the captive unit globally. Irrespective of the path they take, we observe that captives have a distinct lifecycle with a clear startup phase, maturity phase and eventually a “restructuring phase,” as depicted in the following figure.CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 4
  6. 6. STARTUP PHASE: KEY AREAS OF FOCUS Perceived as the Rapid expan- Combines Some level of Accountability lowest cost sion capabili- competing control Transfer of (initially) ties strategies Transfer of operating and Most control Leverage exist- Portfolio risk operating and financial riskPros IP protection ing provider management financial risk Maximum vari- Option to tran- Satisfies different Speed to market able cost sition in-house business unit “Variabilize” cost More control clients Management BOT price pre- Management Enough control for Perceived as focus mium complexities business units? most expensive Capital invest- Transition risk Additional Potential rela- New manage-Cons ment Operating and governance tionship strains ment model Time to market financial risk overhead Business continuity Relationship Operating and Time and expense planning strains financial riskOur research indicates that wholly owned subsidiaries continue to be the preferred captive delivery model.Captives are not an easy way of achieving savings for those organizations that see risks in outsourcing to global serviceproviders, nor will they deliver short-term cost savings. Importantly, moving an inefficient or “problem” process offshorewill not solve the problem. Starting a captive requires planning to address the following issues: Selecting the delivery model best suited to time, scalability and investment requirements. A number of companies aim to lessen some of the establishment risks by using third-party service providers to help, in an “assisted build-out” (ABO) model. Another common approach is “build-operate-transfer” (BOT), in which a provider builds and operates the captive for a period of time before ownership is transferred to the parent. Some companies have also turned to a joint-venture approach and have built captives with the capability to operate other firms’ processes to gain the additional ability to balance demand and leverage the capital investment. These and other approaches can indeed mitigate risks, but they require suitably qualified and motivated partners. Robust planning including investment in startup capital, management time and an understanding of startup time. Establishing a captive typically takes far longer than it would to contract for a third-party service provider for the same services. Equally significant is the realization that it takes very significant investment and time to disengage from a captive operation. Ensuring realistic scale and scope. There is a minimum operational scale below which running captive operations is not very economical. Clear mandate from senior management to establish and grow the captive. The mandate for the captive should include clear rules on how it is to be used. Often different business units within the same company act as de facto rivals rather than partners. Certain business units may not use the captive despite senior management direction, which can lead to jeopardizing even a compelling business case for the captive. Such issues need to be clarified at theCAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 5
  7. 7. start; attempting to resolve them once the project is under way can drain management time and energy and result in costly delays. Understanding cultural issues/local environment. Captives that do not have a thorough understanding of local cultural issues may face turbulence in their operations. In addition, some captives fail to quantify the challenges of building and operating facilities in countries where construction standards may be lower and risks associated with the health and safety of employees may be higher. Building a global project team and maintaining momentum. Setting up a captive is a difficult task. For most of the project team this will be a new experience, and the learning curve will be steep. Experience shows that building and maintaining momentum, and thus enthusiasm in the project team, is a key success factor. ‒ Expatriates: Typically, global organizations relocate one or more senior managers from the key sourcing unit or location as “expats” to set up and run the captive unit. This helps in transferring the culture/values and operating knowledge to the captive as well as serving to build relationships with key stakeholders in the parent. Deciding on individuals who can fit the role and who have the knowledge and attitude to operate in an offshore environment is critical. Often, parent firms seek out persons of local origin for such roles to bridge the cultural gap and overcome potential resistance to relocation. Ensuring an experienced project team. As with any startup unit, prior experience in building offshore service centers is essential. In addition to project management skills, the team requires subject matter expertise across all the support and shared services functions. This area is increasingly becoming less challenging for new entrants given the large number of professionals experienced in setting up captive units. Understanding financial and operating risks. Parent companies have to own the full financial and operating risk of running the captives in the host country including foreign exchange (“forex”) fluctuations and business continuity planning, among other issues. Iterative scoring Compile list of Review and confirm Review and agree process, candidate cities based parameters for scoring weightings of scoring composite score on preliminary filters from long list parameters calculation and rating Candidate Finalize Attribute Score and Countries/Cities Parameters Weights Rank Source: TPI location analysis methodology Selecting the best location for the captive. Delivery location choices are made on the basis of suitability of the local labor pool for the type of proposed work, environmental factors (local costs and escalation, attrition, etc.), local government incentives (now only offered by emerging locations for large proposed units), and so on. ISG’s location analysis capability helps parent organizations to identify suitable locations for their captives.GROWTH PHASE: KEY AREAS OF FOCUSIt is easy to regard the captive build-out as a close-ended project that finishes when services start to flow. Yet a captive,especially during its growth phase, requires much attention, even more so than during the startup phase. Business unitsshould view working with the captive in terms of building and growing relationships; this will require much travel and timespent face-to-face rather than just the occasional phone call. Business units should also work to ensure that the captiveoperations are closely linked to their evolving needs and strategies. Setting and managing expectations. When parent companies move inefficient or difficult processes offshore with the expectation of solving problems or cutting costs, they are setting up the captive for failure. Cost savings will be short-lived and the captive will become an inefficient cost center. At this stage, parent companies start asking the captive to deliver ”at least” in terms of business value. This is not the way the captive was set up, and it struggles to meet the expectations of the parent.CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 6
  8. 8. Scaling up. Captives generally do not maintain the same rigor and discipline in managing the work pipeline as a third- party provider. Demand forecast is also weak, making them reactive in approach. This often makes them less cost- effective com-pared with third parties. Setting up a governance mechanism. A key success factor is to put in place mechanisms for ongoing Service Management & Governance of the captive. There also needs to be strong senior executive sponsorship and governance across all activities to ensure that risks are managed effectively and alignment is achieved across the initiative. Managing cost structures. Captive costs are generally higher compared with those of third-party providers. The different cost structures are attributable to factors such as higher compensation, more experienced workforce, lower span of control (i.e., the ratio of associates to team leader and that of team leader to manager), higher support staff, corporate allocations and higher spend on business continuity planning / disaster recovery planning (BCP/DR) driven by corporate policy. Focus on human resources. The captive workforce’s average years of experience is greater than that of the third- party provider workforce. The average compensation is hence higher at captives. Captives, unlike third-party providers, do not hire in large numbers from campuses; they face a higher cost of hiring and low conversion rates (from application to interview to selection). They also take longer on average to recruit and hire. When captives do go to campuses, they position themselves as offering higher pay on average rather than on their growth and career opportunities. Operational issues. Third-party providers have available capacity-based utilization-tracking mechanisms; captives usually track only the billable utilization ratio. Third-party providers are monitored more closely for compliance with service level agreements (SLAs); most captive units do not have formal SLA frameworks in place with their parent units. Third-party service providers tend to have mature knowledge management (KM) systems in place, while captives have fledgling KM initiatives. As a result, captives are less equipped to focus on operational efficiencies. Shared and support services. Captive units have a higher spend on shared services facilities such as real estate and maintenance, travel and entertainment costs, and recruitment costs compared with third-party providers. For example, to contain travel and entertainment costs, third-party service providers adopt stringent cost-saving measures such as strict approvals for non-billable travel, and they promote video conferencing for meetings. They also provide service apartments for stays longer than two weeks, and employees travel by train for overnight destinations. On the other hand, captives tend to follow a more relaxed approach. The percentage of support staff to total staff is higher for captives than for third-party providers, which also rely heavily on automation and internal systems to reduce support costs. Comparison of Captives and Third-Party Providers on Select Parameters Average Work Experience # of Support Staff 100 100 58 64 Captive Service Provider Captive Service Provider Facilities Cost BCP – Spare Capacity 100 100 67 60 Captive Service Provider Captive Service Provider Normalized using median captive = 100CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 7
  9. 9. RESTRUCTURING PHASE: KEY AREAS OF FOCUSCaptives that have scaled up and been in operations for more than three to five years continue to face internal and externalchallenges as they evolve. Some of the key areas they grapple with at this stage are: Building and demonstrating value beyond cost arbitrage. The standard offshoring paradigm is based on cost arbitrage within acceptable quality parameters. This leads to “value” questions and a “glass ceiling” of parent perception about what the captive unit can deliver. Best-in-class captives focus on delivering both incremental value (enhancing the current delivery and providing additional benefits) and breakthrough value (solving a client problem or creating new business opportunities). Comparison of Captives and Third-Party Provider Cost / FTE Cost/FTE 100 79 67 65 Captive-Median Service Provider- Service Provider-Best- Captive-Best-in-Class Median in-Class Normalized using median captive = 100 Creating integrated capability across delivery units. Captive units typically house multiple delivery units including BPO, IT, R&D and KPO. A very significant opportunity exists to integrate solution and delivery capabilities across these units to ensure synergies for the parent firm for key platforms and programs. In reality, these units report to different parts of the parent organization and often do not share anything beyond support services and legal/management oversight in India. We note that this challenge is not unique to the captive delivery structure. Although integrated offerings are potentially transformational and feature the added benefit of “one throat to choke,” market reality points toward “best-of-breed” contracting. This is compounded by the difficulty in defining holistic SLAs. Specifically, only 15 out of 388 ISG transactions since 2001 have integrated offerings. Maintaining a robust workforce and reinforcing the parent culture as the captive unit scales up. Captive units in India operate in an environment of double-digit growth, salary hikes, and vintage-based attrition as new firms poach experienced talent. These pressures are significantly different from the ones faced by the parent organization, yet the need to replicate the parent culture offshore exists. The additional human resources (HR) challenges faced by captives include a perception of limited career growth along with building a brand, and hiring and training engines without the scale efficiencies of third-party providers. Preventing value leakage. Enhance financial controls to prevent value leakage. Typical value leakage manifests in terms of incorrect chargebacks to the parent organization. If not monitored properly, the long-term effects could be significant. Creating long-term sustainability. Captive operations face two basic challenges around sustainability: 1) the inability to spread fixed costs across multiple clients or convert them into variable costs; and 2) eventual slowdown in growth leading to scalability issues concerning shared and support services. This raises questions of long-term cost sustainability as the initial labor arbitrage opportunities eventually dwindle. Examining monetization opportunities for the parent. Mature captive units are now faced with several enabling factors in the market for monetizing their operations. Potential buyers include service providers looking to scale and private equity players adding to their portfolios.CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 8
  10. 10. ‒ The opportunity to monetize captives at a premium is applicable for scaled captive units that represent either a guaranteed book of business or an anchor client in a growing vertical for the buyer. The window of monetization for such units is unlikely to extend beyond the next 12 to 18 months since service providers are growing very rapidly, organically or otherwise, in a high-growth industry; thus the attraction to acquire a captive to add scale will lessen with time. ‒ Sub-scale captives with costs and metrics totally out of sync with the market will not have a premium associated with them. They will either have to be “revitalized” by their parent firms, atrophy and eventually shut down, or be bought out by a third-party player. Restructuring the model. Several of the challenges outlined above require changes in the basic operating model. To this end, we are seeing delivery models for firms morph into hybrid operating models. Offshore service delivery was either Offshore service delivery happens through a service provider (s), a captive through a hub and spoke model with unit or both in some cases the captive unit acting as the hub Captive unit and service provider did The captive unit and service provider not interact with each other can be in different locations, captive unit may be operating from a service provider location or service provider may be operating from the captive location Company Service Provider Offshore CaptiveA critical element in this evolution is the systematic assessment of applications and processes to see what needs to beretained, what should be done in onshore shared service centers, what should be insourced to the captive unit and whatshould be outsourced to onshore and offshore third parties. This contrasts sharply with the original suboptimal sourcingeffort where piecemeal unit-wise decisions were made to outsource or offshore.CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 9
  11. 11. Application Analysis Application Classification Data Any Security Develop Sourcing Collection Concerns? Do not Scenarios offshore Data Is Technology Analysis Offshoreable? Review & Functionality & Offshore candidates Offshore candidates Validate Challenges? Source: TPI Application Portfolio AnalysisIndia-to-India contracting. A key enabler of the hybrid delivery model is India-to-India (i2i) contracting. Parent organizationsare increasingly setting up and managing i2i contracts with service providers via their India captive unit. This is enabled viathe ”hub-and-spoke” model with the hub being the India captive unit through which different business units procureoffshore services.Captives — particularly those not in the technology space — are at a comparative disadvantage when it comes to attractingand retaining entry-level employees because of the perceived lack of a technology career path at a non-IT company. i2icontracting increases the offshore leverage as well as flexible capacity through rapid deployment capability — especially ofnon-niche skills. Onsite Project Teams Offshore Hub i2i Provider i2i Provider i2i ProviderThe key points to consider when implementing an i2i model include: The agreements with providers have to be structured to reap the tax benefits available to software services exporters in India. The most prevalent version is a time and materials (T&M) arrangement with a service provider–based, profile/skill- based rate card, which means that the captive has to assume the project execution risk. This is increasingly common in IT, and initial BPO pilots are in progress.Because of the various challenges and opportunities faced in this stage, captive units are increasingly focusing on annualstrategy and planning exercises resulting in three-year rolling plans and one-year operating plans. Key inputs into thestrategy planning exercises are market best practices and benchmarks versus peer captive units and relevant third parties.CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 10
  12. 12. THE CAPTIVE CONUNDRUM: VALUE OR EFFICIENCY PLAY Strategy Planning - Market Best Practices Market Best Theme Context Issues Initiatives Perspective Practices Area Observations Initiative (Y/N) — Drive common productivity and quality Align Measurement norms across client and provider sites - systems & Goals support baselining and improvement efforts with Client at client Strategic Objectives Initiatives (being done by other firms) Initiatives needed/already existsWe observe that sustainable captive units tend to migrate along two, often overlapping, paths — enhancing value orefficiency. The extent to which one or the other choice is made determines the ongoing model for the captive.Value players focus primarily on enhancing value to the parent firm while incrementally increasing economic efficiencywithout disrupting the current delivery model.Efficiency players focus primarily on discontinuously enhancing economic efficiency with a tradeoff versus higher valuecapability. This could lead to clearly segmented offerings with differing cost implications — in essence mirroring third-partybehavior of pricing by value. High Unserviceable Speciality Captive Super Captive Best-in-class 3rd Party Value “Factory” 3rd Party “Me-too” Captive “Me-too” 3rd Party Unsustainable Low Economic Efficiency HighCAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 11
  13. 13. We observe the following constructs as part of this model: Specialty captives: Captive units high on the value dimension that are increasingly used to house KPO, Program Management (PMO) and Vendor Management (VMO) functions Super captives: Captive units that have reached the scale and economic efficiency to match best-in-class third parties “Me-too” captives: Captive units that are low in economic efficiency and represent sub-optimal configurations that are unsustainableCHARACTERISTICS OF VALUE AND EFFICIENCY FOCUSED CAPTIVE UNITSValue-focus captives are tightly integrated with the parent unit and, by virtue of their representation in key companycouncils, have a greater line-of-sight into overall company strategy and objectives. Accordingly, they develop thecapabilities and competencies required for the overall company vision and are able to leverage them effectively.Efficiency-focus captives have mature processes, strong internal measurement systems and controls, and achieve a highdegree of standardization and automation. They encourage a culture of thrift across the organization. Efficiency-focuscaptives optimize skills based on work type and thus appropriately spread them across locations.The critical success factors for value-focus captives are: Value Focus Captive Leverage business and proprietary knowledge Deep business knowledge/technology expertise Tighter integration with the parent unit Value-added services that support enterprise-level programs Have a “seat at the table,” e.g., Integrated global career paths for highly skilled employees represented in management councils of Cultivate an “employer of choice” positioning to attract top- the parent notch talent Efficiency Focus Captive Encourage a culture of thrift through the organization Able to contain costs through continued Strong internal measurement, systems and controls growth and having attained critical mass Automation, standardization, and process maturity Automation and productivity im- Employees with the right skills placed in the right locations provements with an optimal match to type of work Expertise in both business and technology areas Effective relationship management through onshore teams Services that can support enterprise-level programs and not just individual business-level projects Global career paths for highly skilled employees Cultivating “an employer of choice” image to be able to attract and retain top-notch talentThe critical success factors for efficiency-focus captives are: Encouraging a culture of thrift throughout the organization Developing strong internal measurement systems and controls Achieving a high degree of automation, standardization and process maturity Using the right employees in the right locations by matching skill and experience levels to the type of workCAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 12
  14. 14. VALUE AND EFFICIENCY OBSERVATIONSISG has found that captives are not always necessarily higher-cost operations compared with third-party providers. Forinstance, in our sample there was a captive that was able to offer services to its parent company at price points lower thanthat of third-party providers.Indian management of captives must work with global management to ensure that the productivity benefits from thecaptive operations are clearly understood.Attrition challenges are not unique to captives, but they do have certain disadvantages compared with third-party providersin attracting talent at entry and junior levels because of the perception of not being able to provide a wide range of projectsto choose from compared with third-party providers.What is very clear is that captives need to regularly evaluate their portfolio of services. They should periodically revisit theassumptions behind the “keeping it in-house” decision and should determine if they are deriving any value in doing so.Of note, we predict a shift away from sourcing programs based on cost considerations alone to include capability andcapacity-based sources. It is possible to choose the efficiency-focus captive or value-focus captive (or both in certaincircumstances).IMPLICATIONS FOR PARENT ORGANIZATIONS WITH EXISTING CAPTIVE UNITS Examine the portfolio of services being delivered from the captive. Benchmark against third parties and captives. Determine if the captive performance is within the acceptable range. Determine which services can be improved and whether new hybrid models will add greater value. EVOLUTION OF CAPTIVE 1.0 TO CAPTIVE 2.0 Captive 1.0 Captive 2.0 Engagement Model Service provider Mix Capabilities Service delivery Service delivery Program management Partner management Talent Create a talent pool Leverage talent pool for higher value-added work Benchmarking Employee compensation Employee compensation Employee productivity Employee utilizationCONCLUSIONCaptive offshore operations require careful planning, long-term investment and rigorous management discipline to performaccording to expectations. Companies that lack global operational management experience should consider alternativemodels.The captive story is far from over, and the model is sustainable. Unlike service providers, captives are fundamentally alignedto the parent’s goals and will drive standardization and reengineering without conflicting commercial objectives.Finally, the era of setting up commodity captives is over. In the era of Captive 2.0, both value and efficiency have emergedas successful models. New captives will largely be hybrid or specialty captives housing KPO or PMO/ VMO functions. Existingcaptive units will evolve into either a super captive or a hybrid captive, both of which will look like a captive but act like aprovider.CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 13
  15. 15. LOOKING FOR A STRATEGIC PARTNER?Viswanathan Krishnan is a Manager with ISG.Contact Viswanathan at viswanathan.krishnan@isg-one.com or +91 974081 11991.Information Services Group (ISG) (NASDAQ: III) is a leading technology insights, market intelligence and advisory servicescompany, serving more than 500 clients around the world to help them achieve operational excellence. ISG supportsprivate and public sector organizations to transform and optimize their operational environments through research,benchmarking, consulting and managed services, with a focus on information technology, business process transformation,program management services and enterprise resource planning. Clients look to ISG for unique insights and innovativesolutions for leveraging technology, the deepest data source in the industry, and more than five decades of experience ofglobal leadership in information and advisory services. Based in Stamford, Conn., the company has more than 700employees and operates in 21 countries. For additional information, visit www.isg-one.com. 010812 © Copyright 2012 Information Services Group – All Rights Reserved

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In their relatively short history, Indian captives — foreign-owned operational units — have experienced a mixed record of success and failure. A new set of studies by ISG finds that both legacy and new captives are embracing emerging business models aimed at unlocking previously untapped business value. We call this trend “Captive 2.0.”


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