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Priyanka Vyas

As it helps them to retain an element of control

New Delhi , Jan. 2

In order to leverage the intellectual capital of India, investment banks such as Bear Stearns, State Street, National Australian Bank and Japanese leading banks such as Nomura Securities, Shinsei, and European mid sized banks are keen to outsource through `virtual captives' in India.

Even existing investment banks such as Goldman Sachs, Lehman Brothers, JP Morgan and Morgan Stanley that already have their own captives in the country are considering this model for capacity expansion.

Traditionally, foreign companies would either set up a captive or outsource it to a third party. In certain instances they prefer the BoT (build-operate-transfer) model under which companies would contract an agreement with a third party vendor to set up a captive, which would then be transferred back to the company.

Since the model runs certain kinds of risk of losing clients and has inherent inefficiencies, investment banks are increasingly looking at the virtual captives model.

Operational Tie-up

Also known as the hybrid model, this typically entails a buyer entering into an operational tie-up with a supplier, wherein the supplier provides the assets, IT infrastructure, and services such as recruitment and training, plus dedicated resources to service the buyer.

"The buyer retains an element of control over the process and technology along with the senior management, thus enabling a captive-like environment," explains Mr Nikhil Rajpal, Vice-President, Global Sourcing, Everest Research Institute.

"Investment banks are looking at the virtual captive model mainly due to regulatory requirements for setting up a captive unit and managing operations.

Through this they retain control over their core process and can also provide domain knowledge to third party service providers," says Mr Rohit Kapoor, CFO, EXL Services. About 10-20 per cent of EXL's prospective clients are considering this model of outsourcing, he added.

Outsourcing ratio

The Evalueserve's COO, Mr Ashish Gupta, also bets on the same trend. As per McKinsey estimates, captives are 29 per cent more expensive than third party. This could be one of the reasons for the changing ratio between captives and third party service providers.

The Boston Consulting Group, Principal, Mr Saurabh Tripathi, estimates that the captive to third party outsourcing ratio has decreased approximately from about 50:50 to 30:70. Another reason for the trend is to diversify business risks and leverage strategic advantages from different countries.

Comparative Advantage

"Considering the most conservative estimates, investment banks are expected to expand at 30-40 per cent per annum. This is likely to set up a new, smart way in outsourcing taking into account risk-hedging prospects.

So, instead of putting all eggs in one basket, virtual captives could be a balanced way to outsource in different countries such as the Philippines and India depending on its comparative advantage," says Mr Ravi Trivedy, Executive Director, Financial Services, KPMG.

Mr Robin Roy, Principal Consultant, Banking and Financial Services, PricewaterhouseCoopers, adds: "Content superiority will differentiate one investment bank from the other. IPR issues remain a concern in outsourcing to third party. Nevertheless, virtual captives will be increasingly used not only to retain core control but manage internal customers well."

More Stories on : Investment Banking | Business Models | Overseas Investments | Outsourcing

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