IT and ITES: Held Captive in India

23 07 2009

 In the IT off shoring and outsourcing industry, it is really hard to decipher a trend among the companies. New captives are being set-up. Many captives are expanding and some captives are being sold.

In the early ’90s the early outsourcers like GE and Texas Instruments saw the India advantage and set up their own captive units for IT. Following their success, many companies like Philips, Siemens set up their captive units in India and started moving a lot of work and jobs to India. Many multinational banks like Citibank had a multi-pronged India strategy using vendors, created their own software products company and also a captive BPO unit.

When the MNCs were setting up captive units, the large Indian IT companies of today the likes of TCS, Infosys were busy taking up on-site (body shopping) assignments and doing a small part of the projects through their offshore centres.

The real feasibility of a captive BPO unit and the attractiveness of India as a BPO was shown by GE’s captive unit namely GECIS ( now GENPACT). Following GE, several banks and financial services units set up their captive IT and BPO units in India. This trend really took off after the dot-com bust/ Y2K crisis in 2000.

Even today several latecomers are setting India captives. Wells Fargo, J P Morgan, Nomura , Fidelity and many insurance companies have set up captives in India in the last two years. Many captives who came in earlier are expanding in India using the cost-advantage of India to move jobs and grow in these recessionary times. HSBC, UBS, Bank of America, Deloitte to name a few.

Yet, some of the early captives are selling out. GECIS is no longer a captive of GE and is owned by a clutch of private equity investors. Philips captive was acquired by Infosys and Infosys took on the work as well as the staff of servicing Philips. TCS acquired Citibank’s captive BPO unit in India in a 500 Mn $ deal last year. Cognizant recently has taken over the captive unit of Invensys. The Chennai based captive IT unit of Alcatel is being taken over by Infosys. 

The attractiveness of India is bringing several companies to set-up captives. These captives are set-up with minimum investments and limited transfer of people from the western countries. Slowly, the work is gradually moved to India and the local staff is recruited and trained to handle the work. These captives become profitable from the first year itself in view of the wage arbitrage. In three to four years time with growth rates of over 50 % year on year, these captives acquire significant size. Being highly profitable they command good valuations too.

Some of the owners of these captives, faced with financial difficulties, (like Citi) in these recessionary times decide to sell off these units. Indian IT companies who were used to 30-35% growth rates suddenly find the market very difficult, so find acquiring captives as a good way of buying growth. The parent companies continue to use India for their IT/BPO services except that instead of using the captive, they have a long-term contract with a vendor.

The other captives who are not tempted to cash-in their valuations early are happy to accumulate their savings year-on-year. Proprietary knowledge and strategy is one more reason many MNCs want to retain their captives.

Jobs are moving to India, when captives are set-up. When captives expand new jobs are being created. When a captive is sold out, the jobs remain in India, only the employer changes.

– G. Mohan

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