Large outsourcing customers such as General Motors Corp. (GM), Deutsche Bank AG, JP Morgan Chase, Merrill Lynch and Goldman Sachs are accelerating the expansion of their development centres in India, as they look beyond third-party providers such as Infosys Technologies Ltd, Tata Consultancy Services Ltd and Wipro Ltd, to outsource software and back office work to.
According to the Everest Research Group, which offers consulting services to Johnson & Johnson, BP Plc. and Unilever Plc. on global sourcing strategies, large North American and European firms outsourced about $9 billion (almost Rs37,000 crore) worth of software and business process outsourcing (BPO) work in 2006 to their ‘captive centres’ in India.
Such companies have added over 50 operations in the last three years, with many of them planning to double their capacities in the next two years, the Dallas, US-based research firm said in early May.
Citibank NA, HSBC Bank Plc., ABB Ltd and Ford Motor Co. are among the several giant multinational corporations scaling up their captive operations in India, Everest said.
Banking and financial services firms have around 27 of the total 110 captive centres of Forbes 2000 companies in India, according to Everest Research. Company-owned centres of banks such as Standard Chartered and HSBC employ over 70,000 professionals handling retail banking, insurance and asset management, and investment banking support processes.
There are around 33 captive BPO companies in India, apart from 23 contact centres of large companies across the verticals of banking and financial services, telecommunications and retail.
Growing at 30% a year, these captive centres now employ over 200,000 full-time employees across software development, back-office operations, high-end research and product engineering. “Companies such as Deutsche Bank and HSBC are expanding their back-office operations; many automobile companies are ramping up their product engineering and design teams,” said S. Sabyasachi, senior director at offshore consulting firm NeoIT.
Executives at several Indian third-party vendors, none of whom wanted to be named, said these captives are increasingly being used by parent companies as centres for managing overall offshore strategy, which includes splitting work between third-party vendors and the company-owned offshore operation.
Moreover, many high-end projects are getting offshored to these captive centres, as Indian companies continue to bag more application development and maintenance work from corporations such as ABN Amro Bank and GM.
Another driver for these corporates to ramp up their captive operations is their interest in India as a market and having more valuable work handled out of India. Existing captive operations are evolving from being lost-cost providers into strategic entities by aligning themselves with their parent companies, “as they manage more end-to-end strategic processes and drive innovation and profit impact,” Nikhil Rajpal, vice-president, global sourcing, Everest Research Institute, said in the report.
Financial services companies including Citibank, Deutsche Bank, HSBC, JP Morgan Chase and Fidelity seem to be leading the captive centres’ momentum in India. “Financial outsourcers have realized that certain processes are better executed at their own centres,” said Siddharth Pai, a partner with the Bangalore-based Technology Partners International. He added that more complex and costly processes are now increasingly being done at the captive centres.
Deutsche Bank, for instance, has established a trading desk for its global customers in Mumbai and has around 2,500 professionals in the country. Fidelity now has around 5,000 professionals doing high-end analytics and financial research in Bangalore.
But although captive centres of many enterprises continue to flourish, 60% of over 300 North American and European firms that established captive centres in the last two years are struggling, according to Forrester Research Inc. “We clearly see these companies struggling due to spiralling costs, skyrocketing attrition and the lack of integration and management support,” said Sudin Apte, country head, Forrester Research India.
So why do many captive centres fail? The answer lies in the scale of operations, as “it is difficult to manage smaller captive teams in an offshore location like India where acquiring and retaining talent has become a daunting task,” said Ajay Kela, chief executive of offshore product development company Symphony Services.
Kela said his company has taken over assets of over three captive centres in the past few months, as their owners could not manage offshore operations well.
Another Bangalore product development company, Aditi Technologies, also admitted to considering to take over a few struggling captive centres in the city.
Recognizing the pains of an offshore set-up, smaller US banks such as the Charlotte, North Carolina-based Wachovia continue to work with third-party vendors such as Infosys, Genpact Ltd and Cognizant Solutions Inc., and stay away from launching their own captive centres in India.