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Global firms' captive IT units in India gain importance

April 09, 2012 11:25 IST

At a time when the Indian information technology services industry is the focus of anti-outsourcing rhetoric, the global in-house centres (GICs) or captive units of multinational companies are increasing their offshore penetration.

According to a survey by McKinsey & Co and Nasscom, 52 per cent of companies with captives in India intend to increase their offshore penetration by 15-30 per cent over the next two to three years.

This is also evident in the growth of captive units and their contribution to India exports. GICs revenues across categoriesĀ -- engineering research and development, business process outsourcing and ITĀ -- have grown from $3 billion in 2003 to $13.9 billion in 2011-12, a compounded annual growth rate of 18 per cent. With 750 captives in India that employee 460,000 people, their contribution to export revenue is 21 per cent.

The GICs that began by doing back-office operations have moved a long way to become key players in the global design and growth of the company.

"GICs have matured over these years. They have built expertise, have developed leadership and credibility that are integrated with the parent company. Have access to the organisation's intellectual property and have goals that are aligned to the parent company. More important, the median age of GICs in India is eight to 10 years and they have moved from execution centre to expertise centre," said Nitin Seth, India country head of Fidelity Worldwide International and Nasscom GIC North Chair.

Take the case of Tesco Hindustan Service Centre. The importance of its 6,000- employee base can be gauged from the fact that the unit is not considered just another offshore unit but as the 'operations and technology centre for the UK's third largest retailer, Tesco.

Cost savings

The survey also notes captive centres are no more seen as just cost centres. "While GICs have increased focus on generating impact on business outcomes, cost still remains a dominant focus for onshore stakeholders.

Despite the maturity of India as an offshoring destination, it still offers significant long-term cost advantage," states Sangeeta Gupta, senior vice-president, Nasscom. Rather, it is predicted the cost arbitrage benefits that India provides will likely be sustained for at least 12-15 years.

According to an Everest Group analysis, even on a total cost of ownership basis, a GIC involved in IT-ADM work in a tier-I Indian city offers 55-70 per cent savings over its parent based in a tier-II US city. More, the impact of wage inflation is much lower than the actual increase.

Contrary to popular perception, wage inflation is not likely to wipe out GIC cost savings in the near term, given that net cost inflation experienced by GICs (six to eight per cent) is much lower than the numbers (12-15 per cent) commonly cited, said the Everest report.

"The pyramid adjusted wage inflation is lower than the numbers for junior level roles that are often reported. Also, actual inflation in salary bands is much lower than individual changes, given promotions," it says.

No mere back office

The industry is witnessing a fundamental shift in operating structure. GICs or captive centres are increasingly handling complex work models and increasing their footprint.

Captive centres have moved away from being just India-centric units. Many of these have started to have centres in other regions as well, reflecting the aspiration of the company. Take the case of Fidelity Worldwide International's captive unit in India.

Almost a third of its global workforce is based here. The unit has been in India for close to 10 years and had technology as its core function. It now also has centres in China and Africa, and India is playing a key role in developing these regions.

"We have a huge presence in Dalian, China. This is mainly to cater to our Japanese and Korean clients. The centre has local language capability that we can never develop in India. Similarly, our centre in Africa gives us the capability to cater to some of the European clients," said Seth.

According to the McKinsey survey, 33 per cent of the respondent base had presence in just one to two countries in 2008. This had gone up to 57 per cent by 2011.

Also many of these captives are now being used to cater to the company's foray into emerging markets, one of the fastest growing in terms of business. In the case of Fidelity, over the past two to three years, the India centre has focused on developing research and analytical capabilities.

"Internationally, we are going big on retail. We are gearing up our sales and marketing team for it. To understand the culture better, we have set up a customer analytics unit in India," he said.

Seth, who'd earlier also headed McKinsey's captive knowledge centre in India, says as McKinsey started to gear its offering here, a lot of new services and innovation delivery started happening for emerging markets from India.

David Awcock, group head of technology, Standard Chartered, believes that while the bank set up its captive unit, Scope, in 2000 for internal use, increasingly it has been catering to the bank's requirement in the Indian market, too.

Shivani Shinde in Mumbai