Philippines and not captives a bigger threat to third party BPO growth

DQW Bureau
New Update


Captive centers act as propellers to third party BPO vendors con-trary to perception that they are eating into the business of third party.

The growth pattern in the BPO industry makes for some interesting analysis. While it is no secret that the sector has witnessed rapid growth at 59 percent, it is also no secret that the growth has largely been propelled by captive centers. 

According to NASSCOM esti-mates, captives have registered almost 90 percent growth during 2002-03, while third party BPO vendors have grown by a mere 28 percent during the same period. The increasing announcements, which large MNCs have been making to set up base in India are also not good news as each announ-cement in turns indicates the possibility of a potential client loss.


Amidst all this, while the growth of captive centers sur-ged there were speculations about the impact of such growth on third party centers. We also started with the pre-mise that captive centers would be a threat to the growth of third party vendors but were pleasantly surprised to find very different sentiments prevailing in the industry: captive centers would not only compliment growth but would help the growth of third parties BPO centers. 

As comfort levels between the two sets of service provi-ders increase third parties will begin to gain from the proxi-mity. So what are the gains? The biggest gain is that the outsour-cing ball game was set in motion by captives. As CEO of 24/7 PV Kannan puts it, “We should not forget that the first success story in this space was due to a captive ie GE.”

Second, captives are strong in internal processes, techno-logy deployment and have mastered the outsourcing busi-ness. As managers learn and migrate between companies, learnings will be passed among companies bringing internal processes at par with inter-national giants. 


“Captives bring a lot of tech-nical and process know-how into the environment,” said Gartner India research VP Partha Iyenger. GTL customer management services chief marketing officer Shyam Bhet-hanabotla echoed the senti-ment, “Captives help in disse-minating process knowledge faster. There are many senior managers today who are from captives.”

Third, captives will be in a position to observe third par-ties from close quarters, which goes a long way in building confidence. “With the India concept getting increasingly proven, as a next step to bring about further cost and opera-ting efficiencies, captives and their parent organizations would be looking towards outsourcing many of their processes to third party BPOs,” said CEO of Infowavz Interna-tional Ltd Zia Sheikh.

Finally, over time parent companies will realize that if it makes sense to offshore it makes even more sense to out-source as it will become increa-singly difficult to justify their cost-plus based model. Certain core and confidential functions may be retained but many jobs, which are non-core, would increasingly be outsourced. 


“Captives tread a fine balance between cost redu-ction and risk and this would trigger the need to outsource in future,” said


In a recent interview with Wharton School of the Univer-sity of Pennsylvania, MD of War-burg Pincus Mimi Wolfe Stro-use stated this very clearly. “Most customers are worried about running captive centers due to operational risks and the time it takes to manage off-shore operations. Our view is that most companies look to third-party vendors to provide outsourcing services. GE is unique because of its six-sigma process.”

That be so, let’s go back to the rhetoric, can captives pose a threat? Sure they can to a certain extent as they would execute processes, which sho-uld logically be outsourced. But as most industry people agree they are two mutually exclusive domains.


 Chairman and CEO of Wipro-Spectramind Raman Roy is of the opinion that both models will continue to co-exist. “This is a huge market and there are huge needs,” he said. 

While issues like confi-dentiality, IPR related work and desire to leverage on India’s intellectual capital will conti-nue to drive the growth of captive centers, internal com-pulsions like need to focus on core-functions, justifying the cost-plus based model work in favor of third party growth. 

“It is compulsions like this that have made companies like GE explore opportunities like shared services”, said Roy. 


Refuting speculations about growth of captives being a threat, the trend has in fact been welcomed by some, “Given the amount of work that is expected to come, it is quite healthy that captives are coming on board,” said


At the same time, companies with niche competencies would always be sought after. For ins-tance, GlobalVantage is focused on collections and receivables in the financial sector, yet it has a customer who has a captive center in the country. 

“That’s because it is not our client’s competencies to do what we have to offer,” said Glo-balVantage CEO Rakesh Kumar.


Strouse points to similar attributes when she defines a successful company. “Some companies can drill down into the processes to understand where technology can provide efficiency and where better and cheaper labor can provide efficiency–then marry both. Such companies can create a lot of value.”

The road ahead

Industry experts suggest that the growth of third party vendors is poised to take off. As the outsourced world gets convinced of the capabilities the scale of work is likely to move faster. There are no boun-daries to the growth prospects of third party players while the growth rates of captives are defined by the parent companies.

“While industry growth is likely to be pushed initially by captive centers, third party-led growth will soon surge”, said


 “My bet is that many more companies will resort to the Dell, AmEx model in having a dual presence in the country,” he added.

This is because “Captives like Dells and AmExs will look at spreading their risks across centers and will outsource work to third party vendors,” opined a senior executive at GE Capital.

Such partnerships also bring up the possibility of acquisition by the larger player. In fact, acquisition may well become a trend as captives mature. Pre-sident of WNS Neeraj Bhargava said, “We see the emerging captives as future acquisition opportunity as they mature, many will be carved out.”

The problem of plenty

There are concerns among industry people that the BPO opportunity might be a pro-blem of plenty. Raising this basic issue, Roy sounds the alarm bells. “What worries me is the lack of fund inflow into new BPO start-ups of late. I am afraid that the huge billion dollar opportunity presented to us will pass by if there aren’t very many small companies ready to live up to that opportunity.”

In fact, some believe that the second wave of captive centers came about because Indian players did not have enough bandwidth to support the captive’s needs. “Many of the Indian BPO vendors are at the very early stage of their deve-lopment and don’t have the vertical and horizontal exper-tise that is necessary to deliver on many of the processes successfully,” said Sheikh.

The verdict is clear. There is room for both the categories of players in the BPO space. As the industry continues to evolve we need to heed to only one warning: not to let the huge opportunity bypass us for want of more players. A senior GE executive summed it aptly, “The challenge is not between third party Indian BPOs and captive centers but in terms of competing with other BPO destinations like Philippines.” 

Balaka Baruah Aggarwal