SYDNEY, 21 JULY 2009 - When Western businesses first stumbled upon the idea of developing their own offshore centres, as opposed to outsourcing to India's rapidly growing technology giants, many thought they had solved the conundrum of cost arbitrage versus loss of control.
With financial markets crashing, the tide has turned, however, and the number of big name global institutions selling their captive centres to those same Indian firms has led many to write obituaries for the strategy.
Citigroup, Barclays, Philips, GE, Prudential, Ericsson and Aviva are among those that have sold their Indian centres to outsourcers, and others are seeking to join the list. Insurance firm Axa is looking to reduce its Indian footprint, AIG's Indian software unit is up for grabs, and UBS has its business process and knowledge process outsourcing centres in Hyderabad and Poland on the market.
With Indian vendors willing buyers, it is looking to many analysts as if the benefits for those on both sides of a deal are helping to bring the subcontinental adventures of many corporations to an end.
The executive in charge of analysing potential captive centre acquisitions at Indian outsourcer Wipro, chief strategy and M&A officer K.R. Lakshminarayana, says there is a clear trend towards companies looking to sell their Indian centres. With more than $US1 billion ($1.2 billion) in the bank, he says Wipro and its cashed-up Indian peers have the whip hand and are keen to buy companies that will then guarantee them long-term outsourcing deals to continue to operate the centre.
"Companies want to sell, but they also want to guarantee that they have a continued reliable service from the centre, so it is a huge advantage for companies like us, as long as we have the appetite and resources for it," Lakshminarayana says.
"Technology firms using captives to do core work and core R&D will continue to grow their centres. But there are others that moved to India solely with the purpose of leveraging the cost arbitrage and they are now seeing that, in the current climate, they can achieve that without the headache of owning the centre."
Asia-Pacific president of advisory firm TPI, Arno Franz, says that depending on the individual circumstances, it can be cheaper to run a captive centre than to outsource. However, he says the financial climate means financial services firms are looking to free up capital and cash in on their centres, while Indian IT firms are looking to increase their capabilities.
The quickest way for an outsourcing company to develop new marketable skills is to buy them, so captive centres performing specialised business processes become prime targets.
Director of Sydney-based independent consultancy Mindfields, Mohit Sharma, says the Indian companies have evolved in the last five years to become gurus of driving out cost-centre efficiencies and leveraging economies of scale. He says the race is on among the Indian IT specialists to diversify their offerings and attract new customers to outsource commoditised business processes.
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