Captive 2.0: Lifecycle of shared service centers, Paul Schmidt, Partner and Practice Lead, Global Services Delivery, TPI

1Copyright © 2008, Technology Partners International, Inc. All Rights Reserved.

Captive 2.0 – The New, Improved Version!

Paul Schmidt, TPI

Surinder Singh, FMR India

February 14, 2008

Copyright © 2007, Technology Partners International, Inc. All Rights Reserved. No part of this document may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval devices or systems, without prior written permission from Technology Partners International, Inc.

Copyright © 2008, Technology Partners International, Inc. All Rights Reserved.

The Journey to Captive 2.0 – the New, Improved Version!


Achieve substantial and sustainable improvements in total cost of operations.

Deploy new and innovative services that materially enable the attainment of strategic business objectives.

CostCost

CapabilityCapability

The 3C Framework for Sourcing

Provide access to scaleable and resilient sources of talent and infrastructure to enable attainment of business goals.

CapacityCapacity

Capability, Capacity and Cost are the underlying sourcing objectives


Cost is KingCost is King

3C … the Compounding of Sourcing Attributes

Cost

Capacity Capacity

Capability

2007 2010

For experienced adopters of outsourcing, we perceive a shift towards a more balanced emphasis and greater compound orientation among Cost / Capability / Capacity.

Strategic Zone

Capability

Cost

Near-term cost attributes Access to skilled resources Effort-oriented, rather than

productivity-driven

Compounding EffectCompounding Effect

Relative equilibrium among sourcing imperatives

Capability prominence for business value dimensions

Tendency towards strategic goals


Value and Economic Efficiency Offshore delivery units exist across across a range of value-efficiency combinations

HighLow

High

Economic Efficiency

Val

ue

Value as defined by the buyer or the parent firm is indicated by a combination of the following:• Supporting new product/ service

development

• Faster time to market

• Enhanced capability/ capacity

• Access to new markets

• Automation/ Reengineering of existing processes

SpecialityCaptive

Best-in-class3rd Party

Economic Efficiency: The ‘Price charged’ (Rate or Transfer Price) is the market measure of economic efficiency

‘Factory’3rd Party

‘Me-too’ Captive

‘Me-too’ 3rd Party

Unsustainable

Unserviceable


Shift to Managed Services is Underway – Best in Breed

The era of labor arbitrage orientation is nearly concluded. We are entering a period of updating historically simple offshore relationships 2008-2010 will see significant

“rationalization” of offshore delivery resource models

The ITO and “horizontal” BPO segments will continue their segregation into best-of-breed provider contracts Providers making decisions on

technical/process orientation versus business value focus

Corporations moving towards bundled arrangements for managed services that comprise elements of infrastructure, applications and operations These will represent a new era for the

BPO segment of the outsourcing industry, one that has much greater domain-specific orientation

Leverage of IT scale becomes more relevant

TPI predicts that BPO ACV will grow faster than ITO ACV for these reasons

TPI sees strategic combinations emerge involving leading ERP software providers, infrastructure providers, and business process experts all oriented around industry solutions delivered via globally-dispersed platforms.

ACV = Annualized Contract Value

Outcome-oriented Services emerging as the focal point for buy-side and provider-side emphasis.


Characteristics of captive and third party players

Third Party Leverage onshore

presence Create centers of

excellence Long duration

customer relationship & deep account knowledge

Captive Leverage business

and proprietary knowledge

Tighter integration with the parent unit

Have a “seat at the table” i.e. represented in management councils of the parent

Onshore team driving relationship

Deep business knowledge/ technology expertise

Value added services that support enterprise level programs

Integrated global career paths for high skilled employees

Cultivate an “employer of choice” positioning to attract top notch talent

Encourage a culture of thrift through the organization

Strong internal measurement, systems and controls

Automation, standardization, and process maturity

Employees with the right skills placed in the right locations with an optimal match to type of work

Efficiency Focus

Value Focus

Captive Able to contain costs

through continued growth and having attained critical mass

Automation and Productivity Improvements

Third Party Fixed costs spread

across a portfolio of clients

Leverage Scale for SG&A costs

Flatter Employee Pyramid


Strategic Options for Existing Captive UnitsFMR Thinking about the way forward

Value Play Focus primarily on enhancing value to the parent firm while incrementally increasing economic efficiency without disrupting the current delivery model

Efficiency Play Focus primarily on discontinuously enhancing economic efficiency with a tradeoff vs. higher value capability. This could lead to clearly segmented offerings with differing cost implications – in essence mirroring third party behavior of pricing by valueHighLow

High

Economic Efficiency

Val

ue

SpecialityCaptive

Best-in-class3rd Party

‘Factory’3rd Party

‘Me-too’ Captive

‘Me-too’ 3rd Party

Unsustainable

Unserviceable

Efficiency Play

Value Play SuperCaptive


Captive Lifecycle View (1)Captives follow a lifecycle model and success hinges on matching strategy and operating model to current state of evolution

2

Sub-scale captive

34

1

2

1

34

1

2

2

Reverse BOT – 3rd Party

Super Captive

34

1

2

Hybrid Captive

34

1

2

1

3

1

2

4

1

Captive

i2i

Start of captive

operations

Evolved captive

Evolved captive

Reverse BOT – 3rd Party/ PE


Captive Lifecycle View (2)After start-up, a captive either falters or “crosses the chasm” to become an evolved captive

2

Sub-scale captive

34

1

2

Evolved captive

2

Reverse BOT – 3rd Party

1

1

Captive unit with costs/ operating metrics out of sync vs. market – will atrophy eventually

Exit option is a people (& assets without premium) transfer to a 3rd party. PE firms have not much interest in such units

Captive perceived as ‘strategic’ part of the enterprise – ongoing growth as captive adds higher value added work and/or FTEs

Costs will be higher than median – a ‘premium’ the enterprise will be willing to pay in the medium term


Captive Lifecycle View (3)Multiple journey paths for an evolved captive

34

1

2

Evolved captive

Super Captive

34

1

2

Hybrid Captive

34

1

2

Reverse BOT – 3rd Party/ PE

3

1

2

4 Captive

i2i

Best in class Captive – has reached scale and operating efficiency of large 3rd party units

Serves as global servicing arm of enterprise – driving standardization & consolidation and reengineering

The ‘Strategic Captive’ housing higher end/ KPO work/ PMO and the VMO to source lower end work via ‘hub and spoke’ model

Entity performing low end work with people (& assets) transfer to a 3rd party/ domestic contracting for people (& assets)

With slowing growth, cost arbitrage stops – enterprise does not see captive activities as ‘core’. With stable operations, Captive represents a monetization opportunity

People and asset transfer at premium – to ensure operational stability, transfer to a 3rd party or 3rd party/ PE combine


India-to-India (i2i) Contracting

“i2i contracting has the potential to deliver 20% to 30% savings on commoditized services” - Captive

Sourcing Manager

We observe that i2i contracting via a ‘hub and spoke’ model is increasing in the IT space – we expect that it will eventually start in the BPO space too

Onsite Project TeamsBenefits Provides access to entry level

resources -several non IT parentage captive find it difficult to attract & retain entry level resources because of the perceived lack of a career path in a non-IT company

Rapid deployment capability Increased Offshore Leverage Low cost commodity skills

Caveats of i2i setup Requires working out a payment

structure that retains the export tax benefits

Contractual provisions around sourcing turn around times and SLAs should be included to ensure satisfactory service delivery

Usually it is a T&M model with profile/skill based rate card – all project risk shifts to the captive unit

i2i Provider i2i Provider i2i Provider

Offshore Hub

The India captive unit becomes a hub through which different business units procure offshore services

Captives focus on program management, vendor management and governance and are able to provide challenging career opportunities for experienced resources

Copyright © 2008, Technology Partners International, Inc. All Rights Reserved.

FMR India – Case Study


Fidelity In India

Bangalore

Chennai

FMR 396

FIL1,205

COLT 845

Shared Services 99

Total2,551

AMC 135

Shared Services 4

Total 139

+ 10 Sales OfficesMumbai

Delhi/Gurgaon

FMR 4,623Shared Services

206COLT

56Total 4,879

FMR 476FIL 115Shared Services

47Total 638

8,207


Service Evolution 2003 to 2007

2006

IT Development

Transaction Processing

Production Support

Application Maintenance

Testing

Database Modeling

Implementations

Background Vetting

Vendor Management

Bank Reconciliation

Problem Resolution

AAA Support

Research

Finance & Accounting

Documentation Services

Securities Processing

Process & Quality Consulting

Network Operations Support

Six Sigma Consulting

2005

2004

2003

2007

Centers of Excellence; Testing, Informatica

Annual Enrollment

Product Implementations

Market Technical Analysis

Campaign Analytics


FMR India Business Plan (Strategic Objectives 2008-10)


Captive Cycles

LIBERATED STATEHOOD

BENIGN AUTONOMY

DIRECTED PROTECTORATE


The Road Ahead

From Process to Business Model Offshoring

MARKET ANALYTICS

BUSINESS ACQUISITION

SERVICE IMPLEMENTATION

SERVICE OPERATIONS

BUSINESS ANALYTICS

LOOPED TRANSFORMATION


So what then is Captive 2.0?

Captive 1.0 Captive 2.0

Organization Structure • Uniform and homogenous

• Hybrid, disaggregated as required

Core Capability • Process Business Model

Talent Pool • High-skilled workforce irrespective of the type of work

• “Horses for courses”

Benchmarking • No benchmarking or limited to a single area like employee compensation

Employee Productivity Employee Utilization Employee Compensation


Key Messages

Captives need to continually evaluate their service portfolio in relation to the value-economic efficiency trade off

Captives need to not just focus on service delivery but become the conduits through services are delivered to the parent

Offshore Captive model is viable in India

Benchmarking themselves against best-in-class captives, third party providers and parent operations demonstrates the viability

Lifecycle view of captive helps understand the captive landscape in India

Recent exits are either regular events in the normal course of business or value-realization (which illustrates the value-creation potential of the captive model)

Captive 2.0 model emulates best of both worlds (captive and third party)


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Copyright © 2007, Technology Partners International, Inc. All Rights Reserved. No part of this document may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval devices or systems, without prior written permission from Technology Partners International, Inc.