Captives : The Middle Path

The value proposition of an offshore based captive is very compelling for large global corporations. Those that have gone through few cycles of offshore services contract, smelt the value in streaks in their experience but also most often faced the business disconnect as IT moved away from an inhouse function to a service provider. While there are cost efficiences to leverage, most enterprises do not expect and are not prepared for the commoditized service model that service providers unleash. Fact is that part of the cost efficiency and its related lower management overhead is derived from these models but IT teams and business often find this to be the most understated situation in the before and after discussions they had during the sales cycle.

It is like moving from a gourmet (and in-house at that) restaurant with all the bells and whistles of a fine dining  place to a fast moving pizza delivery location which at best may have few chairs thrown in just in case patrons are too hungry to take the pizza home. The delivery model for the pizza place which is running a large scale operations at a competitive price with low real-estate footprint and staff does not have the well dressed manager who greets you at the door of a fine dining place. From there, you see that most stuff in the pizza place is standardized and fixed. They may be able to help you with some of your special request but cannot do a made-to-order dish that you can relish at the gourmet place. You often leave the pizza place unsatisfied on these counts if you are not prepared for this change from your gourmet habits. So, that's coarsely what is at play.

Now, the captives step in like couple of those pizza joints which also have a manager who greets you at the door and while they use the same kitchen and staff, the relationship with the client is more refined and customized and factors in your special request (to the extent the kitchen can accommodate). There would silverware for those who look for it and he could take time to explain how the cheese is made and stuff. 

So, in summary, the captives on paper do have a compelling proposition. The devil lies in the detail of execution. Running an offshore set-up requires more than just running an internal IT department. And if the set-up is in the neighborhood of service providers, resource management and retention is just one of the key challenges. Some companies have found the secret (pizza) sauce and are doing well while others are trying to refine the model and few others have already exited selling their set up to IT service providers ( who else?!) as part of a lock, stock barrel deal.

TCS Acquires Citi's Back-office operations

The acquisition of Citibank's back office by Tata Consultancy Services brings forth the following:

• Further validates that offshore captives are passe and no longer hold the charm.
  
• Offshore IT players consider a BPO capability essential to their future growth. This being operations, it gives a credible platform to bring new customers, especially those that are moved through cross-sell from the list of customers for application development and maintenance.
  
• This deal gave TCS a ready pool of 12,000 resources who would be productive from day one and speed-up what would otherwise take at least two years to recruit along with ready infrastructure they come with.
  
• On the new business, part of what TCS pays would be recovered with revenue from Citibank over next few years and that is part of the deal .
  

Citibank thus becomes TCS larges customer, a position held by GE for some time.

Captive Offshore Centers

Let me start with a story:

Traders from far off exotic lands used to get precious gems to a certain village. These were much sought after and sold at a price to the locals. Few smart folks from the village, who liked these gems, wanted to know more about this trade and the trader. So, they found where he comes from and where he gets his precious trade. They figured out that it was futile to pay for these gems those prices when they could get it cheaper if they undertook the same journey from the far off land and brought the stuff to their village.

So they befriended the trader, went with him to his country and found the places to pick those gems. They surely could buy a lot more for the same price that they paid to the trader in their village. However after the initial euphoria of the new find subsided, they found that undertaking this journey to get the gems was taking a toll. They were not able to spend enough time in their village and so their own business was suffering due to the lack of attention. Secondly over a period of time, with some maths they found that the cost of getting the precious finds home was actually more than taking it from the trader! They had initially overlooked the local expenses and costs - the cost of stay in an unknown place, the cost of hiring labor to extract (with a comparatively smaller scale than those of people like their trader friend), cost of security, cost of travel etc. So, while the gems themselves were cheap there, the lack of volumes, lack of knowledge of local conditions, lack of core competency in that space was causing their overall costs to go up.

Finally the smart folks gave up their newfound venture and settled for buying the gems from the trader who visited their village. They could get it at better price than they would have eventually played to get themselves and they were also able to focus on their business.


The story is similar when it comes to offshore captives set up by many enterprises who find it more lucrative to set up an offshore center than to pay a provider to get offshore delivered services. So, while they want to get the benefits of labor arbitrage, they want it do it all themselves.

Over the years, the industry has seen many such captives being closed or sold off. The companies ultimately found that running offshore based delivery centers were best left to be run by companies which understand this business better. They were bogged down by high attrition, escalating cost of labor, lack of opportunities to offer to their employees as compared to service providers and other local conditions.

They still get the gems ( the cost efficiency and improved profits) while they focus on their core business and let the professional service providers run ofshore services for them.

It is no different than the classic "make or buy" decision - only that in this case most companies have realized that "buy" is the way to go. There may be exceptions where a "make" may make sense but then that's what they are -- exceptions!