Published on February 15, 2008
Captive 2.0 – The New, Improved Version! Paul Schmidt, TPI Surinder Singh, FMR India February 14, 2008 Copyright © 2007, Technology Partners International, Inc. All Rights Reserved. No part of this document may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval© 2008, Technology Partnersprior written permission from Technology Partners International, Inc. Copyright devices or systems, without International, Inc. All Rights Reserved. 0
The Journey to Captive 2.0 – the New, Improved Version! Copyright © 2008, Technology Partners International, Inc. All Rights Reserved.
The 3C Framework for Sourcing Capability, Capacity and Cost are the underlying sourcing objectives Deploy new and innovative services that Capability Capability materially enable the attainment of strategic business objectives. Provide access to scaleable and resilient Capacity Capacity sources of talent and infrastructure to enable attainment of business goals. Cost Cost Achieve substantial and sustainable improvements in total cost of operations. Copyright © 2008, Technology Partners International, Inc. All Rights Reserved. 2
3C … the Compounding of Sourcing Attributes For experienced adopters of outsourcing, we perceive a shift towards a more balanced emphasis and greater compound orientation among Cost / Capability / Capacity. 2007 Strategic Zone 2010 Cost Capability Capability Cost Capacity Capacity Cost is King Cost is King Compounding Effect Compounding Effect Near-term cost attributes Relative equilibrium among sourcing Access to skilled resources imperatives Effort-oriented, rather than Capability prominence for business productivity-driven value dimensions Tendency towards strategic goals Copyright © 2008, Technology Partners International, Inc. All Rights Reserved. 3
Value and Economic Efficiency Offshore delivery units exist across across a range of value-efficiency combinations High Unserviceable Value as defined by the buyer Speciality or the parent firm is indicated by Captive a combination of the following: • Supporting new product/ service Best-in-class 3rd Party development • Faster time to market Value • Enhanced capability/ capacity • Access to new markets ‘Factory’ • Automation/ Reengineering of existing 3rd Party processes Economic Efficiency: The ‘Me-too’ Captive ‘Price charged’ (Rate or Transfer ‘Me-too’ 3rd Party Price) is the market measure of Unsustainable economic efficiency Low Economic Efficiency High Copyright © 2008, Technology Partners International, Inc. All Rights Reserved. 4
Shift to Managed Services is Underway – Best in Breed TPI sees strategic combinations emerge involving leading ERP software providers, infrastructure providers, and business process experts all oriented around industry solutions delivered via globally-dispersed platforms. The era of labor arbitrage orientation Corporations moving towards is nearly concluded. We are entering bundled arrangements for managed a period of updating historically services that comprise elements of simple offshore relationships infrastructure, applications and 2008-2010 will see significant operations “rationalization” of offshore delivery These will represent a new era for the resource models BPO segment of the outsourcing industry, one that has much greater The ITO and “horizontal” BPO domain-specific orientation segments will continue their segregation into best-of-breed Leverage of IT scale becomes more relevant provider contracts TPI predicts that BPO ACV will grow Providers making decisions on faster than ITO ACV for these technical/process orientation versus reasons business value focus Outcome-oriented Services emerging as the focal point for buy-side and provider-side emphasis. ACV = Annualized Contract Value Copyright © 2008, Technology Partners International, Inc. All Rights Reserved. 5
Characteristics of captive and third party players Value Focus Onshore team driving relationship Captive Third Party Leverage business Deep business knowledge/ technology Leverage onshore and proprietary expertise presence knowledge Value added services that support Create centers of Tighter integration excellence enterprise level programs with the parent unit Long duration Integrated global career paths for high Have a “seat at the table” i.e. represented customer relationship skilled employees in management & deep account Cultivate an “employer of choice” councils of the parent knowledge positioning to attract top notch talent Efficiency Focus Encourage a culture of thrift through Captive Third Party the organization Able to contain costs Fixed costs spread Strong internal measurement, through continued across a portfolio of systems and controls growth and having clients attained critical mass Leverage Scale for Automation, standardization, and Automation and SG&A costs process maturity Productivity Flatter Employee Employees with the right skills Improvements Pyramid placed in the right locations with an optimal match to type of work Copyright © 2008, Technology Partners International, Inc. All Rights Reserved. 6
Strategic Options for Existing Captive Units FMR Thinking about the way forward High Value Play Focus primarily on Unserviceable enhancing value to the parent firm Speciality Captive while incrementally increasing y economic efficiency without Pla SuperCaptive ue disrupting the current delivery Val Best-in-class 3rd Party model Efficiency Value Play Efficiency Play Focus primarily on discontinuously enhancing ‘Factory’ economic efficiency with a tradeoff 3rd Party vs. higher value capability. This could lead to clearly segmented offerings with differing cost ‘Me-too’ Captive ‘Me-too’ 3rd Party implications – in essence mirroring Unsustainable third party behavior of pricing by Low Economic Efficiency High value Copyright © 2008, Technology Partners International, Inc. All Rights Reserved. 7
Captive Lifecycle View (1) Captives follow a lifecycle model and success hinges on matching strategy and operating model to current state of evolution 2 1 2 Reverse BOT – 3rd Party 1 Sub-scale captive 4 3 2 1 Evolved captive 4 1 3 2 Start of captive 1 operations Super Captive 4 4 Captive 3 3 2 2 i2i 1 1 Hybrid Captive Evolved captive 4 3 2 1 Reverse BOT – 3rd Party/ PE Copyright © 2008, Technology Partners International, Inc. All Rights Reserved. 8
Captive Lifecycle View (2) After start-up, a captive either falters or “crosses the chasm” to become an evolved captive Captive unit with costs/ operating metrics 2 out of sync vs. market – will atrophy 1 eventually Reverse BOT – 3rd Party Exit option is a people (& assets without premium) transfer to a 3rd party. PE firms 2 have not much interest in such units 1 Sub-scale captive 4 Captive perceived as ‘strategic’ part of the 3 enterprise – ongoing growth as captive adds higher value added work and/or FTEs 2 1 Costs will be higher than median – a Evolved captive ‘premium’ the enterprise will be willing to pay in the medium term Copyright © 2008, Technology Partners International, Inc. All Rights Reserved. 9
Captive Lifecycle View (3) Multiple journey paths for an evolved captive 4 Best in class Captive – has reached scale and 3 operating efficiency of large 3rd party units 2 Serves as global servicing arm of enterprise 1 – driving standardization & consolidation and Super Captive reengineering The ‘Strategic Captive’ housing higher end/ 4 Captive KPO work/ PMO and the VMO to source 4 3 lower end work via ‘hub and spoke’ model 3 2 2 i2i Entity performing low end work with people 1 (& assets) transfer to a 3rd party/ domestic 1 Hybrid Captive contracting for people (& assets) Evolved captive With slowing growth, cost arbitrage stops – 4 enterprise does not see captive activities 3 as ‘core’. With stable operations, Captive 2 represents a monetization opportunity 1 People and asset transfer at premium – to Reverse BOT – 3rd Party/ PE ensure operational stability, transfer to a 3rd party or 3rd party/ PE combine Copyright © 2008, Technology Partners International, Inc. All Rights Reserved. 10
India-to-India (i2i) Contracting We observe that i2i contracting via a ‘hub and spoke’ model is increasing in the IT space – we expect that it will eventually start in the BPO space too Benefits Onsite Project Teams Provides access to entry level resources -several non IT parentage captive find it difficult to attract & retain entry level resources because of the perceived lack of a career path in a non-IT company Rapid deployment capability Increased Offshore Leverage Low cost commodity skills Offshore Hub Caveats of i2i setup Requires working out a payment structure that retains the export tax benefits Contractual provisions around sourcing turn around times and SLAs should be i2i Provider i2i Provider i2i Provider included to ensure satisfactory service delivery Usually it is a T&M model with profile/skill based rate card – all project risk shifts to the captive unit The India captive unit becomes a hub through which different business units procure offshore services “i2i contracting has the potential Captives focus on program management, vendor to deliver 20% to 30% savings on management and governance and are able to provide challenging career opportunities for experienced commoditized services” - Captive resources Sourcing Manager Copyright © 2008, Technology Partners International, Inc. All Rights Reserved. 11
FMR India – Case Study Copyright © 2008, Technology Partners International, Inc. All Rights Reserved.
Fidelity In India FMR 396 8,207 FIL 1,205 COLT 845 Shared Services 99 Total 2,551 Delhi/Gurgaon AMC 135 Shared Services 4 Total 139 + 10 Sales Offices Mumbai FMR 4,623 Shared Services 206 COLT 56 Bangalore Total 4,879 FMR 476 Chennai FIL 115 Shared Services 47 Total 638 Copyright © 2008, Technology Partners International, Inc. All Rights Reserved. 13
Service Evolution 2003 to 2007 2007 Centers of 2006 Excellence; Testing, Informatica Research 2005 Annual Enrollment Finance & Accounting Database Modeling Product Documentation Implementations Implementations Services Market Technical Background Vetting Securities Processing Analysis 2004 Vendor Management Process & Quality Campaign Analytics Consulting Transaction Bank Reconciliation Processing Network Operations Problem Resolution Support Production Support AAA Support Six Sigma Consulting 2003 Application Maintenance IT Development Testing Copyright © 2008, Technology Partners International, Inc. All Rights Reserved. 14
FMR India Business Plan (Strategic Objectives 2008-10) Copyright © 2008, Technology Partners International, Inc. All Rights Reserved. 15
Captive Cycles FULL PARTNERSHIP BENIGN AUTONOMY DIRECTED PROTECTORATE Copyright © 2008, Technology Partners International, Inc. All Rights Reserved. 16
The Road Ahead From Process to Business Model Offshoring MARKET BUSINESS SERVICE SERVICE BUSINESS LOOPED ANALYTICS ACQUISITION IMPLEMENTATION OPERATIONS ANALYTICS TRANSFORMATION Copyright © 2008, Technology Partners International, Inc. All Rights Reserved. 17
So what then is Captive 2.0? Captive 1.0 Captive 2.0 Organization Structure • Uniform and • Hybrid, disaggregated as required homogenous Core Capability • Process • Business Model Talent Pool • High-skilled workforce • “Horses for courses” irrespective of the type of work Benchmarking • No benchmarking or • Employee Productivity limited to a single area • Employee Utilization like employee • Employee Compensation compensation Copyright © 2008, Technology Partners International, Inc. All Rights Reserved. 18
Key Messages Captives need to continually evaluate their service portfolio in relation to the value-economic efficiency trade off Captives need to not just focus on service delivery but become the conduits through services are delivered to the parent Offshore Captive model is viable in India Benchmarking themselves against best-in-class captives, third party providers and parent operations demonstrates the viability Lifecycle view of captive helps understand the captive landscape in India Recent exits are either regular events in the normal course of business or value-realization (which illustrates the value-creation potential of the captive model) Captive 2.0 model emulates best of both worlds (captive and third party) Copyright © 2008, Technology Partners International, Inc. All Rights Reserved. 19
www.tpi.net Copyright © 2007, Technology Partners International, Inc. All Rights Reserved. No part of this document may be reproduced in any form or by any electronic or mechanical means, including information storage and Copyright © 2008, Technology Partners International, Inc. All from Technology Partners International, Inc. retrieval devices or systems, without prior written permission Rights Reserved. 20
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