IT service providers based in India are approaching UK corporations with proposals to acquire their captive IT delivery units.
According to a report in The Economic Times in India, suppliers with large delivery capabilities in India are eyeing the IT and back-office services captives of UK banks Barclays and HSBC.
Since the 1980s, large businesses have taken advantage of low-cost regions by setting up operations to perform business processes for their multinational operations. After a lull beginning in 2008 with the financial crisis, businesses have started building captive centres again.
Multinational businesses use captive centres in low-cost regions of the world to take advantage of the low cost of labour and the high availability of skilled workers. Through these centres, businesses supply services to a company’s global operations including IT, HR and finance.
Research from Loughborough Business School found that, in the 12-year period between 1985 and 1997, 13 captives were set up in India. In the four years between 1998 and 2002, 21 were set up in India. This accelerated between 2003 and 2005, with 51 captives set up. Between 2006 and 2010, there were 36 captives set up in India.
Read more about captive IT centres
IT suppliers taking over captives is not a new trend. During the 2008 downturn, there was a trend of large western companies selling captives to suppliers to raise funds. In 2008, Tata Consultancy Services (TCS) acquired Citigroup Global Services (CGS) for £300m. CGS was the India-based business process outsourcing (BPO) arm of bank Citi.
In the same year, insurance giant Aviva sold a captive business process outsourcing (BPO) centre in India to WNS. These sell-offs often include clauses, so the selling business continues to receive services from the new owner for a period of time.
Once businesses have maximised the benefits of a captive centre, they often sell it off at a profit while retaining the same level of service. The IT supplier can then use scale to improve the efficiencies by selling the service to other companies that require similar IT services and business process support.
Professor Ilan Oshri, at the Centre for Global Sourcing and Services (CGSS) at the Loughborough University School of Business and Economics, said captives regularly change hands and a company that focuses on bringing captives and interested suppliers together has reported over 40 deals a year for the last three years.
“In 2008, there was a spate of captives being sold to IT suppliers but it was for very different reasons than today,” he said.
“In 2008, big companies sold captives as part of consolidation. Today, IT suppliers are looking at captives that offer niche service capability or take them to new geographies.” He said it is sometimes considered better to acquire to achieve these aims than to build from scratch.
Oshri added that there is interest from Indian IT services firms in buying captives in Eastern and Central Europe.
Mark Lewis, outsourcing lawyer at Berwin Leighton Paisner, said Indian companies are looking at buying captives because the market is slow. "There are very few mega-deals and what deals there are shorter. In buying a captive you can create a long-term relationship with a big customer and sell the service to others." He said this is particularly the case in BPO.