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Wednesday, May 02, 2007

Captives Are Really Imploding

While writing on captives, I concluded that today’s reality is that barring those that are focused on product development, or support functions involving multiple of hundreds of people working or those focusing on research – the R part of the R&D line item, most of them are grappling with which exit option to choose - ranging from closure to outright sale.

Vinnie points out that the drivers for setting up captive units are margin protection, IP protection, ability to realize some capital gains upon eventual sale. Vinnie – you are definitely right, Symphony & GlobalLogic have reportedly bought over a few captives( Forrester points out that those bought out were actually stagnating/struggling units).I have also pointed out earlier that firms that are focused on product development on a medium to large scale, or support functions involving multiple of hundreds of people working or those focusing on research – the R part of the R&D line item would find it attractive to run captives. Software product majors employing huge numbers or those focusing on niche(s) generally manage to run captives to their corporate satisfaction. But cost advantages and scaling up are proving to be far more difficult things to achieve.

My experience in talking to captive managers who have run captives suggest a sense of dissatisfaction and a majority of them have failed to meet their HQ expectations – on multiple fronts. The issues that run captives to the ground include busting of the myth that they can be in general be more profitable – the loaded costs of captives are on an average more than the loaded costs of third party service providers( even when factoring in a reasonable margin for service providers). Forrester is bang on when it reports that generally, over time, service providers can manage the inflationary pressure, improve productivity measures much better, for high end works.

Hindustan Lever sold its captive unit Indigo recently to Cap Gemini. The valuation, it was widely believed was very subdued as Levers made it look as if a cost center was getting sold. HLL, one of the largest multinational operating in India (it recently lost its largest multinational status in India to Nokia) unarguably India’s corporate icon and Unilever’s crown jewel would not have taken such a decision without working out its near and medium term benefits. Its likely the case that HLL must have thought that sustaining captive BPO center may not be the best option available in front of it – seem from an expertise, economics ascaling up perspective & near-medium-long term valuations. Apple failed in running a successful captive unit in India. There are number of additional examples that come to my mind - Citi, Deutsche and a lot more. Firms like Yahoo & BEA are fine tuning their approach. Amongst the notable exception in running a successful captive is Dell,which seems to be going from strength to strength. In my view, where having a captive is not a strategic decision( should be well justified and unbiased), the era of having captives for the sake of having one, in the hope that in present or in future, in some form benefits may be forthcoming looks doubtful.

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