Charles Darwin once said, “It is not the strongest of the species that survives, nor the most intelligent; it is the one most adaptable to change.” 

Darwin had no experience of global-in-house centers (GIC) or captives (as they were first called), but his idea definitely applies to this species of IT strategy. Offshore centers gained popularity in the late 1990s, as companies sought to arbitrage labor costs by tapping into a skilled talent pool in areas like Mexico, India, eastern Europe, and Philippines. However, two decades later, COVID-19 has brought about seismic changes in the way captives operate, and its effects will last for many years. Captives must adapt to the new realities – and enterprises must address the challenges of balancing control over operations versus increasing margins and converting captives into new engine of innovation to leverage the new age of AI, ML, and automation.

Today’s Challenges for Captives

Even prior to the COVID-19 pandemic, captives were facing cost pressures because of large investments in infrastructure. Additionally, captives were historically less engaged with newer technology work (AI, machine learning, and deep learning); captives were the place to push non-mission-critical work while most cutting-edge work remained with the parent.

One result has been high attrition rates at the captive centers. Captive utilization rates swing between periods of underutilization (more resources in anticipation of an upcoming project) and the inability to scale (fewer resources due to cost constraints or improper planning), which lowers morale and contributes to high attrition. This high turnover rate, coupled with unclear mandates (are we a low-value services arm or a product-development function?), traditionally dampening innovation within captives.

Another consequence of COVID-19: Many captive centers have been hemorrhaging revenue because of additional work-from-home (WFH) costs such as reliable laptops, desktops, and security for these devices. The pandemic has created a perfect storm for cyberattacks: an uncertain environment coupled with an employee’s remote access in a public setting. Low-cost captives cannot deploy state-of-the-art cybersecurity controls, nor can they resort to splurging on insuring against the security gaps. As a result, many captives are at an inflection point and are looking to break out of their inflexible infrastructure that makes innovation difficult.

The research firm ISG has reported that approximately 40% of captive centers today have fewer than 500 people^[2]. Everest Group reports that dealing with volatility, the uncertainty of the post-COVID era, complexity, and ambiguity are forcing captive exits with the number of new captives declining. There are several reasons for this:

• Captives are facing stiff competition from a growing pool of local talent who are working from home, especially in product development and services^[1].
• The role of AI and automation to replace the tasks of staff in these captives has accelerated this trend.
• The power to attract top talent at captive centers has significantly reduced compared to top-tier IT services companies.

The COVID-19 pandemic has forced CFOs to look for alternatives to optimize costs and increase operational flexibility while ensuring minimum business impact. As a result, there is an uptick in the number of organizations re-evaluating their captive strategy and considering relocating ancillary functions including finance & accounting, customer management, and IT to top-tier IT services companies. 

Assessing Captive Strategy

Organizations can use the following heuristic, based on direct revenue impact, to evaluate their captive strategy:

Organizations that have been severely impacted: Organizations in industries such as aviation, healthcare, medical devices, consumer goods, and hospitality need to reduce their total cost of ownership. They should reconsider their captive model by selling their offshore captive to top-tier IT service providers that have vast experiences of delivering value through shared service takeovers.

Organizations that have been moderately impacted: Organizations in industries like banking and electronics can explore a sourcing and technology agreement for their captives with an IT service provider where both the organization and the service provider have a clearly defined scope of operations with the flexibility to scale up and scale down.

Organizations that have been less impacted: Organizations in industries like eCommerce, cloud, and technology industries should look at growing their captives by transforming them into Centers of Excellence (CoE) with the help of an IT service provider that can provide cutting-edge innovation. Wipro has delivered such transformations for a leading financial institution and a top technology company, in both cases converting the client’s captive from a cost center to a revenue generator.

Wipro uses its Captive Monetization Maturity Model to help enterprises identify assets to shed and to bring out the synergies from their captives. The goal of the Captive Monetization Maturity Model is to shift the focus of business leaders of the parent company from routine business operations to driving real business growth by leveraging new technologies such as AI, ML, and automation and by maximizing value creation with IP and new technology resources. This can be accomplished in a three-phase approach with focus around integrating IT, digitizing platforms, and creating value networks.

Wipro can also buy captive assets, creating upfront monetized value using two kinds of transfer agreements:

• Corporate and facilities transfer: The sale and transfer of the GIC to Wipro, including office space, computer/network/office equipment, and captive employees through a shared asset, or business transfer agreement.
• Sourcing and technology agreement: Entering into an outsourcing services agreement under which Wipro will provide ITO and other services previously performed by the captive back to the company on a fee-for-service basis.

Wipro’s Transformation Themes for Captives

Wipro has been regularly ranked among the Leaders in IT Security Services ^[4] by top analysts.

Examples of Captive Transformation

Our partnership with a leader in technology-enabled health, wealth, and human capital management (HCM) solutions showcases our experience in transforming captive entities. Wipro acquired the Indian captive center and transferred 9,000+ staff onto its books. Wipro also accepted responsibility for the services delivered from the organization’s India locations. The acquisition improved the client’s technology agility and monetized its captive asset. ^[3]

COVID-19 has created an imperative for companies to reconfigure their captive center. Early adopters have become aware of the shifting tide and are innovating via these new delivery models to generate high business value.

Darwin was right: “It is not the strongest of the species that survives, nor the most intelligent; it is the one most adaptable to change.” Captives may be less captivating than they once were, but they remain a source of real value – with the right strategy.

References

[1] - http://www.businessworld.in/article/5-Key-Emerging-Trends-In-India-s-KPO-Industry/30-01-2021-371198/

[2] - https://isg-one.com/docs/default-source/default-document-library/1q20-global-isg-index.pdf?sfvrsn=ae0c731_2

[3] - https://www.wipro.com/blogs/aswatha-amarnath/the-new-private-equity-creating-value-quickly-and-reliably/

[4] - https://www.wipro.com/cybersecurity/form/wipro-positioned-as-a-leader-in-the-it-security-service-providers-2020/