Captive Centers – ‘Low Cost Aggregators’ Or ‘New Revenue Streams’

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Captive Centers Low Cost Aggregators Or New
Revenue Streams
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Sangeeta Shankaran Sumesh is a Chartered
Accountant and Cost Accountant by profession with
around 17 years of experience, including 8 years
of international exposure. Currently,
spearheading the Finance Administration
division as Vice President at Dun Bradstreet
Technologies and Data Services, the crests in her
career came with stint in other big
Multinationals Big 4 professional firms.
Some of the honors recognition she received
includes

• Featured as one of Indias most influential
  women in Finance by rediff.com in Jan 2012
• She was also rated as one of the top 5 leading
  Women CFOs at Women Leaders in India Awards 2011
  held at the Taj Mahal Palace in Mumbai.
• Guest speaker at various seminars KPMGs
  seminar on Prevention of Fraud procurement
  Indo French Chamber of Commerce ICAIs Corporate
  Forum in Mumbai etc.

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Featured as one of Indias most influential
women in Finance by rediff.com in Jan 2012 She
was also rated as one of the top 5 leading Women
CFOs at Women Leaders in India Awards 2011 held
at the Taj Mahal Palace in Mumbai. Guest speaker
at various seminars KPMGs seminar on
Prevention of Fraud procurement Indo French
Chamber of Commerce ICAIs Corporate Forum in
Mumbai etc. Also a Nominee for the CA
Professional Achiever Award for 2009 Sangeeta has
also attended the International Financial
Controllers seminar held in Paris and London in
2008. She is a mother of two and balances her
professional, social and spiritual life as an
adept working woman. Sangeeta is in pursuit of
excellence and value creation. In the current
post, Sangeeta shares her perspective of the
role Captive Centers can play for Global
Multinationals and Indian Companies who are
looking to set up such Centers which allows them
proper control of offshore process, access to
diverse talent pool, better resource management,
standardisation of process, flexibility,
stronger delivery process and more importantly
allows the parent company to enjoy full
intellectual rights and onshore buy-ins. From a
CFOs perspective, Sangeeta talks about the need
to look at several other aspects including local
regulations, culture, risk and the general
philosophy that companies have in terms of
encouraging captives.
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• Also a Nominee for the CA Professional Achiever
  Award for 2009
• Sangeeta has also attended the International
  Financial Controllers seminar held in Paris and
  London in 2008.
• She is a mother of two and balances her
  professional, social and spiritual life as an
  adept working woman. Sangeeta is in pursuit of
  excellence and value creation.
• In the current post, Sangeeta shares her
  perspective of the role Captive Centers can
  play for Global Multinationals and Indian
  Companies who are looking to set up such Centers
  which allows them proper control of offshore
  process, access to diverse talent pool, better
  resource management, standardisation of process,
  flexibility, stronger delivery process and more
  importantly allows the parent company to enjoy
  full intellectual rights and onshore buy-ins.
  From a CFOs perspective, Sangeeta talks about
  the need to look at several other aspects
  including local regulations, culture, risk and
  the general philosophy that companies have in
  terms of encouraging captives.

http//mycfo.in
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A Captive center, apart from being cost
effective, has many other benefits like ensuring
proper control of offshore process, diverse
talent pool, better resource management,
standardisation of process, offers flexibility,
stronger delivery process and allows parent
company to enjoy full intellectual rights and
onshore buy-ins. There are many potential
locations to set up a Captive Center (like India,
China, Central Europe and other parts of the
world). While the decision to select an ideal
location can vary dependent on the organisations
requirements, some guiding factors include cost
arbitrage savings potential, availability of
skilled resources, communication ability,
geographical presence and government support in
terms of special economic zones, tax implications
and underlying infrastructure. India fits most of
these criteria and hence has been an ideal option
to set up a captive unit. The past decade has
seen a number of captive centers being set up
across India. As per the latest buzz in the IT
industry, captives are back in vogue. According
to figures from Nasscom, quoted in the Economic
Times, India, there were over 70 new Indian
captives set up by Multinationals in 2012 and 11
existing captives have expanded.
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While setting up a captive Center, the following
aspects will have to be factored during the
planning stages.
Objective The long term vision of setting up a
captive center needs to pre-defined and the under
lying strategies in the development of the Center
has to be meticulously planned while setting up a
captive center. The decision making (for eg. Is
it going to be a 100 captive unit or will it
also encourage third party operations, investment
required to set up the captive unit etc.) need to
be specified and woven around the long term
objective of the Center. Infrastructure Great
attention need to be given while setting up the
necessary infrastructure of the Center from
office space to technology to disaster recovery
to handling productivity issues. In Chennai for
instance, it is common to have a lock in period
for the office space. It has to be ensured that
the lock in period blends with the long term
growth prospects of the Center. Staffing It is
critical to get the right talent to run the
organization. Core positions like CEO, CFO, HR
Head, Delivery Heads etc. need to be put in place
first and the organisation pyramid has to fall in
place subsequently. Personnel with the right
experience, adept knowledge and high integrity
levels should be employed.
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Local regulations Before taking the plunge to
set up the Captive, assess the local statutory
regulations and take assistance of the experts in
this field to understand the rules and the
necessary requirements. The home work on
obtaining necessary licences, understanding the
transfer pricing regulations, the Banking
modalities, tax planning etc. needs to be
undertaken upfront. Policies and procedures
The Captive units policies and procedures need
to be set up at the start and has to be in line
with not only the global practices of the parent
company but also the country specific legal
requirements. Process for each activity has to be
defined and ideally it should help as an internal
control mechanism. It is vital to include the
Corporate Governance policy and also an
exhaustive compliance checklist as part of the
policy. Culture Sensitivity to the inter
cultural aspects needs to be regarded and
respected. Although it is called a global
village, culture varies from country to country
and also in regions and this has to be valued.
Food habits, festivals, working days etc. can
always be flexed without compromising on
professionalism, ethics etc.
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Foreign exchange The currency plays a vital
role on the bottom line. There could be windfall
gains or losses based on the fluctuation. However
the thumb rule while setting up the Center is not
to convert the local currency to the foreign
currency for decision making. All financial
parameters should be evaluated in the local
context. This is because a significant amount in
the local currency may seem immaterial in the
foreign currency, thus paving way for potential
mismanagement. Innovation Innovation from the
Captive Center should be encouraged and the Unit
can be eventually converted from a Center of
Excellence to an Innovation / RD hub. The
expected value add from the Center can be
specified and the employees can be motivated to
achieve their set targets thus making it a win
win situation mutually. Risk mitigation As
prevention is better than cure, utmost care
should be given to ensure that all risks are
mitigated. Risks can be market risks, credit
risks, operational risks, financial risk,
enterprise risks etc. An action plan can be
designed to mitigate all sorts of potential risks
the Center can be exposed to.
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Encouraging the use of the Captive Many times
although a decision has been taken to set up a
captive in a faraway land, due to the distance /
language barrier or efficiency factors etc. the
personnel from the parent company fail to give
sufficient volume of business to the captive.
This practice should be avoided as the Center is
dependent on the parent company for business.
Therefore the senior management should sponsor
the captive and should actively involve and
encourage the teams of the parent company to
outsource as much possible work to the captive
unit. Due to the umpteen advantages of a captive
unit, the number of captive units set up globally
has risen over the last few years. Apart from the
cost arbitrage, tightened regulatory requirements
in US and Europe, the need for greater control
over intellectual property and availability of
ready talent pool in offshore locations have been
the key driving factors for this rapid growth.
For instance, in India there are over 850
captives employing over half a million
professionals. Thus the captives have evolved
from being a low cost aggregator to captives with
global focus to access new markets and generate
new revenue streams.
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