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T his article will probably disappoint grand strategists who formulate and articulate theories about when to go captive or third-party or whether or not to convert a captive into a third-party. My view is that both are viable and necessary and can be made to work in the short term or the long term. Also, the transition from one to another is largely a people and management issue and not of grand structuring or strategy.

Just to recap some history, in the mid 1990s pioneers like GE, Amex and BA set up captives at least partially, because third-party options were not available. In the next phase that began in 1999, the third-party industry began to take shape and secure business from leading global corporations.

In the last 3–4 years, there has been a flood of business moving to India in both forms. Some captives players like BA (now served through WNS Global Services), Conseco (which operated through EXL, which went from third party to being owned by Conseco to being third party again) and GE (reportedly moving to third party) have changed or expanded their focus.

Can Captives Thrive?
No one debates the short-term benefits. They bring in world-class processes, move complex end-to-end work, train people well and expand the market by setting an example. The long term problems are losing talent when growth ebbs, insufficient integration with their parent and a lack of innovation and initiative on delivering value over and above the labor cost arbitrage. In many cases, the captives and parents are themselves to blame as they forget that people in a ‘hot’ industry like ours will move on if there is no growth. And future growth opportunities need to be created globally. Also, they often develop irrational, unsustainable operating structures.

While captives will have periods of re-assessment of their structure or value, they are sustainable in the long term just as shared services centres have been for a long time in the US or Europe. Some organizations will only ‘outlocate’ to India, not outsource and some basic assumptions for going captive like process confidentiality, internal comfort and corporate philosophy will not change easily. But captives have to be proactive on cost and productivity management and offshore-people integration with their global set up, otherwise their model will be challenged.

Can Third Parties Survive?
In the long term, the odds are in their favor in a high market growth environment. But they have short-term issues like people retention partially because captives pay higher, margin retention because competition is not trivial and organization building because they do not have a global legacy to learn from. However, high-quality leaders and strong management teams will solve these problems in some companies. As we are already witnessing, a few large third party players are emerging and becoming as sophisticated as any captive player.

For third-party players, the key imperatives are managing business and client mix, creating a more exciting place to work and continuous focus on productivity improvements. Companies who do these things well in the long term will be gigantic and even possible acquirers of floundering captives.

Can Captives Turn Third Party Successfully?
I am going to resist saying that WNS has proven it because these are early days but we have done many things right. First of all, we did not try to dramatically change everything too early, and decided to build the company on what the erstwhile captive entity did well, that is, execute a large multi-process offshore move built on strong customer partnerships. Second, we immediately built new functions like sales and marketing, transition, risk management that are not as organized in captives as in third parties. Third, we grew the business rapidly while transforming the company both through organic and inorganic growth. One can’t stand still and restructure in a high-growth environment. Finally, we were lucky that the old captive team and the new additions worked well together and we hardly lost anyone.

However, it has not been easy. The most difficult part has been changing the culture from a monolithic one to one flexible enough to deal with many different client cultures. There is also the issue of speed, third parties need to hustle a lot more since their environments are more unpredictable.

But at the end of the day it all comes down to finding good people, building good teams and work very hard. Good luck GECIS, and to any other captive that chooses to follow our path!