Captive BPOs: The good times seem well and truly
There is an apocryphal story about
the CEO of a European company visiting the impressive tech campus
of an IT giant in Bangalore-complete with manicured lawns and
an artificial water body. "Are your clients, including us,
paying for all this?" he asks. The story encapsulates the
angst that many MNCs feel about the very high profitability of
Indian it service vendors-Tier I vendors like TCS, Infosys and
Wipro, for instance, have an average net profit margins of 24
per cent, compared to 6-8 per cent for their multinational competitors.
Not surprisingly, most MNCs come to the conclusion that they will
be better off setting up their own "captive centres"
and, thus, save on vendor margins.
Other arguments-like protection of IPR and the need to ensure
quality by having end-to-end control over the processes-are also
offered by companies that set up captives in India. Over the last
two years alone, more than 300 such captives have popped up in
India. Companies like Ford, Bosch, Lear, Schneider Group, Honeywell,
JP Morgan, Morgan Stanley, Tesco and HSBC have all jumped onto
However, a recent report by Forrester Research Inc., a research
and consultancy firm, titled Shattering the Offshore Captive Center
Myth, states that the captive centre reality differs sharply from
the perceptions of many companies. The report says that more than
60 per cent of captive centres in India are struggling. Sudin
Apte, Country Head & Senior Analyst, Forrester India, who
authored the report, says short-lived enthusiasm for offshoring
and lack of process maturity and integration are the most common
reasons for captives failing. The lack of scale, poor morale and
unrealistic cost models also compound the problem. "As a
result of these issues, firms quickly realise that setting up
a captive centre is not an end point in itself but just a stage
in their offshoring and outsourcing evolution," he says.
A number of early entrants have realised this and have sold their
captives and opted to outsource the work to third-party vendors,
and some others are now leveraging the expertise of their partners
much more than in the past in their renewed initiative to build
an offshore eco-system.
THE RATIONALE AND THE REALITY
Why MNCs set up captive centres:
Executives want to
go offshore because of the 'Welch' legacy
Tech laggards play follow the
Intellectual property concerns
They feel that doing it in-house
will save them money
Foreign parent can retain end-to-end
Why captives mostly fail:
Enthusiasm for offshoring short-lived
Unrealistic cost models
Attrition fuelled by uninteresting
work and overdependence on headquarters
Lack of process and integration
The CEO of a Tier II Indian it services company says: "What
they don't realise is that there are huge challenges-like the
ability to attract and, more importantly, retain talent, given
the high attrition levels prevailing in the industry. Also, the
systems and process maturity that we have developed is difficult
to replicate. The (high) fixed costs are also spread across many
clients. Many companies don't realise this, set up captives, and
then regret their decision later." There are a number of
examples where companies have logged out of India after setting
up captives. Prominent among them are Apple Inc., which shut its
development centre in Bangalore, Sykes Enterprises, PowerGen Retail
and BelAir Communications India. Pervasive sold its operations
to Aztec Software and Technology Services.
The Forrester report predicts that 5-10 per cent of captives
will shut down, 20 per cent will embrace a hybrid approach of
captives plus outsourcing and 40-50 per cent will adopt what Apte
calls the termite strategy. "Here, the third-party vendor
'hollows out' the captive centre, and slowly takes the existing
staff onto its own rolls. All that then remains of the MNC's captive
centre is the Project Management Office (PMO), sometimes called
India Oversight Office. This model provides a unique combination
of close monitoring and low-cost execution," he says. The
remaining 10 per cent of firms will sell out and go the whole
hog in outsourcing.
The failure of the captive model means that within the next
three years, there will be accelerated demand for third-party
vendors for services, especially in product development. The good
times, it seems, will continue for the Indian it sector.
The fortnight's burning question.
HAS RBI MANAGED TO TAME THE INFLATIONARY
FEARS IN THE INDIAN ECONOMY?
No. Rajiv Kumar, Director and Chief
The Index of Industrial Production shows that the manufacturing
sector is still booming; this may result in aggregate demand running
ahead of capacity. Combined with a rise in agricultural prices,
this may result in inflationary pressures rising in the coming
Yes. Venugopal Dhoot, Chairman,
I think the worst is behind us. The government and RBI have
controlled money supply, and this has stemmed the inflation rate.
With the monsoons just around the corner, you can expect food
prices, which have shot up in recent times, to remain stable.
Maybe. Habil Khorakiwala,
Supply side issues are still critical. The government has addressed
a part of the problem by importing primary articles; and a good
monsoon will help the situation further. But we still have to
tackle the supply crunch in the manufacturing sector. And we don't
agree with RBI's decision to raise interest rates as it impacts
BUY TOP END PENS IN INDIA
That the luxury goods
market in India is booming is no secret, but until recently, the
only ultra-luxe pens legally available in that segment were Mont
Blanc and Waterman. That's about to change. Penn-E-Regali has
launched exotic writing instrument brands such as Tibaldi, Visconti,
Delta and Markiaro in the country. The icing on the cake, though,
will be the limited edition pens that the company will periodically
bring into the country from Jaguar, Ferrari and Ducati.
Says Pramod Goenka, Director, M&S Marts India, which owns
Penn-E-Regali: "There is a market for high-end, luxury writing
instruments in India. The country also has a growing tribe of
serious pen collectors." Speaking of the Tibaldi for Bentley
pen, priced at Rs 3 lakh, he explains that people who collect
writing instruments truly value a good pen, and cost is not a
deterrent when it comes to really top end brands.
There are no authentic figures on the size of the luxury pen
market in this country. The company currently has two stores,
in Mumbai and Delhi; by the end of 2007, it plans to have six,
and by end-2008, 16 stores across India.
Batting for Ideas
is it? Ideawicket.com, an ideation portal, allows innovators
to post their ideas or offer solutions to companies that may source
those ideas or post their requirements.
How does it differ from others? It's a generic website
and not focussed on one specific industry like muji.com, from
Japanese specialty furniture maker Muji, and innocentive.com,
a portal for pharmaceutical scientists to post their ideas.
How does it work? The portal allows subscribers-fees
start from $1,000 (Rs 41,000) per month-access to the ideas and
innovations posted on it; they then have to contact the innovator
directly. Innovators, however, can post their ideas free of charge
or browse through company requirements listed on the portal and
What about IPR? The portal is only a "handshake
platform", as Founder CEO Amar Aujla puts it. The innovator
and the company need to carry out their own due diligence on IPR
and other legal issues.
How is it a win-win game? Companies can save on R&D
costs by buying innovations from individuals and innovators get
a platform on which to exhibit their ideas and look for takers.
is it? Microsoft has a $250 million (Rs 1,025 crore) programme
called "Partners in Learning" which will offer a subsidised
Windows Suite for $3 (Rs 123) from the second half of 2007.
Who can be a partner? Qualifying governments (local,
regional, national) who buy their own hardware.
What it does not have? The Personal Computer itself.
Microsoft only provides the software to qualifying governments.
What does the suite have? The suite includes Windows
XP Starter Edition, a student version of MS Office, mail software
and other educational tools from Microsoft.
What is the reach of the scheme? According to Microsoft,
Partners in Learning is active in 101 countries and has reached
over 57 million students to date.
Status: $124.63 billion in 2006-07.
Impact: Growing exports are good for the economy as they
bring in much needed foreign exchange resources into the country.
However, the hardening rupee has led to a dip in the export growth
MONEY SUPPLY GROWTH
Status: Up 20.5 per cent in April '07.
Impact: Growing money supply in the system fuels inflation
which, in turn, pushes up interest rates. The high growth in money
supply over the past few months-fuelled primarily by foreign inflows,
higher credit offtake and corporate savings-has resulted in surplus
liquidity, which has fuelled inflation and led to higher interest
A bird's eye view of what's hot and what's
not on the government's policy radar.
FDI POLICY TO BE REVIEWED
Foreign traders: Will the door be shut?
Expect the much-delayed overhaul of the Foreign Direct Investment
(FDI) policy soon, now that the Uttar Pradesh assembly elections
are out of the way and the Parliament session is getting over.
The agenda is bursting at its seams: besides plugging loopholes
to prevent a repeat of the Hutch-Vodafone controversy (involves
definition of domestic and foreign equity for calculating the
74 per cent cap), the government plans to undertake a comprehensive
review covering a broad spectrum of sectors such as telecom, coal
mining and processing, petroleum, aviation, plantations and media,
where there are sectoral caps and entry conditions.
Also, long-pending and contentious issues pertaining to liquor,
tobacco and even gambling are likely to be taken up. In several
areas where sectoral caps have been prescribed, automatic routes
may be given a rethink and investors may have to go through the
mandatory Foreign Investment Promotion Board (FIPB) approval route.
The fate of foreign investments in multi-brand retailing is
also likely to be discussed, given that the results of the government
sponsored study on the impact of foreign brands in the country
is scheduled to be completed soon. Expect the Left parties to
flare up again.
REGULATOR'S HEAVY HAND
service providers pay 6 per cent of revenue as licence
New entrants to pay Rs 20 lakh
for a national licence and Rs 10 lakh for a state licence;
district level ISPs discontinued
FDI cap for ISPs to be brought
down to 74 per cent, down from 100 per cent over two years
PAY MORE TO SURF: REGULATOR
You may soon have to pay more for your broadband
connection. And, the hike will depend on the internet service
provider (ISP); the biggies will burden you less. This is likely
to follow from the Telecom Regulatory Authority of India (TRAI)
recommendation, seeking a 6 per cent licence fee from all ISPs.
"Small ISPs have no choice but to pass the entire burden
on to the customer," says an angry Rajesh Chharia, President,
Internet Service Providers Association of India (ISPAI). Larger
ISPs, however, are taking a more diplomatic line. Says Naresh
Ajwani, Executive Vice President, Sify: "Rather than making
the customer pay more for basic services, we will earn out of
value added services." Signs of a maturing market?
FILTERS FOR SEZ SOPS
central government is unlikely to press ahead with its advice
to the states on allowing tax-exemptions in the non-processing
areas of special economic zones (SEZs). This follows a recent
communication by The Empowered Committee of State Finance Ministers,
headed by West Bengal finance minister Ashim Dasgupta. "We
cannot afford to lose any revenue on account of exemptions,
whether it is VAT or any other taxes," says Dasgupta.
The decision is also based on past lessons where
several firms in Export Oriented Units (EOUs) and Export Processing
Zones (EPZ) have abused tax exemptions.
Non-processing areas of SEZs relate to social
infrastructure such as schools, hospitals, malls, restaurants
and parks. The Centre's SEZ norms stipulate that at least 50
per cent of an SEZ has to comprise the processing area, leaving
the rest open for other uses.
The why, what and how-to of policy making.
TIME, WE GOT INDEBTED
we celebrate the 150th year of the 1857 uprising, the authorities
are implicitly engaged in shadow-boxing of a similar kind. The
fear of letting go of monetary controls looms large-lest we don't
have enough foreign exchange to pay for our imports, or that our
exporters are left to the vagaries of foreign currency movements
or that RBI's ability to manage inflation is impaired. The result:
a slew of measures by RBI and the Finance Ministry that send mixed
signals to the market (see Unkind Cut, page 104). That is arguably
worse than slowing down the pace of liberalisation, for instability
on the policy front can become a trigger for the flight of capital
out of the country, never mind the $200 billion (Rs 8.2 lakh crore)
reserves in RBI's vaults.
So, how does the play-out look? Inflation targeting measures
by RBI have firmed up domestic interest rates; the government
is hoping that curbing demand will help. And, there is little
else that the state can do, for the inflation drivers are on the
supply side. It is a matter of time before the equity markets
are affected by the increasing cost of debt, especially at a time
when companies are going full throttle ahead with their investment
plans. In anticipation of this, the larger companies have already
hiked their overseas borrowing programmes as it is cheaper to
borrow from abroad-last year's ECB drawal is estimated at $24
billion (Rs 1,08,000 crore), up from $16 billion (Rs 72,000 crore
then) the previous year.
INDIAN PAPER, PLEASE
Last month, the
inter-American Development Bank (the equivalent of Asian
Development in Latin America) went shopping for a $150 million
(Rs 615 crore) loan. The cheapest deal in the world: Japanese
yen backed by a rupee asset. However, in the absence of
full convertibility, the deal made sense only one way: issue
a euro-rupee bond out of New York, which was used to transact
Evidently, the appetite for Indian
paper has soared along with the currency.
Last week, when Indian officials met
up with the other sponsoring nations of the FutureGen project,
they were in for a rude shock. The project, a $1-billion
(Rs 4,100-crore) initiative of the Bush Administration,
to develop a zero-emission coal-fired power plant had little
to offer for their $10 million (Rs 41 crore) contribution.
The US remained non-committal on the cost of accessing the
technology once it was developed. No deal, protested the
Evidently, lack of depth in the domestic debt market is to blame
for this approach-on the NSE, as against daily trades of Rs 12,000
crore in the equity segment, a mere Rs 600 crore of debt instruments
are traded. Not surprisingly, Finance Minister P. Chidambaram
recently told several non-life insurance companies to trade their
government securities (bonds issued by government to finance its
expenditure) before the maturity date. This will improve trading
volumes and help the market discover a lower interest rate-the
G-secs market is the largest component of the debt market and
provides a benchmark for determining interest rates in the country.
The government is now realising that demand side measures have
So, additionally, why not lift the cap on FII participation
in the $4 billion (Rs 16,400 crore) debt market, which will expand
with the fm's advisory? Currently, the $2 billion (Rs 8,200 crore)
limit for the 1,000-odd registered FIIs makes it an unattractive
proposition for the latter. After all, the capital gains in the
debt market are made on volumes compared to equity, where returns
Yes, the risk of flight of capital remains. But, with the rising
interest in Indian paper (read Tale Bearer), this eventuality
is unlikely to come to pass.
Union HRD Minister Singh: Remains defiant
Former US Defence Secretary Donald Rumsfeld is
derisively called "old man in a hurry" in some circles.
In the Indian context, the sobriquet fits Union HRD Minister
Arjun Singh, 83, like a glove. The former Madhya Pradesh strongman
has made no secret of his prime ministerial ambitions, and loses
no opportunity to embarrass Prime Minister Manmohan Singh-he
is the only minister who doesn't address the PM as "Sir"-but
he seems to have run into a brick wall. His proposal on implementing
27 per cent quotas in the IITs and IIMs has been stayed by the
Supreme Court, which has also asked uncomfortable, but relevant,
questions, regarding the rationale behind the decision.
Singh, however, is putting up a brave face. Describing
the court direction as a "welcome step", he said:
"It indicates that the court has understood the implications
of this issue which has wide ramifications." The quota
controversy has divided the country but Singh is unfazed. An
old-school Congressman, he remains mired in the philosophies
that held India on a leash for the first four-and-a-half decades
of Independence. His backers: his friends in the Left, who,
he hopes will help elevate him to the top chair, and a section
of intellectuals who feel the quota project will further their
own regressive agendas. But time is running out for Singh. He
keeps frail health-the joke "Congress ka haath, walking
stick ka saath", is believed to be aimed at him-and it
is no secret that large, progressive sections of the polity
will be happy to see him being put on the pasture. Whatever
happens, Singh's political legacy will be a troubled one.
56 per cent:
Google's share of global internet search queries. The company's
$145 billion (Rs 5,94,500 crore) market value tops that of Time
Warner, Viacom, CBS, Publicis Groupe, and the New York Times
300: The approximate number of biotech
firms in India; this is likely to double in the next four years
$19 billion (Rs 77,900 crore): FDI inflows
into India in 2006-07, the highest ever
$63 billion (Rs 2,58,300 crore): Estimated
global revenues from SMSs, accruing to about 700 carriers in
2007, according to a Frost & Sullivan report. This represents
more than two billion users and a trillion messages per year.
212,000: The number of Indians who visited
London last year, up from 130,000 in 2003
1,188,120: The total number of commercial
aircraft movements in India in 2006; Atlanta alone recorded
976,447 such movements, Los Angeles 656,842, Paris 541,556;
Frankfurt 489,406 and Amsterdam 440,163
54: India's rank this year in the Economist
Intelligence Unit E-readiness ranking. India scored 4.66 on
a scale of 10. Denmark topped the chart with a score of 8.88
107.7 million: The number of monthly visitors
to MySpace, the world's most dominant social network
100 kg: The weight of the world's biggest,
purest and highest denomination coin issued by the Royal Canadian
Mint. It has a face value of C$1 million (Rs 3.7 crore), easily
dwarfing its closest rival, the 31-kilogramme "Big Phil"
million (Rs 16.2 crore): Arcelor-Mittal CEO Lakshmi Mittal's
pay packet in 2006. He earned a base salary of $2.05 million
(Rs 9 crore) and received $1.68 million (Rs 7.56 crore) in performance-related
15,000: The number of Ambassadors assembled