Akshaya Bhargava: Captives for all reasons

Setting up captive BPO units by MNCs may not always be viable

It is hard to read the Indian financial press these days without coming across something about BPO. Given the industry's growth rates, given the employment it is generating, given the VC money that is chasing BPO investment, it is perhaps understandable why everyone sees this as a dream scenario.

But it is with some amazement that I read announcements pretty much every other day, about some overseas company or the other setting up captive BPO units in India, announcing the hundreds of jobs that they will create.

Of course, it is hard not to feel the infectious excitement of a booming industry when we read these things. If so many MNCs come into India, how can that not push India towards greater economic prosperity? When MNCs decide to set up captive units, they are really doing the right thing for their own shareholders; it is in their best interests, so why not just let them? Good questions, but there are serious concerns that underlie this euphoria.

The decision to go captive: When an MNC wants to outsource work to India, the very first question they ask themselves is should we outsource to an existing BPO company or should we set up our own?

When these companies come visiting, they are impressed by what they see in terms of BPO infrastructure, mature methodologies to migrate work to India, a strong work ethic amongst the BPO workers, a desire to please the customer amongst their managers and overall a supportive business climate.

What these companies do not see is a number of BPO providers doing work that is very similar in nature, size and scope to what they intend to outsource. They see good process management in India but what they don't see is offshore managers who speak the language of their business and can demonstrate an intimate understanding of their industry.

They see high attrition rates and do not see a large body of "experts" who can form the labour pool from which they can draw on. This bothers them and they begin to believe that maybe the best thing for them to do is to set up their own.

In defence of the captives: Once these MNCs start in this train of thought, it becomes a self fulfilling journey...we will be fully in control; if we are going to train a third party provider, why not just train our own people; we don't need to pay for the margins of an external vendor and can do it 20 per cent cheaper; we will not need to have a sales team so we can shave off another 10 per cent and so on. The arguments become more and more compelling and a captive becomes the panacea for all concerned.

Reality is that the team within the MNC that is responsible for implementing the "India solution" is facing a hard enough time anyway. They generally face tough internal opposition to outsourcing and have to answer to risk issues that they have no control over. They see their primary job as creating a business case for moving work to India "" what happens once the work is in India quickly becomes a secondary issue.

The practical reality is that a captive is an easier sell internally as it removes all objections around loss of control, confidentiality of information and is often positioned as 20-30 per cent cheaper than going to a third party BPO provider in India.

The right conditions: I am not suggesting for a moment that a captive is always the wrong decision. A captive unit makes powerful sense but only for the right reasons. To me, there are only three reasons under which a decision to set up a captive is the right one "" these have to do with size, familiarity and nature of work:

Size: The captive must have scale otherwise it will never attract the right talent or achieve the cost efficiency that will be required. If you cannot see the captive going up to 3,000 plus people within 2-3 years, chances are that the best managers will not see this as a worthwhile career choice.

The normal MNC response to dearth of managerial talent is to overpay the senior team (after all its only a few people) but the long-term consequences of this financial indiscipline are almost always unpleasant.

Familiarity: India has come a long way in being investor friendly; however you still need to deal with local authorities, taxation issues, corporate approvals, premises problems, transport issues and a hundred other things that go towards setting up and managing a business in India.

People quote GE and Citigroup and HSBC as successful captive units, conveniently forgetting that these companies have run their normal businesses in India for over 100 years and have had several generations of Indian managers.

Nature of work: The desire for control over outsourced processes is often cited as a driver for a captive. However, in most cases, this is grossly misplaced "" can you really make a rational, convincing case to exercise unilateral control over accounts payables? Over help desks? Over reconciliation?

To me, a captive is justified in cases (and only in those cases) where the there are genuine concerns of a high degree of transaction risk or sensitive intellectual property. These cases are far fewer than one might believe.

All other arguments are in reality, easy ways out and quite simply, wrong. For instance, take the cost argument "" that is, captives can do it 30 per cent cheaper. Yes, the MNCs may not pay the margins of a BPO vendor if they have a captive but do they really believe that with a sub-scale operation, they will get the same cost base as a corporate entity that employs 25,000 people?

Do they really believe that the best managerial talent will give up the immense value creation opportunity in a high-growth industry, work in a unit that is by definition non-core, with unclear growth plans without demanding a substantial cash premium (and eroding the very raison d'etre of the captive)?

Do they really believe that they need no "sales" people and nobody from the Indian captive unit needs to evangelise BPO, to cajole and persuade their internal process owners, to sit and plan meticulously to migrate work to India? Once you take into account all these, it is really an incredulous notion that a captive can be cheaper than a well run third party BPO provider.

What this really does is to underscore the fact that offshoring to India needs to be a strategic decision with due regard to long term outcomes. Barring some very special circumstances, most MNCs setting up captive units in India are doing it for all the wrong reasons.

If they don't succeed, it will be because of a business decision based on a flawed premise not due to anything inherent in the Indian BPO industry.

Long-term captives are strategic to both their parent companies and to the BPO industry in India. The "real", long-term captives are an essential part of the industry and have an immensely valuable role to play in anchoring the industry by bringing in international best practices, knowledge, skills and credibility "" without which, we will never meet the ambitious targets that our infant industry is setting for itself.

(The writer is CEO, Progeon)