IT captives queering the pitch for local tech firms

It isn’t just the tech multinationals like IBM and Accenture that are snapping at the heels of Indian information technology (IT) services vendors.

The captive IT centres of many overseas companies in India are gobbling up much of the pie, too. 

Zinnov Management Consulting study says this is happening as chief information officers look at deriving business value from their IT deployments rather than just cost savings.

Another reason, says Chandramouli C S, director-globalisation advisory - Zinnov, is that tech vendors invariably fall behind the CIO’s technology requirement.

The study reveals IT vendors start offering a technology only after enormous opportunity in it emerges. So, if a company has an IT captive, it can adopt or move to a new technology without a lag.

And as this trend catches on, IT captives may see their share swell. 

“While we expect the overall IT outsourcing to grow, within that the pie of captives will expand but it’s not going to completely go their way,” said Chandramouli.

Sandeep Dhar, CEO of TESCO Hindustan Service Centre - offshore arm of the UK retail firm - confirmed the trend saying they are now working on solutions that the vendors were working on.

“Definitely, things that would have gone to vendor we are doing it now. Though, we still outsource some application work to vendors. Today, we use vendors in specific instance where we have short term requirement to scale up. If I suddenly need 300 Java programmers for six months, I am not going to hire 300 Java programmers and six months later fire them. For that six-month period, I may go to the Java programmer and get the job done,” he explained.

The Zinnov report, titled ‘IT Services Captive Landscape in India - Way Forward’, lists five major reasons for IT customers to look at setting their own offshore centres in India.

They include local tech firms’ lower maturity levels in system integration and IT consulting, lack of agility and flexibility, focus on cost and margins, high attrition and failure to keep pace with customer expectations.

“All these (shortcomings) impact business (customers) value and companies would rather spend a little higher than compromise on these counts,” said Chandramouli. 

Citing an example, he said, Barclays Banks started outsourcing IT services to save cost, but today it is in India to get a strong foothold in the domestic market and compete with local banks like State Bank of India.

“In such cases (like Barclays Bank), your IT will play a much significant role than looking at saving another $5-10 per head,” said Chandramouli.

The management consultancy firm forecasts the number of captives in India to grow at very fast pace in the coming years from the current 750.

“In 2008-09, when the recession was at its peak, we saw only five companies set up captives here. We expect it to go up to 25-30 every year in coming years,” said the advisory firm executive.

Today, the size of IT-BPO and engineering services captive in India is estimated to be around $11.1 billion, which 22% of the total export revenues. Of this IT services captive market is expected to be $3.4 billion growing at a compounded annual growth rate of 21% since 2003. 

If this trend continues then soon captives could start competing with local tech firms like Infosys, Tata Consultancy Services, Wipro and others on pricing front too.

That would happen as captive centres would negotiate IT contract on behalf of their parent firms with local firms. Since they would be better aware of the talent cost in the Indian market, they would drive down billing rates.