In Focus
Captivating
Captives
I
T-BPO captives are evolving, innovating and tuning
themselves to the emerging landscape to remain relevant
and viable. Despite speculation about the future of these
companies, it is becoming clear that they are here to stay
and will remain a key part of the IT-BPO industry’s
growth story.
Over the past few years, there have been differing reports on the
captives within the Indian IT-BPO industry. While some research
has indicated that the captives model is unviable, other reports
have shown that it remains robust and future-proof.
However, what exactly is the captives model of IT outsourcing
and is it sustainable in the Indian context? NASSCOM has been
grappling with this question and has found some answers in
detailed research it has carried out in the market recently in
collaboration with Zinnov Consulting.
The NASSCOM-Zinnov Study on the ‘Captive landscape in India’
is aimed at creating awareness about the critical role captives
are playing within the IT-BPO sector in the country. The goal
is also to explore the contribution that captives have and are
continuing to make, to the growth of the IT-BPO industry. The
idea is to establish that not only are captives relevant to the
sector, they also have an extremely bright and vibrant future.
From the time captives arrived on Indian shores to leverage
India’s skilled talent and immense cost advantage, some
have been acquired or moved operations, yet, there are a large
number of IT-BPO captives over 750 in fact, still actively working
out of India, especially in segments such as R&D and product
engineering and generating significant revenues for the Indian
IT-BPO industry.
Captives came to the fore especially during the dot com bust
and Y2K phase, where they demonstrated value and in turn
catalysed the trend of MNCs exploring captive offshoring
opportunities in India.
From 2003-06, a large number of MNCs arrived on Indian shores
from the Software, Semiconductor, Telecom and Banking
domains, setting up their captive centres in India. While these
are still the key verticals for captives, there has also been a
growing concentration in areas such as Aerospace, Healthcare,
Pharmaceuticals and Biotechnology over the last three years.
Key drivers of the captive phenomenon
The evolution of the captive market in India has been driven by
factors such as availability of a skilled and scalable talent pool,
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 In Focus
low-costs, supportive infrastructure and a conducive
business environment.
What’s making Indian IT-BPO captives tick?
India offers a cost advantage of 30 per cent against other Asian
IT-BPO service providers and over 100 per cent advantage over • IT captives have experienced the
Eastern European captives. The country is a global leader in fastest growth in India over the past
talent output, with over 3.7 million additions to the talent pool four years
in FY2010, including 571,000 technical graduates. In order to
provide a healthy business environment, the government and • Many captives have moved up the
the private sector are working in tandem to create a robust value chain to become ‘Centres of
infrastructure system through STPI, SEZ, DTC and by building
Excellence (CoE)’ for specific areas
43 Tier 2 and 3 locations.

The NASSCOM study additionally reveals the following about
the captive landscape in India:
• The captive offshoring market has witnessed phenomenal
growth in India, accounting for revenues of USD 11.1 billion
in FY2010, almost 22 per cent of total IT-BPO industry
export revenues
• The revenues of the segment have increased at a CAGR of
21 per cent over the last seven years – from USD 3 billion in
FY2003 to 11.1 billion in FY2010
• The IT-BPO captives have close to four lakh employees
• North America and Europe are the largest investors in the
captive space, together accounting for over 90 per cent of
the captives in India
• While the majority (90 per cent) of captive centres are
located in the top six Indian cities, other Tier 2/3 locations
are also coming up as locations for captive facilities
• Successful captive units have migrated along two, often
overlapping paths – enhanced value and efficiency
• BPO captives account for almost 50 per cent of India’s total
knowledge-based services revenues
• Over 100 captives use India as a delivery base for a
wide range of BPO services, generating revenues of
USD 2.8 billion in FY2010
• Captives have transformed from cost
centres to profit centres
• Captive centres are evolving to
become Programme Management
Offices (PMOs) for offshoring to both
captives and vendors
• Captives are exploring hybrid models to
augment capabilities and add greater
value to the parent company
• Captive centres are focusing on
developing multi-lingual capabilities
to increase competitiveness
• 28 per cent of the captives have more
than one location in India and are
moving to Pune, Hyderabad, Kolkata,
Nagpur, Visakhapatnam and Chennai
to access infrastructure and huge
talent pool

Gaining maturity and providing added value
India’s IT-BPO captives are showing signs of maturity. These
organisations have been investing in improving operational
excellence through integrated frameworks, optimisation,
and collaboration.
Furthermore, IT-BPO captives have gravitated from application
development and maintenance to infrastructure management,
consulting and network integration services, as well as
cutting-edge cloud-based services. BPO captives in particular
have expanded their services portfolio to include F&A, HRO,
procurement, analytics and knowledge services, besides the
traditional customer interaction services.
The rise of ESO and SPD
In the past few years, engineering and R&D captives have
come to the fore, creating competencies and domain expertise
through proper project selection. The captives in India are in
fact, enabling the country to emerge as a design hub.
At present, over 500 captives are providing engineering and
design services to myriad industry verticals. The Engineering
Services Outsourcing (ESO) captive market in India has shown
signs of fast growth with over 400 engineering and R&D
captives being established in the last five years, up from
170 in 2001.
The ESO and Software Product Development (SPD) segments
have witnessed a CAGR of 24 per cent over the last seven years,
with revenues touching USD 4.9 billion in FY2010.
Most of the world’s top ISVs including Microsoft, Oracle and
SAP have their R&D centres in India. These centres have
achieved significant scale since their inception and are now
positioned as the second largest centres outside of headquarter
countries for many of these companies.
The way forward
It is becoming increasingly clear that IT-BPO captives will
continue to survive and thrive in India. These companies have

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already established their relevance to the Indian IT-BPO industry
by catalysing its exports; enlarging the job market; establishing
global best practices in the areas of quality, security, risk
management, business excellence; building
skill sets in new areas; developing products for emerging
markets and increasing confidence within Indian companies
to leverage globalisation.
In particular, these companies have helped foster a
product management culture within the IT-BPO sector. They
have enabled the industry to understand the concept of
product development.
Despite certain challenges related to escalating costs, lack of
talent and innovation, these companies have continued to
remain competitive. Operating cost inflation for instance, has
been tempered by the recession, and best-in-class captives
have maintained exemplary control over operating costs.
Even though salaries have increased, the cost savings are still
substantial in India. Captives have also managed to deal with
concerns related to attrition and exerted control by putting in
place robust career growth plans for employees, cross-skilling
them, and grooming them for leadership positions.
Maintaining relevance
In this way, captives have proved themselves to be indispensible
to the Indian IT-BPO industry. Moving forward too, they are
likely to remain key contributors to the growth of the sector as
well as the Indian economy. In 2009-10 itself, over 40 captives
either expanded operations or set up new centres in India.
The country accounted for 33 per cent of total worldwide new
captive announcements in Q1 of 2010 and had 11 centres with
planned investments of over USD 800 million.
Increasingly, captives are now moving towards innovative
business models to create more for the emerging markets.
They are being subjected to the fundamental changes in their
business models, where they are emerging as profit centres,
offering third-party services or acting as global sourcing
companies through their India centres. Many captives are also
expected to evolve into Centres of Excellence (CoE) providing
higher value and efficiency propositions.
There are of course exceptions, where certain captives
are following similar models and processes as their parent
Location-wise split of talent pool, 2009
In Focus
Captives have followed an evolutionary
path with different business models
and service delivery and leveraged India
as an innovation hub for emerging
economies. Global companies have
created value by monetising their
centres, building domain skills,
enhancing service delivery through 24x7
operations and faster time to market.
However, going forward, it would be
important for the parent companies
to empower the local management,
not only to derive full value, but also
to ensure that the captive can exercise
sufficient flexibility when required.”
Som Mittal, President, NASSCOM
companies, that are sub-optimal in the Indian context. The
NASSCOM-Zinnov Study suggests that such companies must
localise their global processes and empower their centres, in order
to improve cost inefficiencies, productivity and innovation.
According to the study, many captives have been adding
value to their global businesses, emerging as the key players
with robust processes and controls. Best-in-class are known
to have around 11 per cent higher productivity than their
parent organisations! They are also providing 100 per cent
savings, cutting down on attrition and creating non-linear
growth through reverse innovation, IP development and
platform products.
In the years ahead, captives are expected to expand into newer
service lines, engage in M&A activities, penetrate emerging
markets and drive faster time-to-market.
Captives are ensuring that they remain integral to the growth
of the Indian IT-BPO industry and help India establish itself as a
leader in the global sourcing market.
Headcount range of captives, 2009