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It wasn’t that long ago when a slew of Fortune 500 companies, particularly in the financial services sector, announced they were opening captive centers in India to save a buck on a variety of back office tasks.
Now it seems many of those companies are auctioning off those centers as the benefits have proven more difficult to realize.
A story in the Wall Street Journal this week highlighted just how broad the trend has become. It listed a number of high-profile companies that have sold off centers, including AXA Sun Life, Aviva, Adaptec and Citigroup. In almost all cases, the companies have sold off the centers and signed multi-year contracts with the buyer to provide the same services back to the seller.
Winning bidders in the sweeps include Wipro, Tata Consultancy Services (TCS), GlobalLogic, Symphony, and Capita Group. At least two other companies, Delta Air Lines and UAL (United Airlines parent) have shut down centers completely as they scramble to cut costs.
Citigroup sold its Indian center to outsourcing firm Tata in October for $505 million and awarded it a nine-year $2.5 billion contract. In May, AXA Sun Life struck a 15-year, $836 million deal with Capita Group to take over a 600-person center in India.
It’s an interesting turn of events for companies that rushed to India to save a buck earlier in the decade. One of the problems they have faced is the fact that while the centers initially generated sizeable returns, over time the costs began to escalate. Indian workers expect to receive raises on an annual basis, and needed those raises to keep up with an overheated economy. In addition, the staff turnover rate at outsourcing centers is high, resulting in greater training costs.
The bigger question going forward is whether this trend will continue or will companies once again look to establish captive outsourcing centers once the economy settles. In January, management consulting firm Zinnov predicted Global 5,000 companies would increase captive centers as a result of the uncertainty caused by the Satyam fraud scandal. Yet, the opposite seems to be happening.
At the Global Sourcing Council summit in New York City last week, one IT executive with a top tier bank shared with me the fact firms the bank outsourced operations to in India were in turn outsourcing the work to even more cost effective centers on the east coast of Africa.
As long as companies keep chasing cheaper answers to their back office operations, there’s know telling where this trend will end – in India or the shores of East Africa.
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