The Hindu Business Line : Captive centres losing ground to R&D service providers

In the next three to four years, 40-60 per cent of captives would either stop work or partner with the Indian service providers, according to Forrester.

Our Bureau

Bangalore, April 7 Hit by rampant attrition, high costs, operational problems, lack of scale and poor delivery track record, captive centres in India are losing ground to the R&D service providers who see quick growth.

Mr Ajay Kela, Chief Operating Officer and Managing Director, Symphony Services, said in the next 10 years, 75 per cent of the outsourced product development work would be with the service providers. At present captives get 75 per cent of the work, and only 25 per cent is given to service providers.

Indian market

Mr Kela expects the global product development outsourcing market to touch $14 billion by 2010, up from the present $9 billion. The Indian market is worth about $3.5 billion, he said.

Analysts, too, are optimistic about the growth of the R&D service providers. Forrester Research in a note said by 2009, diminished reliance on the captive strategy would accelerate third-party market for product development.

About 60 per cent of captive centres fail to meet expectation, and in the next three to four years, 40-60 per cent of captives would either stop work or partner with the Indian service providers, Forrester added.

High costs are one of the main problems for the captives. According to Forrester, a captive centre of 150 people can cost $2 million a year more than using a third-party provider for the same work.

Also, in most instances, the work in captives is mundane and related to old projects, leading to high attrition level. Mr Srinivasan Chandrasekhar, Senior Vice-President, Aztecsoft, said companies often offshore low-end work. Skilled people hired by the captives have different expectations and they leave, he explained.

Weak processes

Many captives fail because of their own weak processes. Forrester Research said processes designed to work within the four walls of the company buckle when deployed at a global level.

Moreover, because captives do not invest enough in process improvement measures such as CMMI, Six Sigma, or security certifications, their resource utilisation is at least five to 10 per cent poorer than the industry average of 75 per cent, Forrester said.

Companies having captives outsource because it is not possible for them to develop all the competencies.

By outsourcing, they also try to keep certain costs variable. At present, companies mostly outsource non-core work.

Vmware Inc, a provider of virtualisation solutions, said R&D service providers give the flexibility to quickly expand development team. It also offers specific expertise in key areas.

This enables Vmware to get quality products out to its customers in a timely manner.

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