New Delhi: When a multinational invests big money to set up a captive centre in another country, its main objective is to cut product development and back-office costs, while simultaneously maintaining tighter management control. After all, a captive centre functions pretty much as a BPO, except that the MNC owns it, not a local service provider – which is why the multinational has a greater hold control over its operations, right? Wrong.
A recent report by global consulting firm, Forrester Research Inc., says during the past two years, more than 300 North American and European firms started their own offshore units in destinations such as China, India and Russia for reasons that had little to do with business prudence.
For instance, in a majority of cases in India, the decision to establish captives was driven by personal agendas such as an expatriate employee’s urge to go back home to take care of aged parents, retire, raise their kids outside the US, and the like.
But yes, there were genuine reasons as well. More than 60% of the respondents in the survey cited quality control and intellectual property (IP) protection for going the captive route – instead of simply outsourcing to a local service provider.
Many did it to curb expenses too, stating that by having their own facility, they believed they would save on R&D and IT costs. Besides, they felt it was easier for them to propagate consistent processes and culture in their own centres, rather than one owned by a third party.
While these reasons have sent several firms down the do-it-yourself path in places like India and China, the study says more than 60% of captives are in trouble – although few will admit it – due to a poor delivery track record, operational problems, a lack of scale, poor morale, rampant attrition, and high costs.
For example, Ericsson sold its facility to Wipro as it was not able to scale up enough to be self-sustaining and cost-effective. BelAir Networks and Powergen – both UK-based firms — closed their call centres in India, as they were more costly than anticipated, and attrition was pegged as high as 80%.
Firms such as BEA Systems, Capital One Services, Google, Mimosa, Seagate, and Yahoo started using partners instead of doing it all alone. And taking a build, operate, transfer (BOT) approach to a captive centre does not avoid the problems either. A client of Ness Technologies did the transfer to start the captive centre only to see 25% of the employees leaving in the first year and cost increasing 10% with each passing quarter.
Why are captives imploding?
The report says that more often than not, the justifications for setting up offshore units ring false and don’t match the reality of the marketplace. According to the report, management enthusiasm for offshoring is often short-lived, and this hinders the captive unit’s ability to gain scale and internal momentum.
The report also blames unrealistic cost models for the state of affairs. It says a captive of 150 people can cost $2 million a year more than using a service provider for the same work, even after factoring the 15-20% margin the service provider charges. This is because the MNCs higher more senior – ergo more expensive – staff and spend lavishly on buildings and furnishings.
Mundane work, usually related to old projects, and lack of delegation and non-involvement of the offshore staff in the strategic planning phase of projects leave employees disillusioned. As a result, attrition at captives runs 30% to 40%. That’s higher than the industry-provider average of 20%.
The report says processes designed to work within the four walls of the company buckle when deployed at a global level, hindering productivity and obstructing the process of building trust between the members of the onshore and offshore teams.
Forrester recommends four remedies for captives performing below expectations. These are:
? Shutting down
? A ‘hybrid’ strategy that involves getting third parties to take over work that becomes less strategic over time
? Partnering with service providers, who will hollow out the centre by hiring and augmenting the staff with its own employees – Forrester calls this the ‘termite’ strategy
? Selling off and going the outsourcing route instead
What strategy a captive should adopt depends on a number of factors, such as size of the facility, the ability – or the lack of it – to hire and retain skills, the level of expenditure, among others.
So while Apple shut down its not-so-large 35-people strong centre in India a year ago, Microsoft and Motorola went hybrid and Ericsson’s product engineering captive and Yahoo’s IT application development unit engaged the services of termites. Air France subsidiary AFS sold its BPO facility to TCS and is now its client.