The noise around business process outsourcing (BPO) captives losing its charm and being acquired by third party suppliers is familiar to the ears now. The definition of captive as a business model has evolved over the years ? giving rise to a win-win situation to both the client and the third party service provider in large captive acquisitions. Consequentially, as the concept of large scale BPO captives is on a declining spree, more and more engineering services and research and development captives are touching mind boggling numbers in terms of new centres.

Amongst the total 750 captives present in India today, 350 are engineering and R&D, against 40 BPO captives. The remaining comprises 40 ITO captives and 328 hybrid models. In India, engineering and R&D captives grew at a CAGR of 20% in recent times and 200 new captives were opened in the last three years, as per a recent report by Nasscom. The multinational companies having R&D centres in India include Intel, Microsoft, AMD, General Motors, Hyundai etc.

?Outsourcing R&D work to a third party saves only 5-10% as compared doing it in your own centre which is a captive. Also, you lose control over core activities in your organisation,? says Amneet Singh, VP, Everest Group. In spite of having IT talent in the country, there are very few third party suppliers doing engineering services or R&D in a prominent way. Even Infosys, Wipro and TCS do it on a small scale.

Location India for R&D captives

Accompanying the IT expertise, the cost of running R&D centres in India has continued to decline over the last two years and currently stands at Rs 18.2 lakh per person per year, according to Zinnov Consulting. Not surprisingly, the April-June quarter announced 38 new captives globally and 14 of them were set up in India. This is the first time that in a quarter, a captive acquisition has not taken place, says Everest.

Hyundai Motors, the South Korean company had set up its R&D centre in Hyderababd last year. Arvind Saxena, director, marketing and sales, HMIL says, ?Hyderabad was chosen because it is a developing city with adequate infrastructure. Further, it has a big talent pool as far as IT industry is concerned and this provides us with an opportunity to staff it with competent and educated people who would do a good job.? He adds that most of the developmental work is done in-house as it helps meet quality requirements as well as time and cost deadlines better and the Indian R&D centre will further help in this process.

Even IT companies like Intel have leveraged the opportunity. Praveen Vishakantaiah, president, Intel India comments, ?Our main areas of operations in India include sales and marketing, research, product design and development, IT applications development, infrastructure solutions delivery and venture capital. Today, the product development teams at Intel India contribute significantly to most of Intel’s critical products and platforms.?

Diminishing large scale BPO captives

The past BPO captives were primarily driven by its revenue impact on the acquirer in cases like TCS, Wipro and WNS. While some mid-size acquisitions last year focused on increasing vertical presence like EXL Service acquisition of American Express captive to expand into the travel services space. A similar trend was seen in deals like MphasiS- AIG or Dell-Teleperformance.

The kind of work done out of BPO captives is changing drastically and back office work is preferred to be outsourced to a third party supplier due to its large scale and cost effectiveness in outsourcing. Som Mittal, president, Nasscom says, ?Most of the BPO captives that started with initial voice-based and transaction services for the banking, financial services and insurance (BFSI) and telecom segment have increased its depth of services over the years. As a result, while many multinationals moved to India as a hub for finance and knowledge based services ? captives currently account for 50% of total knowledge based revenues from India.? He further explains that captives like Delloite, HSBC or Standard Chartered which started voice based have also diversified into different verticals.

However, with the pace at which the industry dynamics changed and improved IP laws, captives had to re-invent their value proposition to exist as a viable business model. This is exactly what the present trend has provided ? captives are no longer just cost saving options but also long-term investment options.

Saugata Sengupta, senior analyst at Tholons Advisory explains that captive acquisitions by service providers will continue into the near future, with a win-win situation for both the service provider and the client. ?The service provider not only gains the competencies of the captive post-acquisition, but also the assurance of a long-term client, while the buyer is able to exit with sizable cash and reducing management hassles.?

Thus, large scale BPO captives still remain a grey area of investment. Engineering, R&D centres are making their mark due to cost benefit and small scale.