Captives in India Complete Report

Captives in India

Adding Value to Global Businesses

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Adding Value to Global Businesses

Captives in India

Captives in India Adding Value to Global Businesses3

Copyright 2010

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The Indian IT-BPO industry has been the signi cantly contributed to Indias growth story, contributing

over 9 per cent of incremental GDP growth in the last decade, impacting the lives of over 10 million people

through direct and indirect employment and in uencing the lives of many more.

Captive centres have played a key role in this phenomenal growth story, establishing proof of concept

and branding India as a global sourcing destination. This segment, miniscule till 2003, has witnessed

tremendous development in the last 7 years growing at a CAGR of 22 per cent, employing close to 4

lakh people and contributing to 1 per cent of India GDP. Their impact on India extends beyond revenues and

employment- playing a leading role in developing an R&D and product culture, spearheaded initiatives to

develop aff ordable products for emerging markets and created entrepreneurship opportunities.

While we talk about the impact on the Indian economy and speci cally the IT-BPO industry, captives have

been consistently adding value to their global businesses establishing the case to expand the capacities

and capabilities of the India centres. Consolidated operations, process expertise and effi ciencies, faster

time-to-market, leveraging a seamless value chain are some of the key attributes being contributed by

them, not to mention the fact that in some cases even global leadership is being driven out of India. Further,

captives have been steadily moving up the value chain to deliver higher-end services across service lines.

IT captives are increasingly delivering high-end consulting services from India, BPO captives have been

instrumental in creating India as a delivery centre for high-end knowledge services; and ER&D captives are

taking on complete product ownership, competency creation and innovation roles.

The captive industry has its own set of challenges, which stems from the basic business model more than

anything else. Lack of a exible local strategy with limited decision making authority for local management,

stringent budgetary controls and the dictate to comply with global policies can cause ineffi ciencies to creep

in, but as highlighted in the report, it is important to note that best-in-class captives have been successful

in surmounting these obstacles to emerge pivotal for their global businesses.

Going forward, captives would continue to emerge as value players with increased emergence of hybrid

business models that include programme management roles and collaboration with third parties. However,

building an ecosystem of trust is vital for the parent organisations to derive full value from the captive

model which is based upon empowered local management sharing a common vision driving transformation

and enterprise-wide cost effi ciencies.

This report is a rst-of-its-kind, providing an overview of the captives, detailed insights on industry trends,

growth drivers, assesses speci c issues and challenges through case studies, and addresses future growth

opportunities. IT-BPO captives are an integral part of the industry, and NASSCOM and other stakeholders

are committed to the continued success of this segment. We trust you will nd this report useful, and we

welcome your feedback and comments.

Foreword

Som MittalPresident


AcknowledgementsThis report was developed by NASSCOM, with research support from Zinnov, who conducted a

comprehensive six month study to understand the evolution of the Indian IT-BPO captives industry,

current business trends and future opportunities.

We would like to thank various people for their valuable contribution, without which this report would

not have been possible. First, we would like to thank all the captive member companies of NASSCOM,

who went out of their way to provide detailed statistics for their individual companies. We would like to

thank our Executive Council for their valuable counsel and guidance.

We would like to acknowledge the inputs from McKinsey & Co., TPI, Everest Research Institute, AT

Kearney, AICTE, Booz & Co., Cushman & Wake eld, company websites, etc.

We would also like to thank the team from Zinnov for conducting this study. In particular, we would like

to thank Pari Natarajan, Chandramouli CS, Praveen Bhadada, Kartik Vittal, and Pranab Sen for providing

direction, and guidance to this research eff ort.

A special acknowledgement to the NASSCOM research team for their eff orts and contribution towards

this report.


Executive SummaryIndian IT-BPO sector has grown signi cantly over the last decade to contribute over 6 per cent of the

countrys GDP. The sector has helped the country in terms of revenue growth, employee generation

and value creation. The sector has also helped position brand India in the global markets and help drive

growth in other sectors. The industry has used global delivery model to execute complex, mission-critical

projects to customers across the globe using teams across multiple locations.

The Indian IT-BPO third-party service providers role in the industrys growth is well known. However,

the role of the MNC captive centres in India is often overlooked. Organisations such as Motorola, Texas

Instruments started their own centres in India very early in the evolution of the IT industry and have played

a signi cant role in the evolution of the industry and the move towards value creation and innovation.

The MNC centres saw an explosive growth from USD 3 billion in FY2003 to revenues of USD 11.1 billion in

FY2010 has increased the contribution to IT-BPO industrys export revenue to 22 per cent. Today, there

are over 750 MNCs with captive centres in India which employ almost 4 lakh people.

The ER&D/SPD segment is the largest segment within the Indian captive landscape. It accounts for USD

4.9 billion in FY2011, almost 44 per cent of total captive revenues. It is followed by IT outsourcing at USD

3.4 billion, (30 per cent of total revenues) and the BPO captives generated the remaining 26 per cent, or

USD 2.9 billion. The ER&D/SPD segment employs 132,920 people, the IT services segment account for

135,306 employees and the remaining 124,799 people are employed by BPO captives.

Impact on IndiaMNC captive centres have done a phenomenal job in helping India achieve the global leader status in the

IT, BPO and R&D sectors. The captive centres account for over 1 per cent of Indias GDP, and support indirect

employment of 1.4 million people. Captive centres have played a signi cant role in creating an innovation

ecosystem in India. They continue to play a key role in developing highly skilled talent, partnership with

universities, research collaboration with Indian organisations and showcase of Indias capabilities. The

captive centres have also brought the latest technologies to India that was otherwise unavailable. They

have implemented global management and process best practices at their India centres and helped in

spreading these practices in the location ecosystem. Over the last couple of years, these centres are also

focusing on creating India and emerging market-speci c products. The success of these products will

signi cantly help improve overall productivity in India.

Moving up the Value ChainMNC captive centres were set up initially to take advance of the cost arbitrage in India. During the early

2000s, the organisations were not able to hire fast enough at their headquarters and choose to grow

their centres in India due to the availability of skilled labour in India. The cost and labour arbitrage were

the primary levers for the growth at the India centre till recently. The strong India value proposition

prompted these centres to grow rapidly. The average employee size of captive centres grew from 375

employees per captive in FY2003 to 575 employees per captive in FY2010.

During this period, the key focus was on process and delivery excellence. The centres were modelled

very similar to the third-party service providers and were structured to provide services to their global

centres. They were measured on their ability to deliver projects at lower cost, higher quality and on-time

delivery. The managers at these centres were resource managers with exceptional people management


skills with ability to manage large project teams. The project requirements often came from the global

headquarters. The India captive centres focused on project execution and delivery.

The IT captive centre focused on basic application development, maintenance and testing activities. The

BPO captives initially off ered voice-based customer interaction and transaction services. The ER&D/SPD

centres focused on product sustenance and quality assurance activities. The centres also worked at lower

levels of maturity often in operational and engineering support models.

Over the last few years, MNCs have realised that India captive centres have lot more to off er than just

cost and talent arbitrage. The rapid growth in market opportunities in emerging markets have made

companies realise that they need to transform their India centres to focus on innovation and use the

centres as a gateway into the emerging markets.

Today, many of the captive centres have evolved in their maturity and operate as strategic partner to

their headquarters. Many IT centres have global leaders who run global IT operations from the India

centres. The captive centres have consciously focused on increasing business analysts, product managers,

programme managers, vertical/functional domain experts, technical architects and other functions at

the India centre. The centres have also helped their global organisations in creating completely new

business units and helped not just in bottom-line impact but also in top-line impact.

BPO captive centres have moved into models where they are able to create complex analytical models

to help measure and improve the business processes. Some of the BPO captive centres host global

leadership roles for complex processes in areas of F&A, HRO, Procurement, Banking and Analytics. BPO

captives have been a key driver for India becoming a hub for high-end knowledge process service delivery

accounting for almost 50 per cent of Indias total knowledge based services revenues.

The ER&D/SPD captive centres are focused on creating new products from their India centres. Many

of the organisations have set up incubation groups within their India centres. These groups research

and develop product concepts with emerging markets and global relevance. The successful innovations

from the incubation groups are transferred to the business units within the organisation to productise

these innovations.

ChallengesIn spite of the success of the captive centres, they continue to face a number of challenges in terms of

cost, talent, innovation, productivity and business continuity. Many of the captive centres have however,

successfully resolved their challenges using industry best practices.

Cost: Cost escalation is been a key concern of the global stakeholders with captive centres in India. They look at the compensation increase year-over-year and relate it to the overall cost increase at the India

centre. The operating costs during the period FY2007-10 is expected to have grown by 8 per cent. However,

in-depth analysis of operating costs between best-in-class and median captives show the existence

of a wide gap in terms of costs. A median captive has almost double the level of operating costs as a

best-in-class captive centre. The large diff erence in cost structure can be explained by the diff erences in

underlying practices being followed. Captive centres with optimal talent pyramid, maximum utilisation

of existing infrastructure, eff ective travel policy and use of local service providers have been able to

successfully address cost-related challenges.


Talent: Lack of experienced talent pool and high attrition are key talent-related issues faced by captive centres. The transformation of the captive centres to value centres requires them to develop specialised

skills and domain expertise in a short duration. The lack of availability of this talent slows down the

transformation at some of the centres. Best-in-class captive centres have devised innovative strategies to

develop the talent through expat programmes, partnerships with universities, internal/external training

programmes and cross-centre mentorship programmes.

Attrition is a key issue at these centres as they do not have a concept of bench resources, often used by

services providers to reduce the impact of attrition. Closer analysis of the attrition issue throws up some

interesting facts best-in-class captives have an attrition rate that is signi cantly lower than median

captives; compensation is not the only factor for attrition. Organisations that focus on job satisfaction,

career growth, constant employee communication, work-life balance are able to successfully manage

the attrition issues.

Productivity: Global stakeholders often cite the lower productivity from their India captive centres as a key challenge. They perceive that the individual productivity at the India centre is lower than the

individual productivity at the headquarters. Expectation mismatch, communication and management

overheads, lack of travel, lack of customer access and micromanagement came out as the key reasons for

the diff erence in productivity. The average experience level of talent at developed geographies is higher

than in India and is misconstrued for lower productivity at the India centre. Best-in-class captive centres

are able to operate at same or higher level of productivity by establishing the key drivers that improve

productivity and work towards improving these drivers. The key drivers include talent development,

process optimisation, lab infrastructure, engagement models and automation.

Innovation: Innovation is one of the key focus areas for the Indian captive centres. Once the captive centres started delivering end-to-end projects from their India centre, the expectation of the global

stakeholders moved from delivery quality to innovation and new ideas. The key constraints are: lack of

access to customers, lack of product management capability and evolving product development mindset

of engineers. The growth of the emerging markets is helping organisations solve the customer access

problems. Many captive centres now have direct access to customers in Asia Paci c. It gives them a

sample of the global customer requirements. Organisations are also encouraging a risk taking culture

within and are focused on interventions that provide incentives for engineers to develop new ideas and

also partner with the external ecosystem. The innovations focused on emerging market and new business

models are getting more traction at the India centres.

Business continuity: Organisations with over 30-40 per cent of headcount for any function or business unit are worried about business continuity. They look at other locations to expand their global footprint.

Many organisations have realised that most other global locations dont off er similar advantages as India

and are now looking at Tier 2/3 locations within India. We have seen cities such as Chandigarh, Nagpur,

Coimbatore become a preferred location for MNC to set up their second or third centre in India.

Way ForwardIn FY2009-10, over 40 captives have either expanded operations or set up new centres in India. Almost

40 per cent of the new captives are ER&D/SPD focused, while the remaining are off ering a mix of BPO

and IT services. India accounted for 33 per cent of total worldwide new captive announcements in Q1 2010


itself, 11 centres with planned investments of over USD 800 million. 5 of these planned captive centres

are in Tier 2/3 locations. The future growth of captives in India hinges on six key themes:

Product and business model innovation Captive centres in India will focus on developing new products with emerging markets and global relevance. The incubation centres within their organisations will

become a key source of ideas and products. The presence of various IT, BPO and engineering functions

in India will allow organisations to experiment with new business models from the India centre. This will

also allow organisations to host headquarters of the new businesses from their India centre.

Global sourcing management Competency in global delivery model and globalisation is moving toward the India centres. This will allow organisations to drive their globalisation initiatives from their India

centre. This will include programme management, contract negotiation/management and governance

of third-party service providers across the globe.

Open innovation network Indian captive centres will play a key role in developing innovation network across emerging countries. This will include research partnerships with universities, joint development

with third-party service providers and also with technology start-ups in India. Organisations who have

platform-based products will leverage the India centre to create ecosystem around their platforms and

encourage the technical community to contribute to the platform initiatives.

Global location support India captive centres will increasingly support global locations outside of the headquarters for their IT, BPO and engineering needs. The close proximity to Asia and other emerging

locations will allow India centre to take a lead in supporting these locations.

Global leadership Captive centres that have proved their capabilities will be given responsibilities to lead other global centres. India centre leaders will also take up product leadership and business leadership

roles within the organisation.

Increased breadth of services India captive centres will increase the breadth of services off ered from India. The services will expand to all support functions such as SG&A, HRO, Sales & Marketing and

Procurement functions.

The captive centres should consciously put themselves in the transformation journey to focus on

innovation and leadership from India. This will allow these centres to become the key growth engine

within their organisations. The centres will continue to play a key role helping their parent organisations

attain high level of operational effi ciency.


Lay of the Land 11

IT Captive Landscape 22

BPO Captive Landscape 31

Engineering Research & Design/Software Product Development Captive Landscape 40

India Value Proposition 49

Challenges for Captives 55

Way Forward 68

Appendix 83

Contents


Lay of the Land


The growth of captive off shoring market in India has been phenomenal till date, with revenues of ~USD 11 billion in FY2010, almost 22 per cent of total IT-BPO industry export revenues

The Indian captive market has risen from USD 3 billion in FY2003 to USD 10.6 billion FY2009. It is

estimated to touch USD 11.1 billion by FY2010, or 4.8 per cent increase from the previous year

Majority of the contribution comes from the ER&D/SPD segment which has consistently contributed

around 44 per cent of the market size over the last 3 years

The captive industry has signi cantly grown over the last 5 years and currently has representation

from most of the verticals like Aerospace & Defence, Automotive, BFSI, Bio-Technology, Chemicals,

Computer Hardware, Education, Electronic/Electrical Equipment, Energy, Healthcare, Industrial,

Semiconductors, Software/Internet, and Telecommunications, etc.

Software, Semiconductor and Telecommunication verticals together contribute around 30 per cent

of the captive market size


The demonstrated success of Indian IT vendors in the Y2K phenomenon prompted increasing number of MNCs exploring captive off shoring opportunities in India

Large number of MNCs from the Software, Semiconductors, Telecom and Banking domains set up

their operations in India between the years 2003-06

Software, Semiconductor and Telecom domains still remain the main areas of interest for

captives, with growing concentration in Aerospace, Healthcare, Pharmaceuticals and

Biotechnology domains

Owing to the global economic scenario, India witnessed a dip in the number of new centres being

set up over the last 12 months

In the last 24 months, the Indian captive industry has witnessed increased investments in Knowledge

Services/BPO-related activities (growth of shared services)


North America and Europe happen to be the largest investors in the captive space; together they contribute to more than 90 per cent of the captives in India

76 per cent of the captive centres located in India have their parent organisations based out of

North America. 38 per cent of these organisations are from the software vertical. Semiconductors

and telecommunications together contribute another 31.5 per cent

The next highest representation has been from Europe 17 per cent. The contribution from other

parts of the world like APAC, Japan, etc. has been minimal. However, organisations from across

the world have perceived India as a destination for multiple activities like IT outsourcing, BPO and

ER&D/SPD


More than 750 IT-BPO captives present in India with close to 400,000 employees

India boasts of a huge MNC presence with a strong base of 758 captives. This sector is largely

dominated by the presence of ER&D/SPD organisations. 84.5 per cent (641) organisations perform

ER&D/SPD-related activities from their captive centres

These captive centres have employed around 389,674 people in India. 38.5 per cent of the talent

pool is based on captive IT outsourcing. Similarly BPO and ER&D/SPD contribute 32 per cent and

30 per cent of the talent pool respectively

Bengaluru being a major destination for most MNCs, has helped nurture the captive talent pool

growth. 44 per cent of the captive talent pool is based out of Bengaluru


While the majority of captive centres are located in the top 6 cities, other Tier 2/3 locations are starting to gain momentum

India has witnessed remarkable growth in the number captive centres established in the last decade.

Most of the large centres started their rst centre in Bengaluru and slowly started to expand into

other cities

Today, most of the captive centres are located in the Top 5 cities (established IT hubs) of Bengaluru,

Mumbai/Pune, NCR, Hyderabad and Chennai. Bengaluru has been the hub for outsourcing for most

multinationals and has become the host for 381 organisations. There are about 103 centres in

Tier 2 cities

Captive centres prefer Tier 2 locations for expansion, business continuity reasons. 28 per cent of

the companies now have more than one location within India. 20 organisations have more than

5 centres in India

Few captives have considered Tier 2 cities for cost bene t reasons. However, lack of infrastructure

and inability to attract middle and senior level management is hampering the growth in

these cities


The evolution of the captive landscape in India has been supported by critical drivers such as abundant talent, low-costs, supportive infrastructure and business environment

The initial drivers for most multinationals to set up captive centres in India were cost arbitrage and

the huge talent pool availability. At that time, lack of knowledge about outsourcing by both the

parties (HQ and India centre) was perceived as a major challenge

The demonstrated success of the global sourcing model in India gave a further llip to the overall

growth of the industry between 2005-2007. The captive market size in FY2008 reached a whooping

USD 9.6 billion from USD 3 billion in FY2003

With the economic meltdown, though the landscape did not change drastically, there was a

slowdown in growth and cost arbitrage again became a major driver for organisations. Organisations

concentrated in becoming operationally more effi cient

Organisations are now looking at driving innovation and transformation to create more value from

their India centres. They now understand the role of emerging markets for their products/services

in the future, and the advantage of being close to such markets

Moving forward, the need for global leadership from India centre is going to be the most important

aspect for organisations to further enhance their business in the emerging markets


As a result, the captive landscape is starting to show signs of maturity across multiple activities, attracting more and more organisations to explore opportunities going forward

Over the last 25 years the Indian captive ecosystem has matured in various services. ER&D and SPD

are high on the maturity curve followed by application development and infrastructure management

services

The primary reason for this growth is the vast base of ER&D/SPD organisations in India. Organisations

in this space have moved from being a pure cost arbitrage centre to an innovation centre. Also,

many organisations now have global leaders operating from these centres

India will witness rapid growth in services like technical/customer support, professional services,

nance and accounting. Many organisations have established their F&A shared services centres in

India to support all geographies

However services like Sales & Marketing, HR, Procurement & Logistics, etc. are in the emerging

phase and will take time to reach the next level of maturity. Most of the work carried out in these

service lines are transactional in nature. Also in Sales & Marketing, due to customer disconnect,

the work is currently limited to doing collaterals and documentation, though is changing rapidly.


Successful captive units have migrated along two, often overlapping paths enhanced value or effi ciency

Sustainable captives in India have migrated along two, often overlapping paths enhanced value or

enhanced effi ciency. The extent to which one or the other choice is made determines the ongoing

business model for the captive

Value players typically focus on enhancing value to the parent organisation, while incrementally

increasing economic efficiency without disrupting current delivery model, e.g. a number of

engineering captives have in particular used India as a place to derive value for global products,

and a core centre for emerging market products

Effi ciency players focus primarily on enhancing economic effi ciency. They have mature processes,

strong internal measurements and controls, and achieve a high degree of standardisation and

automation. They encourage a culture of thrift across the organisation


Improving operational excellence has been key focus for captives in India

In the past, IT-BPO captives used a plethora of frameworks and guidelines, myriad operational

assessments and improvement techniques. Organisations measured their performance on the

basis of key operational metrics such as utilisation, attrition and FTE costs. Lack of communication

and focus on organisation led to silo approach in operational improvement strategies, as a result

of which they were ineff ective

Now, captives have a consolidated approach that organisations inputs from the onshore customers

and the off shore operations teams across all operating areas, on metrics as well as underlying

practices. More value can be unlocked if both off shore organisations and clients strive for end-to-end

project and process optimisation. This would require that they jointly de ne a common operations

assessment and improvement framework


Captives have made a signi cant impact on India, and on global business

Over the years, captives have played a stellar role in making India the global leader in the

IT-BPO outsourcing landscape. Captives today account for over 1 per cent of Indias GDP, and support

indirect employment of 1.4 million people

Captives have played a key role in creating brand India as a global sourcing destination, and

establishing 'proof of concept'. Captives have played a leading role in establishing an R&D and

product culture focusing on IP creation, platform products and establishing India as a design hub

Further, the captive drive towards higher value work has enabled the availability of

highly skilled manpower for the entire industry, and made India a hotbed for process expertise

and effi ciencies.

Additionally, captives are playing a major part in developing India and other emerging

markets-speci c products out of India, in addition to promoting entrepreneurship opportunities

Captives in India have added signi cant value to parent organisations not only through cost savings

and access to talent, also by increased process effi ciencies across geographies, leveraging the

24/7 value chain, leading to faster time-to-market of solutions and products, establishing global

best practices, and spearheading eff orts to penetrate emerging markets


IT Captive Landscape


IT captives have experienced the fastest growth in India in the past 4 years

The captive IT services market has increased from USD 0.9 billion in FY2003 to USD 3.2 billion in

FY2009 with a CAGR of around 21 per cent

There were about 45 captives in this segment before the year 2000. Exponential growth has been

observed during 2002-2007; when close to 80 captives were set up in this segment alone. At present,

the Indian captive industry has 153 captives focusing on IT-related activities which represent an

increase of 240 per cent in the last 10 years

The captive IT industry is well-represented by most of the verticals including BFSI, Retail, Software,

Semiconductors, Telecommunications, Electronic/Electrical Equipments, Energy, Industrial, etc.

High talent pool availability for IT services, primarily due to the talent pool generated by the growth

of service providers in India, is one of the key drivers for organisations across diff erent verticals to

choose India as their destination for IT off shoring

The software vertical contributes to 38.5 per cent of the total IT captives in India, followed by BFSI

which contributes around 17 per cent


BFSI, software and telecom verticals account for more than75 per cent of the total installed base of talent pool withinIT captives

BFSI is the dominant vertical in the IT captive space with 23 of the global banks currently having a

captive presence in India including some of the largest banks across the globe

Software vertical is the second largest in terms of headcount, and organisations predominantly

leverage India from an internal IT/professional services standpoint

Telecom vertical is fast emerging with 15 organisations currently leveraging India for activities

spanning from application development, system integration to IT consulting

Only 18 per cent of the total IT captive centres in India have a headcount of more than 1,000 and

the average headcount for all captive centres in the IT space in India is about 650


Though North America accounts for the majority of the captive centres, European organisations including some of the large banks are increasingly leveraging India

North America has been the biggest adopter of IT captive outsourcing both in terms of number

of captives and the revenue generated. 69 per cent of the IT captives have their parent

organisation based out of North America and have contributed to 61 per cent of the IT captive

market size in 2009

Though 23 per cent of the IT captives are based out of Europe, they contribute 34 per cent to the

market size

153 captives have set up 300 centres across diff erent cities in India like Bengaluru, Pune, Mumbai,

Hyderabad, NCR, etc.

Bengaluru continues to retain its position in hosting the maximum number of IT captive centres


Testing services and application development and maintenance are prime focus areas for IT services captive centres

The major focus areas for the IT captives in India are testing, application development, Infrastructure

Management Services (IMS), system integration and IT consulting

Testing services is the major focus area for IT captives focus area contributing 46 per cent to the

market size. Testing includes maintaining the IT applications built internally for running the day-

to-day operations of the organizations

Application development includes developing custom applications for internal purposes of

the organisation and forms the second major focus area. This sector makes up 34 per cent of the

market size

IMS forms the third major focus area and providing services like database administration, web

operations, desktop management, service desk, incident management, etc. to all the offi ces located

globally

Systems and network integration include building computing systems internally by combining

hardware and software products from multiple vendors

IT consulting is seen as a niche area and very few organisations practice this at their captive

centres. Organisations who are ahead in the off shoring maturity curve like Oracle, SAP, etc. are

now beginning to provide IT consulting solutions like SAP or Oracle implementation to their other

offi ces globally


IT captives are increasingly using their India delivery base to off er services beyond application development such as testing, infrastructure management and consulting services

Application development & maintenance is a mature function in the Indian IT industry and is

primarily driven by organisations in the BFSI and retail industries. From a pure captive perspective,

BFSI vertical currently dominates the market for ADM in India

Organisations across verticals such as BFSI and retail are now starting to leverage their existing

operations for growth; captives are starting to leverage hybrid models (with vendors) to cross

leverage capabilities

Technology disruptions such as cloud/SOA allows a level playing eld for Indian captives and

are increasingly being looked upon

Organisations performing ER&D/SPD activities are now looking to move in-house IT-related work

to their captive centres in India

Especially for ER&D/SPD captive centres, which account for more than 20 per cent of the global

headcount, the growth in terms of headcount ramp-up has been slow. Internal IT is now being

thought of as a new growth engine

With the license revenues dipping for many organisations, product-based organisations are

consciously focusing on services (delivered from low-cost destinations) in order to increase customer

wallet share and smoothen revenue ows

Captive Landscape in India28

The recent acquisitions by Dell, Xerox, etc. have established the fact that organisations globally

are moving towards increase in percentage contribution of services revenue. With this changing

phenomenon, the importance of professional services is increasing rapidly

As the talent pool required for professional services is similar to IT, we can expect growth of this

function in captive model

Further, the growth of Indian service providers in this space has created a vast pool of talent in

areas such as implementation services, migrations/upgrades, sustaining services, etc.


Captive centres in India are aggressively being leveraged to provide Infrastructure Management Services to the parent organisation

IMS is fast catching up. The early movers in this space have faced some key talent-related challenges

while maturing this function at the captive centres in India

The resources (skill sets, capabilities, etc.) required for IMS function are similar to level

3 technical support

Shared model has emerged in IMS where activities such as desktop support, application services

are being outsourced to vendors while activities such as information security, server and network

infrastructure support activities are preferred within the captive model

A few organisations have tried to leverage vendor resources to work out of their centre to deliver

IMS activities. However, this is still a nascent phenomenon. Vendors who off er managed services

engagement model are preferred for IMS function as compared to captive centres


Captives are now starting to leverage cloud-based testing automation to optimise investments and standardisethe processes

Testing has been an important part of the off shoring business for most of the captives in India.

Organisations have built strong expertise in this space and are world leaders

However, organisations are now looking at cloud-based solutions for automating testing.

Organisations are coming up with business model innovations enabling exible and standardised

testing processes

In the previous model, captives had to plan for dedicated resource allocation and create an entire

plan for the testing processes. As the testing practice has matured and been commoditised,

organisations are now taking the cloud approach with access to a library of test cases

This is especially true for mature and sunset products where the customer feedback, challenges and

customer pain points are very well-understood. Such systems generally have pre-built scenarios,

powerful analytical engines with search engines to search for relevant test cases. Having such a

system reduces the time and eff ort involved in testing and is a cheaper option in the long-term


BPO Captive Landscape


Over 100 captives use India as a delivery base for a wide range of BPO services, generating revenues of USD 2.8 billion in FY2010

The Indian BPO captive market forms 25.4 per cent of the total captive market size. When compared to the IT or ER&D/SPD captive segments, the growth in BPO segment has been steady from USD 1.1 billion in FY2003 to USD 2.7 billion in FY2009. In terms of the number of captives off ering such services, there has been an increase from 26 in FY2000 to 113 in FY2009

The BPO market is well-represented from all verticals like software, research/consulting, BFSI, telecommunications, etc. 30 per cent of the captives carry out research/consulting activities for their parent organisations.

Organisations are increasingly realising the advantages of having BPO captives. Big organisations like Dell have set up knowledge-based services teams to provide business intelligence to headquarters. These teams would play a diligent role in collecting data from across the organisation to help business units in making strategic decisions. Many organisations now have dedicated knowledge teams for their HR, F&A activities. For e.g., a dedicated knowledge team for HR can help in providing on-time data like projected attrition, expected requirement for new candidates, etc. for decision-makers in a faster and simpli ed manner. This would help in proactively shaping or changing strategies and better prepare for future issues that need to be addressed.


BFSI, software and computer hardware are key verticals for BPO captives in India

Most of the banks have a large BPO (voice and non-voice) presence in India providing support

services to global customers of the parent organisations

Organisations in the software vertical have been at the forefront of offshoring F&A, and

HRO-related activities to India

The last 18 months also witnessed faster ramp-up at the existing knowledge process services in

India providing market research and analytics services to global customers

The average BPO captive currently stands at about 1,250 per centre

The BPO captive space is dominated by large-sized organisations leveraging India across

sub-categories

Most of the smaller organisations prefer to outsource BPO-related activities to third-party

providers owing to cost constraints


Though most of the BPO captive centres are spread across top 5 locations in India, organisations are now looking towards exploring low-cost Tier 2/3 locations within India

78 per cent of the BPO captives have their parent organisations based out of USA and have

contributed 82 per cent of the BPO captive market size in 2009

113 captives have set up 226 centres across diff erent cities in India like Mumbai, Pune, Bengaluru,

Chennai, Hyderabad, NCR, etc.

Mumbai being the nancial capital of India, has attracted 58 captives to set up their operations in

this location. This is followed by Bengaluru and the NCR


F&A and knowledge-based services account for the majority of BPO-related activities for captives

The major focus areas for the BPO/Knowledge Services captives in India are Finance and Accounting

(F&A), Customer interaction services, Knowledge-based services, Sales & Marketing, HR and

Procurement & Logistics

F&A forms the major focus area for 27 per cent of the captives in India. This is majorly dominated

by large players in the BFSI segment like American Express, Bank of America, Citibank, Fidelity, JP

Morgan, Goldman Sachs, etc.

Knowledge-based Services form the focus area for 19 per cent of the captives. This space is

dominated by players from BFSI and research/consulting. A T Kearney, Bain, McKinsey, Gartner,

Forrester, Frost and Sullivan are some of the big players in this space

While Customer interaction and support constitutes 20 per cent of BPO captives revenues,

a signi cant chunk of global high level L3, L4, L5 support for hi-tech companies is delivered

from India


F&A services with varied complexity across the BPO value chain are currently being off shored

F&A accounts for a majority share of the BPO function in India with majority of the activity

concentrated in BFSI, utilities & healthcare verticals

India is seeing rapid growth in the F&A off shoring segment. 31 per cent of the various processes

in the F&A segment have high propensity for off shoring to captive centres in India. Around

42 per cent of the processes have medium propensity of off shoring

With good availability talent pool, off shoring in the F&A segment is bound to grow rapidly in the

near future

Indian F&A captive centres are gradually evolving into F&A shared services centres to deliver greater

business impact at the HQ in terms of higher value delivery and enhanced cost savings


HRO has vastly matured over the years with a number of processes now being provided by captives in India

HR outsourcing to captives is relatively in a nascent stage when compared to internal IT or F&A

with very select processes being delivered out of the global centre

This function being a 'high-touch' function prevents a large chunk of the activities from

being off shored

Workforce administration & leave management, payroll and recruiting & staffi ng are the most

off shored functions to the India centres

Increasingly organisations of relatively smaller size (Headcount ~ 9,000; Sales; USD 3-5 billion) are

also outsourcing their HR processes to India


Within inside sales value chain, lead generation and requirement analysis sub-processes have higher propensity to be off shored

Planning & identi cation, lead generation and requirement analysis & ful llment are the typically

off shored processes in inside sales

Organisations are leveraging inside sales team in their India centres for hosting live online demos

for potential end-users, and help them with product information

The major drivers for off shoring of inside sales functions to India include large talent pool, time

zone advantage, regional market understanding to penetrate the APAC market

This function is gaining increasing importance since customers prefer talking directly to the

organisation as opposed to a systems integrator or a re-seller


Knowledge-based services account for over USD 500 million for captives; captives have played a key role in making India a knowledge-based services delivery hub

Knowledge Services is one of the key trends that were bought in the Indian off shoring landscape by

the captives in the late 1990s. The initial success of ITO-BPO in India prompted many organisations

to experiment outsourcing of high-end knowledge-based services to India

The trend started with General Electrics captive unit in Bengaluru providing risk analytics service

to GE capital in 1997, followed by American Express performing risk analytics for many of its credit

card divisions across the globe

Talent pool for statistical modelling and analytics is also very limited in India. Cost of talent for

vertical specialists including business consulting, statistical modelling, actuarial analysis, etc. is

very high. Only a few consulting/banking captives have been able to hire and retain top talent at

their captive units


Engineering, Research & Design/Software Product Development Captive Landscape


The engineering services captive market in India has shown signs of fast growth with over 400 engineering and R&D captives having been established in the last 5 years

The Engineering Services Research & Development/Software Product Development (ER&D/SPD)

segment is the fastest growing segment within the captive industry in India, with a CAGR of 24

per cent over the last 7 years, to reach revenues of USD 4.9 billion in FY2010. While in 2001, there

were only 170 captives in this segment, exponential growth was witnessed between 2003 and 2007,

where close to 400 new captives were set up

Organisations in embedded systems are the pioneers in India, while off shoring of engineering

services design activities by organisations in manufacturing began in early 2000. Many new

automotive and aerospace organisations are setting up/expanding their operations

High talent pool availability for ER&D/SPD in India has been a key driver for the growth of this sector.

Most of the worlds top ISVs including Microsoft, Oracle and SAP have their R&D centres in India.

These R&D centres have achieved signi cant scale since their inception and are now positioned as

the second largest centres outside the headquarter countries


The hi-tech verticals account for the majority of installedbase of talent pool engaged in R&D-related activities at the captive centres

The ER&D/SPD segment has a well-rounded representation from various verticals like software/

internet, telecommunications, semiconductors, industrial, automotive, aerospace, defence, etc.

31 per cent of the captives in this segment are from the software vertical. It is followed by

15 per cent from telecommunications and 12 per cent from semiconductors

The average ER&D/SPD captive currently stands at about 200 per centre

22 per cent of the captives in this segment have more than USD 10 billion as revenue. Around

60 per cent of these captives have a headcount of less than 500 people

Small R&D centres usually employ high quality talent at a compensation level slightly above the

industry average. These centres form a signi cant portion of the global R&D headcount and share

a high amount of product ownership and responsibility with their parent organisation. And hence,

there is a greater percentage of innovation happening from these centres.

The ER&D/SPD segment employs over 1.1 lakh employees, with the software/internet segment

accounting for the biggest share, around 28 per cent of the total base


While Bengaluru continues to be the key hub forengineering-related activities in India, other locations such as NCR and Mumbai/Pune are fast catching up

Unlike the IT and BPO markets, in the ER&D/SPD market the revenue contribution is well-represented

by organisations in North America, Europe and APAC regions

76 per cent of the ER&D/SPD captives have their parent organisations based out of North America

and they have contributed 69.4 per cent to the market size in 2009

641 captives have set up 868 centres across diff erent cities in India like Bengaluru, Mumbai, Pune,

Chennai, Hyderabad, NCR, etc.

Bengaluru hosts 313 captive centres in this segment, which contributes to 58 per cent of the total

ER&D/SPD talent pool

Bengaluru is expected to be the frontrunner driving the growth for R&D off shoring in India while

Pune and NCR would follow the league. Pune is expected to grow in SPD and ER&D while Delhi/

NCR is expected to grow in embedded systems capabilities.

Moving forward, large organisations will plan the operation of their second centre to tap talent

that is unwilling to relocate. The second centre will help strengthen business continuity plans. Also,

these centres with strong education ecosystem will act as satellite centres to main centre and help

in managing costs eff ectively


Captives focused in the embedded, as well as the engineering services market

The major focus areas for the ER&D/SPD captives in India are Embedded Systems, Engineering

Services and Software Product Development (SPD)

Embedded services form the major focus area for 20 per cent of the captives and contribute 45 per

cent to the market size

Product development, testing and support activities are the functions most commonly off shored

to India. However, with increasing maturity of R&D centres product management, architecture

design will soon be making inroads. Organisations such as Adobe has successfully conceptualised,

developed and released products like Page Maker from India centre

Also with the increasing awareness about the emerging markets, organisations will command more

product ownership from India centres for creating localised products. This will also help in driving

innovation thus creating more value for the organisation


Despite challenges, the past year witnessed a shift in key focus areas of organisations doing engineering-related work in India

Cost arbitrage and vast availability of talent pool were the key drivers for many organisations to

have an R&D presence in India

However, slow growth in developed markets and increased focus on emerging markets has

fundamentally changed the paradigm. The drivers of cost and talent are now giving way to newer

dimensions of innovation and access to newer markets in the region

While operational effi ciency still remains critical, organisations are now looking at ways beyond

these to add higher value

ER&D captives are now increasingly focusing on competency creation; focus on increasing maturity

of the centres, etc.


Engineering captives have chosen a few focus areas fortheir growth

With cost arbitrage and talent pool being no longer the only attractive proposition, organisations

are looking at various growth themes for their India centres. Broadly, the growth themes focus

on building products for emerging markets, innovation, localisation, increasing productivity and

product ownership

There are multiple examples of organisations who have achieved phenomenal success by focusing

on one or more of these themes, e.g. Texas instruments, CISCO, Microsoft, etc.


Captives are striving to create competencies and synergies through proper project selection and aggressively focusing on driving innovation for local markets by creating innovation culture

Competency Creation India centres are striving to create location-speci c competencies and strive to be the primary

location for the selected areas

Business units should be provided with a broad framework for them to choose the right projects

and location

Project Consolidation Evaluate the complete project portfolio at the India centre and move back the projects where there

is not enough competencies within the India centre or in the Indian talent market

This helps India centres in developing deep domain expertise in few areas rather than spreading

thin across product areas

Project Selection De ne processes to strategically select the right projects to be executed at the India centre


Create Synergies Improve organisation alignment by enabling a platform to enable joint decisions among BU heads

as well as the associated global centre heads

Balance the tension/synergies between the India centre leadership and the business leadership

Innovation for Local Markets Drive innovation for the local market by building a compelling business case to channelise investments

Full edged integrated eff orts involving engineering, market development and sales teams should

be undertaken

Education on R&D Globalisation Increase the knowledge level of engineers at various global centres to eff ectively work with

India centre

Holding knowledge workshops to explain the 'Know-how's' of working with India teams at middle

management level

Innovation Culture Inculcate the culture of 'Customer-led innovation' across development teams

Innovation programmes are sponsored by senior leaders in the organisation

Both monetary and non monetary rewards and recognition programmes can be introduced


India Value Proposition


8 factors have led to establishing India as the leader in the global sourcing landscape and being 'distinctive'

Clients looking at outsourcing in a more strategic and inclusive manner have generated a need for

demonstrating greater value and diff erentiation. Providers in India both third party and captive have

responded well to these demands, thus creating a role model which others are trying to replicate. India

started as a low-cost location providing routine technology services on project basis, moving on to

providing BPO services and now integrated service off erings, large scale contracts and product/service

design capabilities thus including the bene ts of cost, quality and innovation.

Today, virtually any off shoring service can be performed in India and new areas are being constantly

invented including customer facing functions apart from knowledge management and legal processes.

This expansion has turned Indian IT locations into hubs of the global off shoring universe with more

spokes reaching out to increasingly diverse locations.

This industry has built a unique 'service-led' export-oriented model away from the traditional

product-based play. Cost eff ective and high reliable delivery model of caters to the core process of

its customers across the globe. The emergence of the Indian domestic market has also attracted

organisations to set up operations that focus on developing solutions for emerging markets.


India continues to hold onto its position as the leading and cost effi cent provider of talent

India continues to be the most nancially attractive location for off shored services across the world.

While a number of Asian countries off er competing services, in addition to locations in Eastern Europe

and South America, service delivery from Tier 1 centres in India still works out to be signi cantly lower.

Tier 2 centres in India off er a further 20-30 per cent reduction in the operating costs.

Availability of skilled talent has been the foremost attraction for India to emerge as a global sourcing

country. Indias graduate out-turn has more than doubled in the past decade. It is steadily adding fresh

graduates to the workforce 3.7 million in FY2010.

Technical graduate out-turn, comprising engineering degree (4-year programmes) and diploma/

MCA students (3-year programmes), is expected to be over 571,000. Graduate out-turn across other

non-technical streams including science, commerce and arts is expected to cross 3.1 million.


Government and private enterprise working in tandem to create a robust infrastructure ecosystem

The growth of the IT-BPO industry in India has been supported by an enabling policy environment.

The Software Technology Parks of India (STPI) scheme was crucial to the development of the

industry, the Special Economic Zone (SEZ) scheme is creating investment, employment, exports and

infrastructural development. Further, the development of Tier 2/3 locations in India off er a signi cant

cost advantage.

The telecom revolution in India has led to average call rates decreasing by 70 per cent, handset prices

by 50 per cent, while computer prices had declined by 40 per cent. This allowed the IT-BPO sector to

access ready connectivity and world-class services at declining costs and enjoy unhindered growth.

Today, Indian telecom ranks amongst the largest and the fastest growing markets in the world, adding

over 10 million wireless subscribers a month.

Similar explosive growth has taken place in the real estate sector. The ability of private developers

to quickly adopt world-class standards (large oor-plate designs, energy effi cient designs, etc.) has

ensured that supply of Grade A infrastructure has always met the demand.


India presents an enormous market in itself, with a rapidly growing economy and increased demand from the burgeoning Indian middle-class

India has become, (in Purchasing Power Parity terms), the fourth largest economy in the world leading

to global organisations customising products/services for the Indian markets.

Indias economic growth has accelerated signi cantly over the past two decades resulting in an increase

in the spending power of its citizens. Real average household income has roughly doubled since 1985.

With rising incomes, household consumption has soared and a new middle-class has emerged. It is

expected that India will go through a major transformation over the next decade and emerge as the

fth largest consumer market provided it continues its high growth path. As incomes rise, the shape

of the pyramid will change considerably. About 18 per cent of the total households will move from

poverty to more sustainable life and Indias middle-class will swell by 17 per cent in terms of number

of households.

This will lead to a signi cantly diff erent socio-economic structure in India with declining poverty

levels and increasing income levels. In the next 5 years, the number of rich people in India is expected

to double, while the middle-class is expected to grow by 50 per cent. While much of this wealth will

be created in the urban areas, rural households will bene t too. Indian spending patterns will also

evolve with basic necessities declining in relative importance and categories such as communication

and healthcare growing rapidly. But in order to achieve these results, the country must continue to

reform and modernise its economy as well as address signi cant shortfalls in its education and

infrastructure systems.


IT-BPO organisations in India are creating aninnovation-conducive environment within their organisations

Rapid maturity of Indian IT-BPO organisations, coupled with the need to move up the value chain

and access new markets has prompted organisations to focus on creating an innovation-conducive

environment. Most of the large organisations have moved from ad hoc eff orts at innovation to

putting in place structured programmes to drive innovation through the breadth and depth of their

organisations. Apart from identifying a leader for innovation in their organisation, they have introduced

several organisation-wide internal initiatives to create a rich environment which encourages employees

to innovate. Thus, organisations are seeking to utilise their own domain experience, gained over the

last two decades, to generate business impact for clients through innovation.

The drive to create core intellectual property has meant that the larger organisations have set up

in-house research labs for applied research. They are also increasingly integrating with the academia

on research projects at the institutes as well as having academicians consult them. Thus, innovations

on core technology are now being generated as opposed to a predominant focus on process innovation

in the past. Further, even innovations to internal process have been led by the development of core

technology. There has been several instances of IP creation by Indian organisations, along with

substantial work in new technology development, model and process innovation.


Challenges for Captives


The captive business model has inherent challenges

In spite of the success of the captive centres, they continue to face a number of challenges in terms

of cost, talent, innovation, productivity and business continuity. Many of the captive centres have

however, successfully resolved their challenges using industry best practices.

Cost: Cost escalation is been a key concern of the global stakeholders with captive centres in India. Captive centres with optimal talent pyramid, maximum utilisation of existing infrastructure, eff ective

travel policy and use of local service providers have been able to successfully address cost-related

challenges.

Talent: Lack of experienced talent pool and high attrition are key talent-related issues faced by captive centres. Best-in-class captive centres have devised innovative strategies to develop the talent through

expat programmes, partnerships with universities, internal/external training programmes and cross-

centre mentorship programmes.

Productivity: Global stakeholders often cite the lower productivity from their India captive centres as a key challenge. They perceive that the individual productivity at the India centre is lower than

the individual productivity at the headquarters. Best-in-class captive centres are able to operate at

same or higher level of productivity by establishing the key drivers that improve productivity and work

towards improving these drivers. The key drivers include talent development, process optimisation,

lab infrastructure, engagement models and automation.


Innovation: Innovation is one of the key focus areas for the Indian captive centres. The key constraints are: lack of access to customers, lack of product management capability and evolving product

development mindset of engineers. The growth of the emerging markets is helping organisations

solve the customer access problems. Many captive centres now have direct access to customers in Asia

Paci c. It gives them a sample of the global customer requirements. Organisations are also encouraging

a risk taking culture within the organisations and are focused on interventions that provide incentives

for engineers to develop new ideas and also partner with the external ecosystem.

Business continuity: Organisations with over 30-40 per cent of headcount for any function or business unit are worried about business continuity.


Operating cost in ation has been tempered by the recession; best-in-class captives have maintained exemplary control over operating costs

Rising operating costs are cited as a key deterrent to Indias competitiveness by industry players.

Captives need to follow global standards in technology, infrastructure and processes that can lead to

in ated costs. Operating costs during the period FY2007-10 is expected to have grown by 8 per cent.

While the economic recession again cushioned the rise somewhat in the past year, overall operating

costs are expected to grow further in the future.

Again, in-depth analysis of operating costs between best-in-class and median captives show the

existence of a wide gap in terms of costs. A median captive has almost double the level of operating

costs as a best-in-class captive. The large diff erence in cost structure can be explained by the diff erences

in underlying practices being followed. Captives with a sound talent management plan hiring people

with the right skills, setting correct job expectations and creating visible career paths, leading to lower

attrition at lower compensation levels, providing a 35 per cent operating cost advantage. Similarly,

captives focusing on productivity minimising idle time for agents and multi-skilling their workforce

for data and voice processes have a 20 per cent cost advantage. Lastly, improving management

infrastructure to increase the span of control and lower support headcount can give an additional

25 per cent cost advantage.


Though there has been periodic increases in salaries, cost savings are still signi cant in India


Taking proactive talent development initiatives by encouraging innovation and ideas has worked for some organisations

Expatriate Movement Movement of expatriates continues to be the key for talent/technical leadership development

Few organisations have also adopted interval approach for expatriate relocation, for e.g. IBM

and CISCO

Immersion Programmes Engaging promising technical engineers in early part of their career with senior technical leaders

at HQ

Send engineers to HQ location for longer periods of time, i.e. 6 to 12 months which helps in

understanding the product context

De ne the success of HQ leader based on the number of engineers who he/she has mentored and

trained in the de ned time period

Establish Product Management Teams Provide opportunity for customer interaction in local markets by establishing a product

management team in global locations


Initially product managers will shadow HQ teams from global location

Promote Innovation Culture Conceptualise innovation month in a year where engineers are motivated to nominate their ideas

and compete with global teams

Initially handhold the global centre engineers by screening and mentoring them through

the process

Help articulate a business case for the best ideas at local level and then pass it on to global teams

for further validation

Provide Ownership Provide end-to-end ownership on certain components of the product which are developed at

global locations

Local leadership to drive the product management (move a senior leader to global centre for 3 years).

In this scenario, HQ teams will continue to report to the leader based out of global locations

Consistently mentor and build next level leadership during the time period

Empower and enable partner management at local leadership level

University Partnerships Partner with local universities for research projects

Encourage engineering teams at global locations to drive the partnership locally

Provide best practices and metrics to manage the relationship


While high attrition levels are a challenge, best-in-class captives have exerted control by putting in place robust career growth plans

High attrition levels have always been a prime concern for captives in India. Attrition is a bigger issue

because captives do not keep a bench, and do not hire extensively from campus. While attrition

levels peaked in FY2007, the advent of the economic recession reduced attrition levels to manageable

proportions. Even then, a closer analysis of the attrition conundrum throws up some interesting

facts:

Best-in-class captives have an attrition rate that is signi cantly lower than median captives

Compensation is not the only factor for attrition

Further analysis showed that best-in-class captives, that had lower attrition, were also paying lower

wages. This was possible because they focused intensely on employee engagement. These organisations

successfully cross-skilled people, de ned explicit career tracks for them, groomed them into leadership

positions, actively worked on retaining team leaders. These measures bind the employees emotionally

to the organisation induce them to build long-term careers with the organisation.

Thus, captives that have robust career management plans have successfully managed the attrition

problem in India.


Embracing innovation can lead to new opportunities for captives

MNCs are changing their focus from developed to emerging markets but R&D subsidiaries are still

not their primary agents for innovation. However, these subsidiaries are now looking at 3 popular

models for innovating for the emerging markets

But the success of these models necessitate a mindset change at HQ and an organisational change

at the global level

Build local growth teams from the ground up Like new organisations: Zero-based innovation needs zero-based organisational design. Hiring practices, reporting structures, titles, job descriptions,

norms for working relationships, and power balances between functions all should be evolved to

support globalisation

Shift power to where the growth is: Without autonomy, the local growth teams wont be able to focus on the problems of customers in emerging markets. Speci cally, they need the power to

develop their own strategies, organisations and products

Customise objectives, targets and metrics: Innovation by nature, is uncertain. Its more important to learn quickly by effi ciently testing assumptions than to hit the numbers. Relevant metrics and

standards for LGTs the ones that resolve the critical unknowns are rarely the same as those

used by the established businesses


Have local growth teams report to someone high in the organisation: The executive overseeing the LGT has 3 critical roles: mediating con icts between the team and the global business, connecting

the team to resources such as global R&D centres, and helping take the innovations that the team

develops into rich countries. Only top managers have the access to experiment with people transfers,

organisational structures, and processes to see what works

Build new off erings from the ground up: Given the tremendous gulfs between rich countries and poor ones in income, infrastructure, and sustainability needs, reverse innovation must be

zero-based. These wide diff erences cannot be spanned by adapting global products


Captive organisations will need to identify multiple 'innovation themes'; diff erent sources and enablers of innovation

As captives look beyond labour arbitrage, need for innovation is emerging as the dominant theme for

captive expansion in the future. While in the past, organisations struggled with execution-related

challenges, such as lack of senior management focus, innovation frameworks, talent and nancial

investments, captives now are in the process of unlocking the vast innovation potential of India-based

delivery centres

Building a culture of innovation within the organisation is paramount by providing freedom to take

risks, assigning responsibilities, and incentivising teams. Key innovation enablers include research

labs/Centres of Excellence (CoEs) focusing on innovation, tools, workshops and symposiums, and

organisational changes rede ning focus on innovation. Innovation ideas can be sourced from customer

demands and experiences, internal brainstorming and collaboration with third-party advisors.

Innovation ideas are centred around themes such as off erings for emerging markets, improving user

experience and new business models.


Low productivity of many captive centres is a hindrance, but a number of captives have put in place levers that substantially enhance productivity levels

Global corporations often cite low productivity of their Indian captive centres as their primary challenge.

The captive's view on this is often diametrically opposite with most of them considering their

productivity levels to be in the range of headquarters. While this suggests that there might exist a

mismatch in expectations between the management of diff erent locations, along with lack of eff ective

communication channels, it is interesting to note that best-in-class captives in India are seen to have

higher productivity levels than parent organisations, which means that this is a challenge that can be

overcome if right processes are put in place.

Eliminating waste, accurate volume forecasting, automation tools, cross-skilling initiatives (that enables

job rotation and work load balancing) and a strong training programme are some of the tools by which

best-in-class captives have been able to increase their productivity levels by 10-15 per cent each year.


MNCs are building development centres in Tier 2 cities in India as a business continuity plan

Emergence of low-cost Tier 2 cities as an alternative to the Tier 1 cities for off shoring has opened

gates for increased MNC investments

MNCs have set up centres in cities like Coimbatore, Mysore and Madurai. Most of the Tier 2

cities off er low-cost of living thus, featuring as attractive locations, coupled with entertainment,

communication and basic facilities

Also medium to large IT-BPO organisations have significantly benefited from the local

talent pool

Local governments have done well lately in order to promote their cities as R&D and IT services

hubs as an alternative to the nearby well-established Tier 1 cities. A large number of technology

parks are now coming up in Tier 2 cities which provide good tax incentives to R&D organisations


Way Forward


A number of trends are shaping the future of IT-BPO captivesin India

Product and business model innovation: Captive centres in India will focus on developing new products with emerging market and global relevance. The incubation centres within their organisations will

become a key source of ideas and products. The presence of various IT, BPO and engineering functions

in India will allow organisations to experiment with new business models from the India centre. This

will also allow organisations to host headquarters of the new businesses from their India centre.

Global sourcing management: Competency in global delivery model and globalisation is moving towards the India centres. This will allow organisations to drive their globalisation initiatives from their India

centre. This will include programme management, contract negotiation/management and governance

of third-party service providers across the globe.

Open innovation network: Indian captive centres will play a key role in developing innovation network across emerging countries. This will include research partnerships with universities, joint development

with third-party service providers and also with technology start-ups in India. Organisations with

platform-based products will leverage the India centre to create ecosystem around their platforms

and encourage the technical community to contribute to the platform initiatives.

Global location support: India captive centres will increasingly support global locations outside of the headquarters for their IT, BPO and engineering needs. The close proximity to Asia and other emerging

locations will allow India centre to take a lead in supporting these locations.


Global leadership: Captive centres that have proved their capabilities will be given responsibilities to lead other global centres. India centre leaders will also take up product leadership and business

leadership roles within the organisation.

Increased breadth of services: India captive centres will increase the breadth of services off ered from India. The services will expand to all support functions such as SG&A, HRO, Sales & Marketing and

Procurement functions.

The captive centres should consciously put themselves in the transformation journey to focus on

innovation and leadership from India. This will allow these centres to become the key growth engine

within their organisations. The centres will continue to play a key role helping their parent organisations

attain high level of operational effi ciency.


GE has brought a new organisation model with a changed mindset to foster innovation from emerging countries

GE has mastered the concept of reverse innovation and is already reaping the bene ts both in

monetary and technology terms

The primary drivers for reverse innovation are:

- Need to have low-cost products to scale and succeed in growth markets

- Pre-empt competition from emerging giants in India & China

The challenges faced by GE were:

- Existing products 1990s ultrasound priced at USD 100,000 and above and targeted at

sophisticated hospitals in China

- Too expensive for the market; poor sales of currently offered solutions; inability to

achieve scale

GE took a robust approach to master this concept. As a rst step, they built a LGT model,

basically shifting power to where the growth is centred. They built this team from ground

up just like a new start-up. This team would directly report to senior management in

the organisation

Accordingly they came up with an entirely new set of off erings for the emerging markets from ground

up. Further, they customised the objectives, targets and metrics to t the emerging markets


The impact was that GE could build a low-cost portable ultrasound priced between

USD 15K to USD 100K which has produced revenues of greater than USD 200 million

Similarly, many other MNCs are now looking at India for product and business model innovation

LG developed a low-cost air conditioner targeted at the Indian market. After widespread success

in India, they have taken this product to developed markets and are gaining market share rapidly

Philips India introduced a crank up, or free-power, radio in the Indian market that didn't require

any batteries since it works on mechanical power through the movement of a rotary arm. This had

huge success in the power-starved regions of the country. Philips is taking this product to its other

markets in the Asia Paci c region

Teams at the India centre must act as catalysts to increase the organisations focus on emerging

market opportunities. Leadership team should work towards allocating a percentage of the

cost savings to build products for India. India team better understands the local customers and

market needs

MNCs should capitalise on their advantage of being in an emerging market like India and motivate the

teams here to take product ownership for local markets. Moving forward, this is a huge opportunity

that no MNC can aff ord to miss


Captives are now looking at various innovative business models for non-linear growth

Captives are now making eff ective use of the ecosystem for creating innovative business models.

One of the computer manufacturing organisations collaborated with one the vendors to come up

with an innovative business model. Through this model, all the customer care calls are converted

to prospective leads

Similarly IBM is leveraging the university ecosystem in creating services innovation. The objective

is to research and develop IPs for streamlining automated service processes

Documents

Captives in India Complete Report