In their relatively short history, Indian captives — foreign-owned operational units — have experienced a mixed record of success and failure. A new set of studies by ISG finds that both legacy and new captives are embracing emerging business models aimed at unlocking previously untapped business value. We call this trend “Captive 2.0.”

1. CAPTIVE 2.0
The Next Generation of Indian IT and BPO Captive Operations
Viswanathan Krishnan, Manager, ISG
www.isg-one.com

2. INTRODUCTION
In their relatively short history, Indian captives — foreign-owned operational
units — have experienced a mixed record of success and failure. A new set of
studies by ISG finds that both legacy and new captives are embracing
emerging business models aimed at unlocking previously untapped business
value. We call this trend “Captive 2.0.”
The same analysis finds that parent companies are still struggling to properly
manage captives, and the report discusses effective governance options along
with recommended steps to address performance issues.
CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 1

3. EXECUTIVE SUMMARY units to service providers and private equity houses, as
well as by routine media reports on the problems of
The captive model is evolving and is sustainable. smaller captive units.
Company-owned captive operations hold broad appeal
because of persistent concerns about intellectual ISG has worked extensively on consulting engagements
property (IP) and security in outsourcing, the both with parent organizations and with their captive
opportunities to build domain knowledge globally, and units and recently completed several comprehensive
the prospects of driving standardization and studies of captives and global delivery.
reengineering without potentially conflicting commercial Across the last quarter of 2007, ISG carried out a
interests. comprehensive captive benchmarking study
together with the Indian School of Business. This
Captive units based in India have emerged as strong
bench-marking study was done across IT and
offshore delivery vehicles for businesses, primarily for
business process outsourcing (BPO) captive units
contact centers, back-office processes such as finance
covering 51 key parameters — including business
and accounting, research and development, and IT-
model and financials, people metrics, shared and
related work. For many companies, captive centers
support services and operational metrics.
represent an opportunity to tap into the global talent
pool in order to on-board skills that may be in short We also studied characteristics of 74 global
supply elsewhere in the organization. However, many of financial services captives, including 26 captives
the captives face daunting internal and external being operated in India.
challenges that are causing some to consider significant In this paper, we have drawn heavily on these studies as
strategic changes. well as our consulting engagements in order to develop
As the initial savings from labor arbitrage have an informed opinion on the future of captive units and
diminished, parent firms are increasingly asking for perspectives on their evolution.
additional value as well as for operating models that are Going forward, ISG predicts three key trends for captives:
comparable with those of third-party service providers.
1. Both “value addition” and “efficiency
However, captive units are unable to achieve economies
enhancement” are critical drivers for captives.
of scale for their shared and support services, nor are
Existing captive units will increasingly evolve into
they able to flex or spread fixed costs across multiple
specialty captives, hybrid captives or super
clients.
captives, (which follow captive thought processes
At the same time, captive units are encountering strong in adding value but increasingly behave like a third
headwinds from the external marketplace: party in their operating model and “squeeze the
Cost pressures: Due to year-over-year salary lemon” around current costs).
increases and other inflationary pressures such as 2. A new generation of captive units will be set up in
a devalued U.S. dollar. the next 24 months — several of them by firms
Workforce issues: Compared with other with existing outsourced operations. However, the
employers, many captives are perceived as not era of starting new commodity captives is over. By
offering a good career path; this results in high contrast, startup captives will largely be hybrid or
attrition. specialty captive units housing knowledge
Technology/process issues: Because of the narrow processing or program management/vendor
area in which they provide their services, captives management functions.
are generally behind the curve in terms of 3. Some captives that have reached a large scale of
technology and process maturity. operations represent a significant monetization
Operational visibility issues: Parent organizations opportunity for their parents and will be sold in the
in some instances do not have complete next 12–18 months. The current credit crunch will
operational visibility into their captives; this gives only serve to add impetus to such monetization
rise to significant value leakage. efforts. We believe that only a select number of
captives will follow this route. In parallel, sub-scale
These concerns have prompted various stakeholders,
generic captives, which will not make the
analysts and market observers to question the
transition, will atrophy and be bought by third-
sustainability of the captive model. This debate has been
party players at par value.
further intensified by the sale of several large captive
CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 2

4. EXAMINING THE DECISION TO SET UP A CAPTIVE UNIT
We define a captive unit as a facility that is domiciled outside of the home country of a parent organization or affiliates to
which it provides services. In India, the earliest captives were set up in the 1990s by global firms such as Citibank, General
Electric and British Airways. These companies were seeking to capture labor cost arbitrage but did not have sourcing
options with mature offshore service providers or sufficient confidence in the security and IP protection provided by service
providers.
THE CAPTIVE LANDSCAPE
ISG analyzed more than 300 captives in India with information gathered through primary and secondary sources —
including interviews, published reports and our repository of historical data — in order to arrive at the following profile.
Industry Profile of Captives BFSI Functions
BPO CRM BPO Back Office
BFSI Aero/Auto Technology
IT Software IT Back Office
Telecome Others
Asset Management Bank Operations
20% 21% 17%
34%
13% 9%
25%
12% 12%
21%
16%
The banking and financial services industry (BFSI) accounts for 34 percent of the total captive space. Within BFSI:
25 percent of the captives in BFSI offer BPO back-office functions; captives that offer banking operations are the next
1
largest segment (21 percent).
Prior to 2000, the BPO back-office and BPO CRM functions were the predominant functions in captives. These
functions have maintained a fair level of growth.
Banking operations started in earnest in 2000 but have shown slower growth since 2003.
Over the past decade, we have continued to see organizations set up captives. Beyond the cost arbitrage opportunity,
organizations set up captives to:
Access new sources of management, technology and process expertise globally.
Build a foothold in a high-growth region prior to setting up a local presence.
House processes and applications that are core to the business, are complex, or re-quire very strong regulatory or IP
controls.
Leverage the captive as the global serving back end of the organization by creating a platform that can standardize,
consolidate and reengineer global processes while also integrating the parent’s new businesses into the fold.
Increasingly act as specialty units housing:
‒ Knowledge-intensive processes or knowledge process outsourcing (KPO)
1.
Technology category does not include R&D captive units. “Others” category includes captives in healthcare, pharma, retail, oil and gas,
chemicals and transportation.
CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 3

5. ‒ Vendor management units to manage the performance and increasingly the entire contractual relationship
with vendors
‒ Program management offices for supporting global programs
THE CAPTIVE LIFE CYCLE
Start-up Growth
Restructuring Phase
Phase Phase
— Captive unit with costs/operating metrics out of sync
2 vs. market – will atrophy eventually
1 — Exit option is a people (and assets without
premium) transfer to a 3rd party. PE/VC firm shave
Reverse BOT – 3rd no interest in such units
2
Party
1
Sub-scale 4 — Captive perceived as “strategic” part of the
Captive 3 enterprise – ongoing growth as captive adds higher
value added work and FTEs
2
— Costs will be higher than median – a “premium” the
1
enterprise will be willing to pay in the medium term
Evolved Captive
1
4
— Best in class captive – has reached scale and
Inception 3 operating efficiency of large 3rd party units
2 — Serves as global servicing arm of enterprise driving
1 standardization & consolidation and reengineering
Super Captive
4 Captive morphs into two operating entities:
4 Captive — The “strategic captive” housing higher-end/KPO
3
3 work/ PMO and the VMO to source lower end work
2 via “hub and spoke” model
2
1 — Entity performing low-end work with people(and
1 i2i
assets) transfer to a 3rd party/domestic contracting
Evolved Captive
Hybrid Captive for people (and assets)
— With slowing growth, cost arbitrage stops –
4 enterprise does not see captive activities as “core.”
3 With stable operations, captive represents a
2 monetization opportunity
1 — People and asset transfer at premium – to ensure
Reverse BOT – 3rd operational stability, transfer to a 3rdparty or 3rd
Party/ PE party/ PE combination
Having decided to set up a captive unit, firms follow widely varying paths in terms of how they structure the captive entity,
the types of work they house in the captive unit, the level of decision making they devolve to the captive and, ultimately,
how they perceive the captive unit globally. Irrespective of the path they take, we observe that captives have a distinct life
cycle with a clear startup phase, maturity phase and eventually a “restructuring phase,” as depicted in the following figure.
CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 4

6. STARTUP PHASE: KEY AREAS OF FOCUS
Perceived as the Rapid expan- Combines Some level of Accountability
lowest cost sion capabili- competing control Transfer of
(initially) ties strategies Transfer of operating and
Most control Leverage exist- Portfolio risk operating and financial risk
Pros
IP protection ing provider management financial risk Maximum vari-
Option to tran- Satisfies different Speed to market able cost
sition in-house business unit “Variabilize” cost
More control clients
Management BOT price pre- Management Enough control for Perceived as
focus mium complexities business units? most expensive
Capital invest- Transition risk Additional Potential rela- New manage-
Cons
ment Operating and governance tionship strains ment model
Time to market financial risk overhead Business continuity Relationship
Operating and Time and expense planning strains
financial risk
Our research indicates that wholly owned subsidiaries continue to be the preferred captive delivery model.
Captives are not an easy way of achieving savings for those organizations that see risks in outsourcing to global service
providers, nor will they deliver short-term cost savings. Importantly, moving an inefficient or “problem” process offshore
will not solve the problem. Starting a captive requires planning to address the following issues:
Selecting the delivery model best suited to time, scalability and investment requirements. A number of companies
aim to lessen some of the establishment risks by using third-party service providers to help, in an “assisted build-out”
(ABO) model. Another common approach is “build-operate-transfer” (BOT), in which a provider builds and operates
the captive for a period of time before ownership is transferred to the parent. Some companies have also turned to a
joint-venture approach and have built captives with the capability to operate other firms’ processes to gain the
additional ability to balance demand and leverage the capital investment. These and other approaches can indeed
mitigate risks, but they require suitably qualified and motivated partners.
Robust planning including investment in startup capital, management time and an understanding of startup time.
Establishing a captive typically takes far longer than it would to contract for a third-party service provider for the
same services. Equally significant is the realization that it takes very significant investment and time to disengage
from a captive operation.
Ensuring realistic scale and scope. There is a minimum operational scale below which running captive operations is
not very economical.
Clear mandate from senior management to establish and grow the captive. The mandate for the captive should
include clear rules on how it is to be used. Often different business units within the same company act as de facto
rivals rather than partners. Certain business units may not use the captive despite senior management direction,
which can lead to jeopardizing even a compelling business case for the captive. Such issues need to be clarified at the
CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 5

7. start; attempting to resolve them once the project is under way can drain management time and energy and result in
costly delays.
Understanding cultural issues/local environment. Captives that do not have a thorough understanding of local
cultural issues may face turbulence in their operations. In addition, some captives fail to quantify the challenges of
building and operating facilities in countries where construction standards may be lower and risks associated with
the health and safety of employees may be higher.
Building a global project team and maintaining momentum. Setting up a captive is a difficult task. For most of the
project team this will be a new experience, and the learning curve will be steep. Experience shows that building and
maintaining momentum, and thus enthusiasm in the project team, is a key success factor.
‒ Expatriates: Typically, global organizations relocate one or more senior managers from the key sourcing unit or
location as “expats” to set up and run the captive unit. This helps in transferring the culture/values and
operating knowledge to the captive as well as serving to build relationships with key stakeholders in the parent.
Deciding on individuals who can fit the role and who have the knowledge and attitude to operate in an offshore
environment is critical. Often, parent firms seek out persons of local origin for such roles to bridge the cultural
gap and overcome potential resistance to relocation.
Ensuring an experienced project team. As with any startup unit, prior experience in building offshore service centers
is essential. In addition to project management skills, the team requires subject matter expertise across all the
support and shared services functions. This area is increasingly becoming less challenging for new entrants given the
large number of professionals experienced in setting up captive units.
Understanding financial and operating risks. Parent companies have to own the full financial and operating risk of
running the captives in the host country including foreign exchange (“forex”) fluctuations and business continuity
planning, among other issues.
Iterative scoring
Compile list of Review and confirm Review and agree
process,
candidate cities based parameters for scoring weightings of scoring
composite score
on preliminary filters from long list parameters
calculation and rating
Candidate Finalize Attribute Score and
Countries/Cities Parameters Weights Rank
Source: TPI location analysis methodology
Selecting the best location for the captive. Delivery location choices are made on the basis of suitability of the local
labor pool for the type of proposed work, environmental factors (local costs and escalation, attrition, etc.), local
government incentives (now only offered by emerging locations for large proposed units), and so on. ISG’s location
analysis capability helps parent organizations to identify suitable locations for their captives.
GROWTH PHASE: KEY AREAS OF FOCUS
It is easy to regard the captive build-out as a close-ended project that finishes when services start to flow. Yet a captive,
especially during its growth phase, requires much attention, even more so than during the startup phase. Business units
should view working with the captive in terms of building and growing relationships; this will require much travel and time
spent face-to-face rather than just the occasional phone call. Business units should also work to ensure that the captive
operations are closely linked to their evolving needs and strategies.
Setting and managing expectations. When parent companies move inefficient or difficult processes offshore with
the expectation of solving problems or cutting costs, they are setting up the captive for failure. Cost savings will be
short-lived and the captive will become an inefficient cost center. At this stage, parent companies start asking the
captive to deliver ”at least” in terms of business value. This is not the way the captive was set up, and it struggles to
meet the expectations of the parent.
CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 6

8. Scaling up. Captives generally do not maintain the same rigor and discipline in managing the work pipeline as a third-
party provider. Demand forecast is also weak, making them reactive in approach. This often makes them less cost-
effective com-pared with third parties.
Setting up a governance mechanism. A key success factor is to put in place mechanisms for ongoing Service
Management & Governance of the captive. There also needs to be strong senior executive sponsorship and
governance across all activities to ensure that risks are managed effectively and alignment is achieved across the
initiative.
Managing cost structures. Captive costs are generally higher compared with those of third-party providers. The
different cost structures are attributable to factors such as higher compensation, more experienced workforce, lower
span of control (i.e., the ratio of associates to team leader and that of team leader to manager), higher support staff,
corporate allocations and higher spend on business continuity planning / disaster recovery planning (BCP/DR) driven
by corporate policy.
Focus on human resources. The captive workforce’s average years of experience is greater than that of the third-
party provider workforce. The average compensation is hence higher at captives. Captives, unlike third-party
providers, do not hire in large numbers from campuses; they face a higher cost of hiring and low conversion rates
(from application to interview to selection). They also take longer on average to recruit and hire. When captives do
go to campuses, they position themselves as offering higher pay on average rather than on their growth and career
opportunities.
Operational issues. Third-party providers have available capacity-based utilization-tracking mechanisms; captives
usually track only the billable utilization ratio. Third-party providers are monitored more closely for compliance with
service level agreements (SLAs); most captive units do not have formal SLA frameworks in place with their parent
units. Third-party service providers tend to have mature knowledge management (KM) systems in place, while
captives have fledgling KM initiatives. As a result, captives are less equipped to focus on operational efficiencies.
Shared and support services. Captive units have a higher spend on shared services facilities such as real estate and
maintenance, travel and entertainment costs, and recruitment costs compared with third-party providers. For
example, to contain travel and entertainment costs, third-party service providers adopt stringent cost-saving
measures such as strict approvals for non-billable travel, and they promote video conferencing for meetings. They
also provide service apartments for stays longer than two weeks, and employees travel by train for overnight
destinations. On the other hand, captives tend to follow a more relaxed approach. The percentage of support staff to
total staff is higher for captives than for third-party providers, which also rely heavily on automation and internal
systems to reduce support costs.
Comparison of Captives and Third-Party Providers on Select Parameters
Average Work Experience # of Support Staff
100 100
58 64
Captive Service Provider Captive Service Provider
Facilities Cost BCP – Spare Capacity
100 100
67 60
Captive Service Provider Captive Service Provider
Normalized using median captive = 100
CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 7

9. RESTRUCTURING PHASE: KEY AREAS OF FOCUS
Captives that have scaled up and been in operations for more than three to five years continue to face internal and external
challenges as they evolve. Some of the key areas they grapple with at this stage are:
Building and demonstrating value beyond cost arbitrage. The standard offshoring paradigm is based on cost
arbitrage within acceptable quality parameters. This leads to “value” questions and a “glass ceiling” of parent
perception about what the captive unit can deliver. Best-in-class captives focus on delivering both incremental value
(enhancing the current delivery and providing additional benefits) and breakthrough value (solving a client problem
or creating new business opportunities).
Comparison of Captives and Third-Party Provider Cost / FTE
Cost/FTE
100
79
67 65
Captive-Median Service Provider- Service Provider-Best- Captive-Best-in-Class
Median in-Class
Normalized using median captive = 100
Creating integrated capability across delivery units. Captive units typically house multiple delivery units including
BPO, IT, R&D and KPO. A very significant opportunity exists to integrate solution and delivery capabilities across
these units to ensure synergies for the parent firm for key platforms and programs. In reality, these units report to
different parts of the parent organization and often do not share anything beyond support services and
legal/management oversight in India.
We note that this challenge is not unique to the captive delivery structure. Although integrated offerings are
potentially transformational and feature the added benefit of “one throat to choke,” market reality points toward
“best-of-breed” contracting. This is compounded by the difficulty in defining holistic SLAs. Specifically, only 15 out of
388 ISG transactions since 2001 have integrated offerings.
Maintaining a robust workforce and reinforcing the parent culture as the captive unit scales up. Captive units in
India operate in an environment of double-digit growth, salary hikes, and vintage-based attrition as new firms poach
experienced talent. These pressures are significantly different from the ones faced by the parent organization, yet
the need to replicate the parent culture offshore exists. The additional human resources (HR) challenges faced by
captives include a perception of limited career growth along with building a brand, and hiring and training engines
without the scale efficiencies of third-party providers.
Preventing value leakage. Enhance financial controls to prevent value leakage. Typical value leakage manifests in
terms of incorrect chargebacks to the parent organization. If not monitored properly, the long-term effects could be
significant.
Creating long-term sustainability. Captive operations face two basic challenges around sustainability: 1) the inability
to spread fixed costs across multiple clients or convert them into variable costs; and 2) eventual slowdown in growth
leading to scalability issues concerning shared and support services. This raises questions of long-term cost
sustainability as the initial labor arbitrage opportunities eventually dwindle.
Examining monetization opportunities for the parent. Mature captive units are now faced with several enabling
factors in the market for monetizing their operations. Potential buyers include service providers looking to scale and
private equity players adding to their portfolios.
CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 8

10. ‒ The opportunity to monetize captives at a premium is applicable for scaled captive units that represent either a
guaranteed book of business or an anchor client in a growing vertical for the buyer. The window of
monetization for such units is unlikely to extend beyond the next 12 to 18 months since service providers are
growing very rapidly, organically or otherwise, in a high-growth industry; thus the attraction to acquire a
captive to add scale will lessen with time.
‒ Sub-scale captives with costs and metrics totally out of sync with the market will not have a premium
associated with them. They will either have to be “revitalized” by their parent firms, atrophy and eventually
shut down, or be bought out by a third-party player.
Restructuring the model. Several of the challenges outlined above require changes in the basic operating model. To
this end, we are seeing delivery models for firms morph into hybrid operating models.
Offshore service delivery was either Offshore service delivery happens
through a service provider (s), a captive through a hub and spoke model with
unit or both in some cases the captive unit acting as the hub
Captive unit and service provider did The captive unit and service provider
not interact with each other can be in different locations, captive
unit may be operating from a service
provider location or service provider
may be operating from the captive
location
Company Service Provider Offshore Captive
A critical element in this evolution is the systematic assessment of applications and processes to see what needs to be
retained, what should be done in onshore shared service centers, what should be insourced to the captive unit and what
should be outsourced to onshore and offshore third parties. This contrasts sharply with the original suboptimal sourcing
effort where piecemeal unit-wise decisions were made to outsource or offshore.
CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 9

11. Application Analysis Application Classification
Data Any Security
Develop Sourcing
Collection Concerns? Do
not
Scenarios
offshore
Data Is Technology
Analysis Offshoreable?
Review & Functionality &
Offshore candidates
Offshore candidates
Validate Challenges?
Source: TPI Application Portfolio Analysis
India-to-India contracting. A key enabler of the hybrid delivery model is India-to-India (i2i) contracting. Parent organizations
are increasingly setting up and managing i2i contracts with service providers via their India captive unit. This is enabled via
the ”hub-and-spoke” model with the hub being the India captive unit through which different business units procure
offshore services.
Captives — particularly those not in the technology space — are at a comparative disadvantage when it comes to attracting
and retaining entry-level employees because of the perceived lack of a technology career path at a non-IT company. i2i
contracting increases the offshore leverage as well as flexible capacity through rapid deployment capability — especially of
non-niche skills.
Onsite Project Teams
Offshore Hub
i2i Provider i2i Provider i2i Provider
The key points to consider when implementing an i2i model include:
The agreements with providers have to be structured to reap the tax benefits available to software services
exporters in India.
The most prevalent version is a time and materials (T&M) arrangement with a service provider–based, profile/skill-
based rate card, which means that the captive has to assume the project execution risk. This is increasingly common
in IT, and initial BPO pilots are in progress.
Because of the various challenges and opportunities faced in this stage, captive units are increasingly focusing on annual
strategy and planning exercises resulting in three-year rolling plans and one-year operating plans. Key inputs into the
strategy planning exercises are market best practices and benchmarks versus peer captive units and relevant third parties.
CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 10

12. THE CAPTIVE CONUNDRUM: VALUE OR EFFICIENCY PLAY
Strategy Planning - Market Best Practices
Market Best
Theme Context Issues Initiatives
Perspective Practices
Area Observations Initiative (Y/N)
— Drive common productivity and quality
Align Measurement norms across client and provider sites -
systems & Goals support baselining and improvement efforts
with Client
at client
Strategic Objectives Initiatives (being done by other firms) Initiatives needed/already exists
We observe that sustainable captive units tend to migrate along two, often overlapping, paths — enhancing value or
efficiency. The extent to which one or the other choice is made determines the ongoing model for the captive.
Value players focus primarily on enhancing value to the parent firm while incrementally increasing economic efficiency
without disrupting the current delivery model.
Efficiency players focus primarily on discontinuously enhancing economic efficiency with a tradeoff versus higher value
capability. This could lead to clearly segmented offerings with differing cost implications — in essence mirroring third-party
behavior of pricing by value.
High Unserviceable
Speciality
Captive
Super Captive
Best-in-class 3rd
Party
Value
“Factory”
3rd Party
“Me-too”
Captive
“Me-too”
3rd Party
Unsustainable
Low Economic Efficiency High
CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 11

13. We observe the following constructs as part of this model:
Specialty captives: Captive units high on the value dimension that are increasingly used to house KPO, Program
Management (PMO) and Vendor Management (VMO) functions
Super captives: Captive units that have reached the scale and economic efficiency to match best-in-class third
parties
“Me-too” captives: Captive units that are low in economic efficiency and represent sub-optimal configurations that
are unsustainable
CHARACTERISTICS OF VALUE AND EFFICIENCY FOCUSED CAPTIVE UNITS
Value-focus captives are tightly integrated with the parent unit and, by virtue of their representation in key company
councils, have a greater line-of-sight into overall company strategy and objectives. Accordingly, they develop the
capabilities and competencies required for the overall company vision and are able to leverage them effectively.
Efficiency-focus captives have mature processes, strong internal measurement systems and controls, and achieve a high
degree of standardization and automation. They encourage a culture of thrift across the organization. Efficiency-focus
captives optimize skills based on work type and thus appropriately spread them across locations.
The critical success factors for value-focus captives are:
Value Focus Captive
Leverage business and proprietary
knowledge Deep business knowledge/technology expertise
Tighter integration with the parent unit Value-added services that support enterprise-level programs
Have a “seat at the table,” e.g., Integrated global career paths for highly skilled employees
represented in management councils of Cultivate an “employer of choice” positioning to attract top-
the parent notch talent
Efficiency Focus Captive
Encourage a culture of thrift through the organization
Able to contain costs through continued
Strong internal measurement, systems and controls
growth and having attained critical mass
Automation, standardization, and process maturity
Automation and productivity im-
Employees with the right skills placed in the right locations
provements
with an optimal match to type of work
Expertise in both business and technology areas
Effective relationship management through onshore teams
Services that can support enterprise-level programs and not just individual business-level projects
Global career paths for highly skilled employees
Cultivating “an employer of choice” image to be able to attract and retain top-notch talent
The critical success factors for efficiency-focus captives are:
Encouraging a culture of thrift throughout the organization
Developing strong internal measurement systems and controls
Achieving a high degree of automation, standardization and process maturity
Using the right employees in the right locations by matching skill and experience levels to the type of work
CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 12

14. VALUE AND EFFICIENCY OBSERVATIONS
ISG has found that captives are not always necessarily higher-cost operations compared with third-party providers. For
instance, in our sample there was a captive that was able to offer services to its parent company at price points lower than
that of third-party providers.
Indian management of captives must work with global management to ensure that the productivity benefits from the
captive operations are clearly understood.
Attrition challenges are not unique to captives, but they do have certain disadvantages compared with third-party providers
in attracting talent at entry and junior levels because of the perception of not being able to provide a wide range of projects
to choose from compared with third-party providers.
What is very clear is that captives need to regularly evaluate their portfolio of services. They should periodically revisit the
assumptions behind the “keeping it in-house” decision and should determine if they are deriving any value in doing so.
Of note, we predict a shift away from sourcing programs based on cost considerations alone to include capability and
capacity-based sources. It is possible to choose the efficiency-focus captive or value-focus captive (or both in certain
circumstances).
IMPLICATIONS FOR PARENT ORGANIZATIONS WITH EXISTING CAPTIVE UNITS
Examine the portfolio of services being delivered from the captive.
Benchmark against third parties and captives.
Determine if the captive performance is within the acceptable range.
Determine which services can be improved and whether new hybrid models will add greater value.
EVOLUTION OF CAPTIVE 1.0 TO CAPTIVE 2.0
Captive 1.0 Captive 2.0
Engagement Model Service provider Mix
Capabilities Service delivery Service delivery
Program management
Partner management
Talent Create a talent pool Leverage talent pool for higher value-added work
Benchmarking Employee compensation Employee compensation
Employee productivity
Employee utilization
CONCLUSION
Captive offshore operations require careful planning, long-term investment and rigorous management discipline to perform
according to expectations. Companies that lack global operational management experience should consider alternative
models.
The captive story is far from over, and the model is sustainable. Unlike service providers, captives are fundamentally aligned
to the parent’s goals and will drive standardization and reengineering without conflicting commercial objectives.
Finally, the era of setting up commodity captives is over. In the era of Captive 2.0, both value and efficiency have emerged
as successful models. New captives will largely be hybrid or specialty captives housing KPO or PMO/ VMO functions. Existing
captive units will evolve into either a super captive or a hybrid captive, both of which will look like a captive but act like a
provider.
CAPTIVE 2.0 ■ VISWANATHAN KRISHNAN 13

15. LOOKING FOR A STRATEGIC PARTNER?
Viswanathan Krishnan is a Manager with ISG.
Contact Viswanathan at viswanathan.krishnan@isg-one.com or +91 974081 11991.
Information Services Group (ISG) (NASDAQ: III) is a leading technology insights, market intelligence and advisory services
company, serving more than 500 clients around the world to help them achieve operational excellence. ISG supports
private and public sector organizations to transform and optimize their operational environments through research,
benchmarking, consulting and managed services, with a focus on information technology, business process transformation,
program management services and enterprise resource planning. Clients look to ISG for unique insights and innovative
solutions for leveraging technology, the deepest data source in the industry, and more than five decades of experience of
global leadership in information and advisory services. Based in Stamford, Conn., the company has more than 700
employees and operates in 21 countries. For additional information, visit www.isg-one.com.
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