Captive 2.0 – The New, Improved Version!

Paul Schmidt, TPI

Surinder Singh, FMR India

February 14, 2008

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 The Journey to Captive 2.0 – the New,
Improved Version!

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The 3C Framework for Sourcing
Capability, Capacity and Cost are the underlying sourcing objectives

Deploy new and innovative services that

Capabilitymaterially enable the attainment of
strategic business objectives.

Provide access to scaleable and resilient

Capacity sources of talent and infrastructure to
enable attainment of business goals.

Cost Achieve substantial and sustainable

improvements in total cost of operations.

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 3C … the Compounding of Sourcing Attributes
For experienced adopters of outsourcing, we perceive a shift towards a more balanced
emphasis and greater compound orientation among Cost / Capability / Capacity.

2007 Strategic Zone 2010

Cost
Capability
Capability
Cost

Capacity Capacity

Cost is King Compounding Effect

 Near-term cost attributes  Relative equilibrium among sourcing
 Access to skilled resources imperatives
 Effort-oriented, rather than productivity-  Capability prominence for business
driven value dimensions
 Tendency towards strategic goals

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Value and Economic Efficiency
Offshore delivery units exist across across a range of value-efficiency combinations

High
Unserviceable  Value as defined by the buyer
Speciality or the parent firm is indicated by
Captive
a combination of the following:
• Supporting new product/ service
Best-in-class
development
3rd Party
• Faster time to market
Value

• Enhanced capability/ capacity

• Access to new markets
‘Factory’ • Automation/ Reengineering of existing
3rd Party
processes

 Economic Efficiency: The

‘Me-too’ Captive ‘Price charged’ (Rate or Transfer
‘Me-too’ 3rd Party Price) is the market measure of
Unsustainable
economic efficiency
Low Economic Efficiency High

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 Shift to Managed Services is Underway – Best in Breed
TPI sees strategic combinations emerge involving leading ERP software providers,
infrastructure providers, and business process experts all oriented around industry solutions
delivered via globally-dispersed platforms.

 The era of labor arbitrage orientation  Corporations moving towards

is nearly concluded. We are entering bundled arrangements for managed
a period of updating historically services that comprise elements of
simple offshore relationships infrastructure, applications and
 2008-2010 will see significant operations
“rationalization” of offshore delivery  These will represent a new era for the
resource models BPO segment of the outsourcing
industry, one that has much greater
 The ITO and “horizontal” BPO domain-specific orientation
segments will continue their
segregation into best-of-breed  Leverage of IT scale becomes more
relevant
provider contracts
 TPI predicts that BPO ACV will grow
 Providers making decisions on faster than ITO ACV for these reasons
technical/process orientation versus
business value focus

Outcome-oriented Services emerging as the focal point for

buy-side and provider-side emphasis.
ACV = Annualized Contract Value

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Characteristics of captive and third party players

Value Focus
 Onshore team driving relationship
Captive Third Party
 Leverage business  Leverage onshore
 Deep business knowledge/ technology
and proprietary expertise
presence
knowledge  Value added services that support
 Create centers of
 Tighter integration with excellence enterprise level programs
the parent unit
 Have a “seat at the
 Long duration  Integrated global career paths for high
table” i.e. represented customer relationship & skilled employees
in management deep account
 Cultivate an “employer of choice”
councils of the parent knowledge
positioning to attract top notch talent

Efficiency Focus  Encourage a culture of thrift through

Captive Third Party the organization
 Able to contain costs  Fixed costs spread  Strong internal measurement,
through continued across a portfolio of systems and controls
growth and having clients
attained critical mass  Leverage Scale for  Automation, standardization, and
 Automation and SG&A costs process maturity
Productivity  Flatter Employee  Employees with the right skills
Improvements Pyramid placed in the right locations with an
optimal match to type of work
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Strategic Options for Existing Captive Units
FMR Thinking about the way forward

High  Value Play Focus primarily on

Unserviceable
enhancing value to the parent firm
Speciality
Captive while incrementally increasing
y economic efficiency without
e Pla SuperCaptive
u disrupting the current delivery
Val Best-in-class
3rd Party
model
Efficiency
Value

Play  Efficiency Play Focus primarily on

discontinuously enhancing
‘Factory’ economic efficiency with a tradeoff
3 Party
rd
vs. higher value capability. This
could lead to clearly segmented
offerings with differing cost
‘Me-too’ Captive
implications – in essence mirroring
‘Me-too’ 3rd Party
Unsustainable third party behavior of pricing by
Low Economic Efficiency High value

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Captive Lifecycle View (1)
Captives follow a lifecycle model and success hinges on matching strategy and
operating model to current state of evolution

2
1
2 Reverse BOT – 3rd Party
1

Sub-scale captive 4
3
2
1

Evolved captive

4
1 3
2
Start of
captive 1
Super Captive
operations
4
4 Captive
3
3
2
2 i2i
1
1
Hybrid Captive
Evolved captive 4
3
2
1
Reverse BOT – 3rd Party/ PE

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Captive Lifecycle View (2)
After start-up, a captive either falters or “crosses the chasm” to become an
evolved captive

 Captive unit with costs/ operating metrics

2
out of sync vs. market – will atrophy
1 eventually
Reverse BOT – 3rd Party
 Exit option is a people (& assets without
premium) transfer to a 3rd party. PE firms
2
have not much interest in such units
1
Sub-scale captive

4  Captive perceived as ‘strategic’ part of the

3 enterprise – ongoing growth as captive
adds higher value added work and/or FTEs
2
1  Costs will be higher than median – a
Evolved captive ‘premium’ the enterprise will be willing to
pay in the medium term

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Captive Lifecycle View (3)
Multiple journey paths for an evolved captive

4  Best in class Captive – has reached scale and

3 operating efficiency of large 3rd party units
2
 Serves as global servicing arm of enterprise –
1 driving standardization & consolidation and
Super Captive reengineering

 The ‘Strategic Captive’ housing higher end/

4
Captive KPO work/ PMO and the VMO to source lower
4 3 end work via ‘hub and spoke’ model
3
2
2 i2i  Entity performing low end work with people
1 (& assets) transfer to a 3rd party/ domestic
1 Hybrid Captive contracting for people (& assets)
Evolved captive

 With slowing growth, cost arbitrage stops –

4 enterprise does not see captive activities as
3 ‘core’. With stable operations, Captive
2
represents a monetization opportunity

1  People and asset transfer at premium – to

Reverse BOT – 3 Party/ PE
rd
ensure operational stability, transfer to a
3rd party or 3rd party/ PE combine

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India-to-India (i2i) Contracting
We observe that i2i contracting via a ‘hub and spoke’ model is increasing in the IT space –
we expect that it will eventually start in the BPO space too
Benefits
 Provides access to entry level resources
Onsite Project Teams -several non IT parentage captive find it
difficult to attract & retain entry level
resources because of the perceived lack
of a career path in a non-IT company
 Rapid deployment capability
 Increased Offshore Leverage
 Low cost commodity skills
Offshore Hub Caveats of i2i setup
 Requires working out a payment
structure that retains the export tax
benefits
 Contractual provisions around sourcing
turn around times and SLAs should be
i2i Provider i2i Provider i2i Provider included to ensure satisfactory service
delivery
 Usually it is a T&M model with
profile/skill based rate card – all project
 The India captive unit becomes a hub through which risk shifts to the captive unit
different business units procure offshore services
“i2i contracting has the potential to
 Captives focus on program management, vendor
management and governance and are able to provide
deliver 20% to 30% savings on
challenging career opportunities for experienced commoditized services” - Captive
resources Sourcing Manager

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 FMR India – Case Study

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 Fidelity In India
FMR 396 8,207
FIL 1,205
COLT 845
Shared Services 99
Total 2,551

Delhi/Gurgaon
AMC 135
Shared Services 4
Total 139
+ 10 Sales Offices
Mumbai

FMR 4,623
Shared Services 206
COLT 56 Bangalore
Total 4,879
FMR 476
Chennai FIL 115
Shared Services 47
Total 638

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 Service Evolution 2003 to 2007

2007
 Centers of
2006 Excellence; Testing,
Informatica
 Research
2005  Annual Enrollment
 Finance & Accounting
 Database Modeling  Product
 Documentation Services Implementations
 Implementations
 Securities Processing  Market Technical
 Background Vetting Analysis
 Process & Quality
2004  Vendor Management Consulting  Campaign Analytics

 Transaction  Bank Reconciliation  Network Operations

Processing Support
 Problem Resolution
 Production Support  Six Sigma Consulting
 AAA Support
2003  Application
Maintenance
 IT Development
 Testing

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FMR India Business Plan (Strategic Objectives 2008-10)

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Captive Cycles

LIBERATED STATEHOOD

BENIGN AUTONOMY

DIRECTED PROTECTORATE

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 The Road Ahead

From Process to Business Model Offshoring

MARKET BUSINESS SERVICE SERVICE BUSINESS

LOOPED TRANSFORMATION
ANALYTICS ACQUISITION IMPLEMENTATION OPERATIONS ANALYTICS

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So what then is Captive 2.0?

Captive 1.0 Captive 2.0

Organization Structure • Uniform and • Hybrid, disaggregated as required

homogenous
Core Capability • Process  Business Model

Talent Pool • High-skilled workforce • “Horses for courses”

irrespective of the type of
work
Benchmarking • No benchmarking or  Employee Productivity
limited to a single area  Employee Utilization
like employee  Employee Compensation
compensation

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Key Messages

 Captives need to continually evaluate their service portfolio in

relation to the value-economic efficiency trade off
 Captives need to not just focus on service delivery but become the
conduits through services are delivered to the parent
 Offshore Captive model is viable in India
 Benchmarking themselves against best-in-class captives, third
party providers and parent operations demonstrates the viability
 Lifecycle view of captive helps understand the captive landscape in
India
 Recent exits are either regular events in the normal course of
business or value-realization (which illustrates the value-creation
potential of the captive model)
 Captive 2.0 model emulates best of both worlds (captive and third
party)

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 www.tpi.net

Copyright © 2007, Technology Partners International, Inc. All Rights Reserved. No part of this document may be reproduced in any form or by any electronic or mechanical means, including
information storage andCopyright
retrieval devices
© 2008,orTechnology
systems, without prior
Partners written permission
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Inc. All Rights Reserved. Partners International, Inc. 21