Article Title - Make or buy?
Economic Times
26th Aug 2004

That is the question. But there’s no question that growing in India is unavoidable for both captive centres as well as third-party vendors. The rumblings are beginning to surface, but it is too early to predict if it can turn into a trend. Domestic software exporters are counting on it as it would mean an upswing in their fortunes. The issue is the rethink that some captive development centres in India are doing on their status -- staying captive or reverting back to what they earlier did -- outsourcing to third party software developers. The feeling is more pronounced with captives smaller in size, those with a sub-100 employee headcount, who having experienced the benefits of outsourcing to India decided to set up in-house development centres.

A few senior managers of captive centres that Networked spoke to, though not wanting to go on record, say they are pondering the viability of staying captive. Escalating wages, scramble for hiring talent, ballooning attrition and cultural challenges along with a host of minor irritants are pushing them to seriously consider the need to be in the captive mode. Companies providing software services however are more vocal. “It is bound to happen and it is turning into a trend,” say some, while others say that captives will continue to co-exist with third party providers.

Although instances of captives folding up are not many, there has been a beginning. Deutsche Software, the software arm of Deutsche Bank, sold its operations to HCL Technologies, while Wipro acquired the research and development outfit of Swedish major Ericsson. Germany’s Dresdner Bank which too had a development centre closed its outfit. There are few small sized outposts of MNC firms which have also shut operations, but it is not very clear if they succumbed to the pressure of managing a remote centre or they moved of India due to business compulsions say officals of STPI, Bangalore.

Vivek Paul, chairman of Wipro Technologies does not see this as a trend. Some captives, he says, may prefer to shut shop to monetise as besides upfront payment they can also benefit from low cost services. The biggest accelerator for captives is the pressure faced by companies to grow their India presence, he says, adding that small sized captive centres will face immense pressure on getting talent. Although they can initially resort to the strategy of paying more, they will find it difficult to retain talent as they cannot offer a growth path for their employees.

Ram Menon, senior vice president of worldwide marketing at Tibco, which runs a small 40 person development outfit at Pune, however, says that getting the right kind of talent has not been an issue. The kind of high end development work done by Tibco India attracts and retains talent, he says. For some companies that have several operations across the globe, managing a centre in India will not be an issue while for others it will be difficult to justify the overheads, says Phaneesh Murthy, CEO, iGate Global Solutions. He too is of the view that the career aspirations of the staff and the salary increases necessary to ensure retention are all things that management which is not familiar with India, will have a hard time coming to terms with. Software service provider Symphony Services, which aggressively pitches itself as a viable alternative to MNC software product development firms, says the trend is obvious and is most apparent with Independent Software Vendors (ISVs).

Ajay Kela, president, Symphony Services India says that over the past decade, Indian IT companies which have done a great job of serving IT departments of Global 1000 companies, have established the model, infrastructure and perfected the process to develop software from 10,000 miles away. Such successes will push Global1000 captives to move work back to service providers again.

“The next generation of IT services companies that were established during the last three to four years have focused on climbing the software innovation ladder and doing work exclusively for ISVs.

These companies also triggered a large reverse brain-drain compelling mid-to-upper-management and developers from US-based companies (mainly of Indian origin) to return to India. This influx has provided ISVs the comfort factor to bring their high-end software product development to service providers.” Kela says that earlier ISVs took the route of setting up captive centres as there were simply not enough players in the market providing product development focus or services. Today the choices are many.

“Setting up captive operations is a complex, non-trivial task. Running an operations several time-zones across, with differently local sensibilities is tough and but for certain ISVs of scale, captive operations remain a significant challenge.

A captive’s longer time to scale, higher costs, lower productivity and the complexity of overall operations, challenges the build-it-yourself mindset,” he adds in defence of third party software providers. Software industry watchers says that there are several third party providers in the country who have the expertise needed to start, manage and ramp up an offshore centre, which is why many firms are now providing BOT service to MNCs who are still unsure of operating in India.

According to Kela, captives experience dramatically slower ramp-up as the first two years are spent on operational issues (recruiting, ever changing facility needs, IT infrastructure, government and regulations).

Typically captives ramp to 75-100 in a year (with much lower productivity). Slower ramp virtually eliminates the cost advantage of going offshore for larger organizations but leaves behind the pain of off shoring for the first 3-5 years. While enterprise software development subsidiaries can afford to wind up operation in favour of contracting work to specalised providers, engineering centres will find it difficult to do so fearing IP (intellectual property) loss.

Lakshmi Narayanan, president and CEO, Cognizant Technology Solutions, says the prime concerns of captives are privacy and data security. R&D; centres and those captives doing high end core product development work are not likely to change over to a third party vendor.

Likewise, most BPO companies that are operating on the in-house mode would not like a change in their status, he adds.

A view echoed by Murthy, who says that unless the work is of a highly confidential nature, IT or software work will be done with partners rather than subsidiaries. "On engineering work, I think opinion is divided – we may have some companies keen on keeping their centres because of the kind of work being done."

Analysts like Gartner say that unlike software services, most companies would like to have an in-house BPO arm. In a report on out sourcing in the BPO industry, Gartner analysts say that companies contemplating on in source vs outsource for their BPO operations should consider the fact that there are only a handful of providers in India who can claim to combine end-to-end process expertise and off shore delivery capabilities. BOT, they say, is a viable model for companies India as a BPO destination. While the debate continues, the inflow of companies into India continues to grow. Bangalore, for instance, has been attracting two foreign companies every week, which some IT industry analysts view as a loss of business for Indian software suppliers. Dismissing the growth of captives in the country as a threat, Wipro’s Paul says the outsourcing pie is increasing for India and many among them besides setting up their subsidiaries will parallely continue to outsource to local vendors.

Adds Murthy, "I think expanding to India is a given and I do not foresee any rethink on that. But certainly the model in which they expand will undergo a rethink."

Captive centres or not, it’s a win-win situation for India and its employable millions.