India has long been a favourite destination for multinational companies to set up their own offshore centres for captive use. In recent times, questions have been raised whether this model was viable and capable of scaling up. Now, in a new study published on such captive units, key stakeholders feel they are delivering on cost savings and service expectations. The research by the Everest group, which polled 102 executives from 56 firms, comes months after a Forrester study which created a stir because it said a majority of captive units in the country were hit by high costs, attrition and other performance issues. "We still think the captive model is very robust.

The trend of divestiture — Citigroup selling its captive — is not new. It has been done before with WNS and Genpact for strategic reasons. In fact, the same year that GE (General Electric) sold Genpact, Citi increased its stake in e-Serve and de-listed the firm," said Everest group country manager Gaurav Gupta. According to Mr Gupta, captive units are trying to monetise the value created and growth recorded by captives in the country does not point to any reduction in work. Since 2004, captive units have grown at around 30% year-on-year, approximately the same growth recorded by the Indian offshore services market, according to Nasscom. Captive revenues have grown from $5.2 billion in 2004 to $6.9 billion in 2005 and to $9 billion in 2006, according to estimates by the Everest Research Group.

"Over time, global companies are following a hybrid strategy, using a mix of both captives and third-party outsourcers. Typically, the captives do more high-end complex transaction work,” said Everest Group head - global sourcing practice Nikhil Rajpal, in response to the higher attrition rate in captives. “There are a number of people who prefer to work with big brands like Fidelity and JP Morgan." The study cited the example of Fortune 500 hi-tech company that has "almost tripled its headcount in the last three years" to illustrate that captives in the country continued to scale up, despite sell-offs and working with third-party outsourcers. It also cited examples of a large US-based bank that planned to shift 30% of its global back office jobs to its Indian captive by 2007, a global telecom major that has more than doubled its headcount in the last years and a UK-based bank that has added four new centres in the last 3-4 years.

More companies also setting up captive units. Among the Forbes 2000 companies, 44 had India captives in 2000, 71 in 2003 and 110 in 2006. Existing captives also continue to expand — a UK-based bank has added four new centres, a European bank plans to triple its headcount in the India captive, and a global telecom major has more than doubled its headcount and added three new centres in the last 2-3 years, according to the study. However, according to Sudin Apte, country head, Forrester, and author of the study, ‘Shattering the Offshore Captive Centre Myth,’ while new captives will continue to be set up in the country, the number will come down over time as companies increasingly question their viability.

In reality, there have been enough instances to illustrate both sides of the story. While there have been instances of captive units turning third-party outsourcers or selling their facilities to third parties, others like Barclays Plc have left third-party outsourcers to set up their own units. More recently, Aviva also moved some of its contracts from third party players to its captive. "Ultimately, it is a question of what role the organisation sees for the captive. In some cases, although firms may want to outsource, third-party outsourcers may not have that capability, so they have to go the captive route," said Ernst & Young partner Milan Sheth.