IT Captives (also known as Global Capability Centers (GCC)) are increasing consistently and account for more than $28 billion in revenue. In 2019, more than 75 global companies including Manhattan Associates and Experian set up new centers or expanded their GICs (Global In-House Centers) in India as they tapped into local talent with skills in newer areas like Digital and Analytics for manufacturers to source enterprise IT solutions.
COVID-19, Working from Home, and the Future of Captives:
COVID-19 and its worldwide repercussions have severely impacted the manufacturing industry. For many employees, Work from Home (WFH) has become the norm. Suddenly, owning an offshore delivery center (ODC) and campus seems very inefficient for organizations, as CFOs face Cost Savings and Cost Optimization challenges and seek new strategies. Now, manufacturers need strategic solutions that still provide the enterprise IT solutions they need – captive monetization.
ISG recently reported an increase in the number of backlogs that have developed at several captives, which creates delays in technology rollouts and other IT sourcing. Around 40% of all captives have less than 500 employees, and this current scenario is testing their resilience.
These captives face challenges like ensuring productivity while providing WFH capabilities and other capabilities for their employees – all while their parent companies are facing the challenge of reducing costs. Simultaneously, they continue to spend on fixed costs like rent as well as variable costs like electricity, hardware and software, and connectivity charges.
WFH setups have increased expenses overall due to employee needs like portable laptops and secure home connectivity. They have also incurred increased communications costs due to the majority of the employees needing cell phones.
Having a captive at a time like this may not provide the strategic solutions it once did for manufacturers. These organizations can use a Captive Monetization strategy to ensure cost optimization. In this strategy, a System Integrator (SI) takes over captive operations and pays the client for the value of the captive’s assets (center, real estate, hardware, software, and employees). The client then contracts with the system integrator for the delivery for software projects.
An India-based System Integrator acquired Citibank’s captive for $505 million, and another U.S.-based System Integrator acquired UBS’s captive for $75 million. This captive monetization setup ensures that the parent company receives a timely infusion of cash while guaranteeing minimal disruption for day-to-day organization operations.