How Effective Are Captive Services?

Captive Services have been a popular means of business process outsourcing for some companies. In this, companies wholly own their BPO units rather than using a third party outsourcing firm. Companies opt for captive services to have complete control on the operations of their business processes in other countries. Again, the main driver is cost effectiveness. Companies tend to shell out more than they would have to pay a third party vendor however a lot less than what they would have to pay in their own country.

Most financial and telecommunication companies prefer having parts of their business processes outsourced in this manner. For example 3 Global services have their captive contact centre in Mumbai, India. Lehman Brothers also had their captive unit in India. The objective of having a captive unit is just to have tighter control and better regulation and functioning of the unit. There are a lot of long drawn legalities around liaising with a third party vendor.

The quality of work can be controlled only to a certain level and the framework of vendor may not be compatible with the company. Hence, using captive services has been an option for companies wanting to outsource since the 1980’s. Some of the companies who spearheaded this movement are British Airways (Captive later known as WNS Global), General Electric (captive later known as GECIS /GENPACT) and AMEX who have their captive units in Delhi and surrounding regions in India. The service arms of Dell, HP, IBM and Accenture have also set up shop in India.

On the other hand, the employees of the captive centres stand to benefit from this sort of a setup. When an employee is working for a BPO, they are indirectly employed by companies that have outsourced their work to them. They may be doing exactly the same work, putting in the same hours and producing the same kind of end product, however they are paid a lot lesser than their counterparts in the west. In a captive service, people are directly employed by the companies and get the same kind of benefits the employees of the company may get in the west. There may be minor differences in their pay scales as compared to the employees in the west; however they pay much better than third party vendors.

The global economic meltdown has not helped these captive setups. Companies like Citibank, Merrill Lynch, BT, Lehman Brothers etc have been forced to shut shop, face bankruptcy and cut down on jobs in many of their captive units. Others have been forced to sell their captives. For example, TCS bought out Citigroup Global Services. In the recent years companies have been forced to rethink their outsourcing strategies as the rising costs have diminished their returns on investments. With most captives attaining maturity and cost effectiveness being a challenge in the face of increasing competition, the future of captive services doesn’t look promising.

China’s Captive Market Captures Foreign Businesses

Fear is not the best way to run a business, yet running a multinational company with an office in mainland China leaves you in a strange limbo.

If you want to relocate, you are afraid to follow through because you presume – not without reason – that China will retaliate if you leave. Not only that, but you are afraid to even say that this is what you fear, for the same reason.

Don’t take my word for it. Ask the anonymous chief executive for Asia at an anonymous company, who declined to let The New York Times print his name because of the legal repercussions that can arise from openly criticizing China. He did say, however, that many companies now are “just convinced if they open that R.&D. center in China, every technical secret they’ve got will be copied, every patent exploited.” (1)

The Times further reported that several multinationals have left mainland China for Singapore, while still others express the desire to relocate but hesitate because of reprisals. Such action is far from unheard of. Jardine Matheson reincorporated in Bermuda in the 1980s and delisted from the Hong Kong Stock Exchange in the mid-1990s. In return, Beijing penalized the company for more than a decade, making it difficult for it to invest in mainland China in any substantial way.

Some companies report having difficulty convincing executives to move to China because of air pollution and limited educational opportunities. Given the climate of fear, however, it seems likely that the real reasons for dissatisfaction run deeper.

I have limited sympathy for the companies that now wish they were less exposed to China. They couldn’t resist the lure of a captive market of over 1.3 billion people. And they couldn’t seem to comprehend, though the risks were already knowable and known, that they would become captives themselves in turn.

Belatedly, however, companies are beginning to realize that choosing China for their Asian center of operations was a decision that held serious drawbacks. A survey of over 500 companies, released in May by the European Union Chamber of Commerce in China, registered an atmosphere of pessimism about Chinese profit margins. (2) Barriers to non-Chinese businesses are well known, both in Europe and the United States, and they seem likely to limit growth there.

China lacks freedom of information, freedom of expression and a legal system free of coercion. These three freedoms – a Chinese-sounding phrase if there ever was one – are essential to good business management in the modern world. But companies stampeded into China over the last 20 years for fear of missing out. Now, like it or not, in many ways they find themselves stuck.

They might get lucky. China might evolve into a more open, democratic and free society. It has happened before in places like South Korea. For a brief moment in the 1990s, there seemed to be hope that it was happening in Russia, though today Russia is an arguably worse environment for business than China.

More likely, however, multinational companies will find themselves divided on opposite sides of the chasm that is opening between China on the one hand and its Asian neighbors and their Western allies on the other, who are threatened by China’s increasingly aggressive territorial claims and protectionist impulses. China is big, but it is not an easy market for foreigners, and it could increasingly cost companies business elsewhere in the region.

For now, however, multinationals already have big problems with their Chinese offices. Major companies have faced complaints from Chinese authorities about everything from food safety to “unparalleled arrogance.” While facing prosecution, foreign companies can also find themselves lambasted by the Chinese press. Companies cannot rely upon the force of law to keep them out of trouble in China when authorities there will act in the best interest of the ruling elite regardless.

We can also be sure that whenever an American or European CEO today visits his company’s Chinese headquarters, he carries no data of any significance on his laptop and uses a smartphone specially scrubbed for the purpose – or, in some cases, a low-tech flip phone without Internet capabilities at all. To carry any sort of intellectual property into China willingly is tantamount to surrendering it to the Chinese government.

It’s a heck of a way to do business, but it is the way these companies chose. Now they have to live with it, or suffer the consequences of leaving.

Sources:

1) The New York Times, “Looking Beyond China, Some Companies Shift Personnel”

2) Bloomberg Businessweek, “Is the ‘Golden Age’ for Multinationals in China Over?”

Legal Outsourcing: Another Billion Dollar Industry

Surging business

Virtually unheard 10 years ago, the term “outsourcing” has emerged as a phenomenon in the business of the present day world. It has become the backbone of Indian service sectors. In the last fiscal India earned $6.7 billion by providing services in software, technology and manufacturing outsourcing.

Now the BPO companies have turned their eyes on legal outsourcing. According to a study by the US-based Forester Research, the current annual value of legal outsourcing which is worth $80 million can rise up to $4 billion and can produce 79,000 jobs in India by 2015. National Association of Software and Service Companies (NASSCOM) also projected that Legal Processing Outsourcing providers (LPOs) in India will soon rise up to $3-4 billion. This heralds the opening of new vistas for law professionals whose number is increasing incessantly.

According to Forrester Research report, “The benefit of the outsourcing companies in the US would translate into a cost saving of about 10-12 per cent. The potential of the Indian resources to absorb the increasing demand in legal outsourcing is because India enjoys the economic advantages of the wage difference and less perks and overheads.”

Nature of work

In the beginning the works which are being outsourced to India are “of secretarial nature and includes patent drafting, legal research, contract review and monitoring,” says Mr. Ravi Shankar S. of 21 st Century Law Firm. But it is set to expand with the enlarging knowledge of Indians regarding the foreign laws. Experts are hoping to receive high-end sophisticated contracts, which require a strong legal base of international standards.

Challenge ahead

The most important challenge to the newly-born sector is the need for Indian lawyers to pass US Bar exams, conflict of interest rules and data security. According to Mr. Ravi Shankar, “As far as qualifications of Indian lawyers regarding handling of foreign legal jobs are concerned, it should be pointed out that the nature of jobs at the lower level is almost the same. So no special qualification is needed to handle them.”

But notwithstanding the optimism prevalent in the legal business, there are a plenty of hurdles which can hamper the growth of this sector. For example the Indian Advocates Act, which deals with the professional conduct of lawyers, does not support work for other countries. Even, in specific laws governing companies and trade in securities, which hugely differ from one country to another, may constrain LPOs to paralegal and secretarial work.

But on the bright side, certain branches of law, which are of a global nature, like Intellectual Property laws (patents and trademarks) can give Legal Process Outsourcing Providers (LPOs) a fillip in their endeavour.

An Indian lawyer can be as good as his American counterpart in US Federal laws if properly trained in US law. What is required of an attorney, either Indian or American, is not that he should be aware of all laws and regulations but that he should be ready to acquire that knowledge.

Rush to grab the opportunity

It is the effect of this optimism that not only established BPO companies but also several legal firms have thrown themselves open to this lucrative opportunity. In fact, American conglomerate, General Electric, was one of the first to set up its captive BPO Gecis in India, which included LPO. Other technology companies, too, farmed out work to their Indian captive units.

Khaitan & Co, a leading law firm from Kolkata has already started an LPO by floating a new company ‘Neoworth’ and engaged 10 US-enrolled lawyers.

There is a strong political opposition in the US against outsourcing as it may affect the livelihood of US attorneys and may also serve as a roadblock. Despite of that feeling, legal firms are more than willing to outsource their jobs to India. That’s because like other BPO activities, Indian lawyers come cheap. An associate lawyer in the US comes with a $225 per hour tag in the first year. By the eighth year, it goes up to $450 an hour. In India, the rates are barely 10 per cent to 15 per cent of that. Moreover, with the time lag between India and the US and the UK, the turnaround time is 24 hours.