In a new wave of outsourcing strategies, overseas parent firms are taking advantage of their captive units in India to broker outsourcing deals.
Several multinational companies with captives in India are learning that the benefits of outsourcing to third party BPO and IT vendors. In fact, they are making use of the excellent management attributes of captive units to ink deals with clients across the world. Reports say that typically the final agreements are signed between the third party vendor and the Indian captive as opposed to a contract between the multinational company and a third party vendor.
In the case of captive firms, these contracts also have the additional benefit of a price advantage since these are domestic contracts. Peter Bendor-Samuel, CEO of Everest Group, a business solutions consultant firm, there is a common understanding that it is better to outsource certain tasks to 3rd party vendors since it is more efficient. Simultaneously, there is also a consensus about reserving captive for high-end tasks, which cannot be easily outsourced. Additionally, the MNCs are also taking advantage of the captive talent to sign agreements with 3rd party vendors - these captive firms also have an increased advantage of the domestic market.
An Economic Times report cited a top executive at a leading Indian IT firm as admitting to having contracts being inked with Indian captive divisions. Some of the Indian multinational captives that are engaging in this kind of contracts include Goldman Sachs, JP Morgan, and Bank of America. With captive units that have a workforce ranging from 5,000 to 8,000, these units have the capacity and talent to negotiate agreements efficiently.
One consultant who specializes in keeping a tab on these business deals told the Economic Times that the cost benefits are significant in captive deals. For instance, an agreement that fits the range of $20-$25/hour can be negotiated to one that does the same job in $15-$18 per hour in a contract that takes its origin in India. Incidentally, the downturn in the economy has spurred on momentum to such deal making.
TPI, a global outsourcing consultant, involved in approximately 25% of global outsourcing contracts revealed that contracts of this nature are on the rise; these captive contracts are sometimes known as 121 deals or India to India agreements.
Sddharath Pai, partner at TPI India said in a statement, since there were not tax advantages, Indian vendors were not eager to sign these contracts previous to the recession. But that has changed since the older servicing firms are no longer eligible for STPI benefits. This indicates that Indian vendors are at an advantage to undertake these deals. Pai added that Indian captives have an adequate number of senior management executives who are involved in decision-making regarding sourcing.