Captives create value for parents: Everest
Divestures not a trend; firms are no longer in distress.
Changing face
While 97 new captive announcements were made in the last 12 months, only 10 captives were actually divested
Captives can triple their value on EBITDA basis by managing complete service lines and the demand for parent
They are much more effective in getting lower pricing in terms of contracting with third party providers
Moumita Bakshi Chatterjee
New Delhi, March 26
Offshore captive IT/BPO units that transition into mature roles such as governance of third party suppliers, and undertaking risk and demand management functions can become up to three times more valuable to their parent entity, according to Mr Peter Bendor-Samuel, CEO of outsourcing advisory firm Everest Group.
Debunking the industry perception that the 2009 trend of captive divestures would continue, Everest has pointed out that against 97 new captive announcements in the last 12 months, only 10 captives were actually divested.
“Historically captives have been seen as a platform to reduce costs. But in this maturing environment, we can see that captives can potentially can triple their value on EBITDA basis by managing complete service lines and the demand (for parent), and by providing a vehicle to do vendor management of the third parties,” Mr Samuel told Business Line recently.
The first quarter of 2009 witnessed 20 new captive announcements and one divesture and the following quarter 27 new captives and one divesture. In the third quarter, against four captive divestures 28 new captives were established – an 18 month high.
Despite the few divestures announced in fourth quarter of 2009, Everest expects continued momentum in the market going forward.
Notable divestures
Some of the notable divesture announced recently include Cognizant Technology Solutions’ acquisition of UBS India Service Centre Pvt Ltd, the Hyderabad-based captive service provider to the Swiss UBS Group; EXL’s acquisition of the back-office centre of American Express Business Travel; and Integreon’s acquisition of Grail Research, the captive unit of the US-based management consulting firm, Monitor group. “For a while there, captives were being valued very highly and it made commercial sense if a company was in need of capital…Firms were in severe distress. The situation has changed now. The valuations have dropped precipitously and firms are no longer under significant distress,” the Everest CEO said.
Relook at strategy
This, in turn, has prompted companies to re-examine their strategy and look at the value creation.
Explaining the changing face of captives, he said that these units started off as a platform for labour arbitrage, but are now moving onto more complex functions right from offering expertise to build reciprocal operations in other geographies, to managing third party suppliers. Captives can advise parent organisations on how to optimise the sourcing programs and mitigate risk, in the process becoming a strategic partner to the parent.
Being an offshore unit themselves, captives are suitably placed to manage the dynamics of offshore sourcing, believes Everest.
“They are much more effective in getting lower pricing in terms of contracting with third party providers. They can become a hub in the ecosystem – so now not only are they doing work themselves but they are also managing third party ecosystems,” Mr Samuel said adding that hybrid models would gain traction as companies outsource part of the work to third parties and retain certain capabilities in-house at comparable price points.
Source: thehindubusinessline.com
