Most captive operations in India feel the heat

Almost 90 per cent of companies that started their captive operations (set up to provide internal services and in some cases sell them to clients) in India in the last 18 months are operating with less than 300 people each which is not sustainable in the long-run.

They all started captives, following the success of a handful of global firms like Oracle, Texas Instruments (TI), Cisco and Motorola in scaling up their captive development centres by 'leveraging the cost-benefit'.

Ericsson, for instance, started its own captive in India almost three years ago, failed and later sold it to Wipro due to its unsustainable model. Pervasive Software closed its offshore development centre in Bangalore seven months ago, but it continues to work with its long-term partner Aztecsoft.

Mimosa Systems, a US-based privately-held VC-funded software product company has captive centres in Bangalore and Pune, but works with Symphony Services, its partner in India.

What they forgot was that the global firms took over 10 years to gain expertise in managing distributed research and development (R&D).

"They come with some holistic objectives, but without much preparation. They fail to understand that companies like TI, Motorola, Cisco or SAP have reached this stage after years of experience. They should understand it is a journey, not an overnight activity," said Sudin Apte, senior analyst and country head (India) "� Forrester Research.

He says unless a captive has a certain volume and unless it scales up to a 300-odd people organisation, it fails to justify its existence.

Ajay Kela, COO & MD, Symphony Services, "When clients decide to set up their own entity, they want to maintain control and better understand the marketplace for future. But typically it takes about three years before the captive centre established itself well and during this time, most of them lose productivity."

Industry sources say high staffing costs and excessive investment in infrastructure "� added up due to reasons like large number of expatriates, cost of certification, cost of building domains "� are some of the reasons behind the failures.

While the costs keep on rising, they serve just one customer "� their own company. However in a third-party, the costs get distributed across the company, across multiple projects.

Besides, while the cost-benefit plays a huge role in attracting the global firms to set up their base here, researchers say the typical cost structure for a captive is at least 20-25 per cent and even in some cases about 40 per cent higher than what they would have got from the third-party product companies.

"Based on our engagements with some of our clients, who also run captive centres in India, the typical per employee cost for a captive in India is about $6,500 per month, whereas we charge about $3,500-$4,000 per person per month, for the same piece of work," says Gowri Shankar Subramanian, CEO of Aspire Systems, an offshore product development company.

One reason why many of these captives fail in attracting and retaining talent is their poor brand visibility in India and limited options for career growth. This is the why attrition rate in captives are 20-25 per cent higher as compared to the third-party.

"People prefer to work for a larger Indian brand or very large global brand, rather than working in a relatively unknown US company with a $300-$400 million topline," says Govindarajan V R, CTO, Aztecsoft.

Typically, there's also a belief that captives generally handle low-end work and the decision making is very much headquartered-centric .