Are captive centres back in fashion after lull?

After a lull beginning with the financial crisis in 2008, businesses are once again building captive centres in low-cost regions

Since the 1980s, large businesses have taken advantage of low-cost regions by setting up operations to perform business processes for their multinational operations and, after a lull beginning in 2008 with the financial crisis, businesses are once again building captive centres.

More and more big businesses are setting up offshore and nearshore captive centres as regulations, fears over IP security, and hidden offshore costs increase.

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 will supply services to a company’s global operations including IT, HR and finance functions.

According to figures from Nasscom, quoted in the Economic Times, India, there were over 70 new Indian captives set up by multi-nationals in 2012 and 11 existing ones expanded.

Growth into reverse

Figures from Loughborough Business School research shows that between 2006 and 2010, the growth in IT captives in India for example went into reverse. During the four-year period, the research found that only 19 IT captives and 37 BPO captives were set up compared with 20 IT and 53 BPO in the two years from 2003 and 2004.

Professor Ilan Oshri, at the Loughborough School of Business, said there has however been an increase in the number of captives being set up since the second half of 2010.

But he says an increasing amount are being established in eastern Europe. With lower labour costs and a highly skilled workforce, locations such as Romania and Bulgaria are becoming more popular. 

“They are beginning to set up in Europe because of the hidden costs associated with managing offshore locations,” said Oshri. 

These hidden costs include increases in training due to high staff attrition and travel expenses. Eastern European workers are less likely to move jobs and travel time and cost are greatly reduced.

Europe matches China and India

Oshri adds that eastern European countries have the skills and experience to match the services provided in countries like India and China. 

“A few of the eastern European countries have demonstrated that their services are on a par with other, attractive offshore locations,” he said.

Loughborough Business School’s research found that in the 12-year period between 1985 and 1997, two captives were set up in Europe and 13 in India. 

In the four years between 1998 and 2002, 12 were set up in eastern Europe and 21 in India. Then came a major acceleration between 2003 and 2005 with 51 captives set up in India and 22 in eastern Europe. Between 2006 and 2010, there were 36 captives set up in India and 25 in eastern Europe.

In 2008, following the credit crunch there was a spate of captives sold to service providers. Insurance giant Aviva and US banking giant Citigroup were among businesses that sold captives. 

Indian outsourcing supplier Tata Consultancy Services (TCS) acquired Citigroup Global Services (CGS), the business process outsourcing (BPO) arm of bank Citi, for about £300m. While the sale gave Citigroup capital during tough market conditions, it provided TCS with end-to-end IT and BPO services in the global banking and financial services sector.

Mark Lewis, head of outsourcing at law firm Berwin Leighton Paisner, believes the trends in captive centres are changing. 

“I think it is quite complicated and many highly regulated businesses are even bringing centres onshore,” he said. A large UK company is planning a back-office centre in the north of England, near universities, he added.

Risks remain

Although the control over captives is retained by the business, unlike full blown offshoring, there are still perceived risks. 

“In the finance sector, there are still concerns about captives because of compliance pressure. 

“Banks are aware that the Financial Services Authority (FSA) and other regulators will focus on operational risk and captives are a feature of this.”

Swiss bank UBS could have avoided £1.4bn losses caused by a rogue trader had a computer been used to detect unauthorised trading been more effectively, according to the FSA. The operation that should have detected the fraud is a captive centre in Hyderabad, India.

Read more on Offshore IT services