Downturn dynamics: New firms use Indian back offices

BANGALORE - Economic meltdown and the US financial crisis have triggered a new trend: while many Western firms are selling off back office operations in India, a clutch of others are rushing in to reap the benefits.

“The global financial crisis has forced many global enterprises to commoditise their captives,” said Som Mittal, who heads sectoral lobby National Association of Software and Service Companies (Nasscom).

“Many in the financial services sector have now begun selling back office operations,” Mittal told IANS.

But he said there’s also a need for outsourcing back office functions. This is luring firms, especially in the tech sector, to set up captives to leverage skills and cost-arbitrage available in India.

“We are seeing new captives being set up by firms that never experienced India. Some of them are discovering the advantage of outsourcing back-office operations through captives or third-party vendors.”

Added Wipro vice-president Ramith Sethi: “We will see more back office captives in India due to easier regulatory framework, technology convergence, human capital and cost-arbitrage. Enterprises will also outsource back-office functions to third-party for lowering operational costs.”

Thanks to the mortgage crisis in the US and recession, American behemoths such as Citigroup, AXA and Aviva have sold or shut down back-office businesses in India. But they have not ignored its talent or cost benefits.

Last October, Citigroup sold its IT captive to outsourcer Tata Consultancy Services (TCS) for $505 million, and awarded it a nine-year, $2.5-billion contract to provide the services back to it.

Two months later, Citigroup also sold its BPO operations for $127 million to another outsourcer, Wipro, giving the global software major a six-year $500-million deal.

In late May, outsourcing firm Capita finalised takeover of a 600-person captive centre in India from AXA as part of a 15-year, $836-million deal.

Though technology spending has declined in traditional verticals like BFSI (banking, financial services and insurance), manufacturing and retail, areas such as healthcare, education and logistics are adopting IT technologies.

“Enterprises may have lowered IT budgets, but technology requirements have not come down,” Mittal explained.

Many enterprises, though headquartered in the US or Europe, have worldwide operations with subsidiaries and captives in multi-locations.

“As part of their global strategy, if US firms set up shop in India because of its advantages and business potential, it does not mean it is outsourcing but that its global outsourcing is,” Mittal added.

Echoing Mittal’s views, GE Money chief financial officer Jatinder Bhasin said global corporations were bullish about captives and third-party vendors as back office requirements were huge.

“The global back office industry will be about $200 billion by 2010-11, but captives will be able to account for only $33 billion. This leaves huge opportunity for third-party vendors,” Bhasin said.

Multinationals such as Dell, Morgan Stanley and GE Money are growing more domain expertise through Indian captives.

According to Morgan Stanley India managing director Nina Nagpal, captives had better edge in operating back offices, as they are part of the parent company and can move up the value chain with in-house talent.

“There are certain things that captives will have access to that a third-party may not have,” Nagpal added.

(Fakir Balaji can be contacted at fakir.b@ians.in)