The Hindu Business Line : Captive development centres facing heat

Captives in India, already battered by rising wages and high attrition over the past few years, are now forced to juggle around with their development spends as exchange rate volatility has added to their operational cost which is in rupee terms.

Product captives with deep pockets and an exposure to local market have been able to withstand the declining dollar impact. But, captives that operate as cost centres are likely to revisit IT budgets and seek higher allocation from parent companies.

On the other hand, the smaller and struggling captives are seen worst affected and are exploring exit options. Analysts said this would accelerate the consolidation, which is already on for some time now.

‘Small cos vulnerable’

“The cost savings for multinationals setting up captives here have halved over past four years,” said Mr Pari Natarajan, CEO of Zinnov, a consulting and research advisory.

The cost to savings ratio now stands at 1:2 as compared to 1:4 four years ago, Mr Natarajan added. This implied that margins had shrunk to half of what it was four years ago.

According to Zinnov, about 430 captives are operational in India at present, of which 170 belong to companies with less than $100 million in annual revenues and are seen more vulnerable. About 65 centres belong to companies with revenues of between $100-500 million, while 140 are above $500 million.

Salary is the largest cost component for captives, accounting for about 70 per cent of their spends in India. “So far we did not pay any attention to the rupee-dollar movement. But the steep rise of rupee in recent months is putting pressure on us to run our operations more efficiently,” said Mr Pradip K. Dutta, Managing Director of Synopsys India Pvt Ltd, which has a 600-people design and development centre in Bangalore.

“Being a cost-centre, we are focussed operationally and there is no further room to take hits like this. In order to perform at the same level, I don’t have any options but to go back and ask parent to hike our budgets,” Mr Dutta said.

Captives unable to withstand the rupee pressure are also seeking services of advisories on restructuring and exit strategy, which Mr Natarajan confirmed.

“The rupee rise may prove a good excuse for captives to exit,” said Mr Sudin Apte, Country Head and Senior Analyst, Forrester Research. “As a result, the consolidation of captives will accelerate”.

Captives who decide to exit typically hand over their operations to the outsourced product development (OPD) firms. “We are currently in talks with nine captives for transfer/takeover of their operations. Many of these firms are pretty big with around 700-800 people,” said Mr Gordon Brooks, President and CEO, Symphony Services, an OPD firm.

Last year Symphony took over seven captives. “The shake-out in the industry has begun and there are well over a 100 captives, who may wind up or transfer their operations to third party vendors in the next couple of years,” Mr Brooks said. For Symphony, the transfer or takeover of captives has emerged as the fastest growing business, he added.

Similarly, Persistent Systems is also in talks with about 4-5 captives for a possible take-over and may soon announce a deal, said the Chairman and Managing Director, Dr Anand Deshpande. In recent weeks, Persistent acquired the Indian assets of the US-based business intelligence solutions provider Metrikus Inc.

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