March 2010

Building a Successful Captive

Services Centre in the Financial
Services Sector

By David Howie, Ph.D.

Director, TPI

CONTENTS

2. What is a Captive?
2. The Market in Context
2. The Advantages and Disadvantages of Captives
4. Tips for Building a Successful Captive
9. Conclusion
WHAT IS A CAPTIVE?
In the sourcing context, a ‘captive’ facility is a wholly
owned entity that provides services principally to a
parent organisation or its affiliates and is located in a
separate country or region. The term is commonly used
today to differentiate between outsourced, offshored
processing and offshoring in a service centre that is
owned by the company to which it provides services.
The management of the captive, together with the
vast majority of workers, will be employees of the
parent company. Captives are used for IT outsourcing
(ITO) services, business process outsourcing (BPO) and,
increasingly, the provision of high-value ‘knowledge
process’ outsourcing (KPO) that require a degree of
specialised domain expertise.
THE MARKET IN CONTEXT
According to TPI research, the financial services
industry’s first captives were established in the early
1980s, principally in countries such as Ireland and
Malaysia, and predominantly to provide technology
services and applications development and
maintenance (ADM) capabilities. Subsequently, a
growing number of BPO back-office and customer
relationship management (CRM) captives have been
built, as well as captives providing specialised financial
services processing and knowledge-based activities
such as equity research and analysis. Many of these
captives have been established in India.
Recognising that financial services companies
have been at the forefront of leveraging captive
organisations as a central ingredient in their global
service delivery models, TPI has recently conducted
an extensive survey to understand the presence and
capabilities of these captives. Seventy-four companies
— more than one-third of the financial services
companies included in the survey — reported that they
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were currently operating captive facilities. According
to our research, the most common services supplied
are transaction processing, CRM voice processes, and
IT help desk, research and analytical support. Roughly
one-third of current captives are based in India, and
the average size of each is approaching 2,000 full-
time equivalents (FTEs).
Though much activity in the last 10 years has been
focused in India, we are now seeing a trend for captive
growth in Eastern Europe, China and the Far East.
There are clear signs that the market is maturing and
companies are becoming more knowledgeable about
the pros and cons of using captive operations. As a
result, we are seeing a polarisation of the market, as
companies aim for either niche facilities offering high-
end business or knowledge processes, or larger, more
general facilities aimed at full-scale back-office BPO
and ITO integration. Companies are also responding
to the challenges of hiring and retaining management
staff, particularly at the mid-levels, where the rate of
attrition can be as high as 20 percent or more per
year.
THE ADVANTAGES AND DISADVANTAGES
OF CAPTIVES
Captive facilities are thought by many to provide
some of the best features of both external and
internal service provision. As with an outsourced
provider, a captive will typically be based in a low-cost
country and will thus represent an opportunity to
improve process economics through wage arbitrage.
Establishing a captive in a region of high growth will
also enable a company to access new sources of
talent. In many cases, companies are using captives
to build a foothold in a potentially expanding market
prior to rolling out a full retail presence.

Further, since the captive is a full part of its parent
company, the risks associated with moving work
offshore are reduced because the parent can retain
a greater degree of control over operations, together
with the flexibility to adapt services and processes
to changes in business requirements. Captives are
also, in theory at least, easier to monitor than third
parties. Using a captive allows the parent to establish
a controlled environment that minimises the security
risks to valuable intellectual property or confidential
information, and it ensures that the parent retains
ownership of any new intellectual property generated.
This is particularly relevant if high-end knowledge
processes are to be provided.
The parent also retains full control over its touchpoints
with clients. In essence, using a captive rather than a
third-party service provider minimises the opportunity
for clients to bypass the parent company and turn
directly to the third party for its services. Finally,
regulatory barriers introduced to protect customers of
financial institutions when processing is outsourced and
moved offshore (e.g., the outsourcing requirements in
the U.K.’s SYS C regulations and the European Union’s
MiFID regulations) are mitigated since the captive is
fully owned and operated by the parent. The overhead
of ensuring compliance for outsourced and offshored
processing can be significantfor financial institutions.
Not all the characteristics of captives are positive,
however. Parent companies typically underestimate
the investment required, both in start-up capital and
management time, and find it more difficult than
expected to recruit talented resources in the host
country.
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They also fail to appreciate the challenges of building
and operating facilities in countries where construction
standards may be lower, where risks to the health
and safety of employees may be greater, and where
cultural issues may affect business practices when
sourcing from third parties. The potential for increased
liability and damaged reputation is greater than if the
operation had been constructed and operated by a
third party.
Establishing a captive typically takes far longer than
it would to contract for a third-party service provider
for the same services. Further, and in contrast to using
a third-party provider, full financial and operating
risk is retained, but without the chance to benefit
from an external provider’s scale, efficiency and
process experience. Crucially, captives are usually
more expensive to operate than using third-party
service providers, mostly due to scale effects. Finally,
the parent company is often unprepared for the
challenges of ongoing service management of the
captive. In particular, the company is often unaware
of the extent to which service provider disciplines
need to be introduced to manage the pipeline of
work and the ongoing demands and expectations
from different parts of its business. These disciplines
differ from those of conventional third-party provider
management.
As a result, it is common for captives to be closed or
sold to BPO providers within a few years of commencing
operations, particularly when the operations are too
low-scale to be cost effective. A number of service
providers have expanded their business operations
successfully by taking over the management of captive
facilities for companies whose ambitions in setting up
these operations were unmatched by their ability to
manage them.

TIPS FOR BUILDING A SUCCESSFUL CAPTIVE
Make Sure You Are Setting Up Your
Captive for the Right Reasons
In our experience, the decision to set up a captive
is often taken for the wrong reasons. It is not, for
example, an easy way to climb onto the offshoring
bandwagon for those who think that using a service
provider is too risky. Nor will it deliver short-term cost
savings. (Indeed, our clients are usually surprised by
the extent of establishment costs, particularly for IT
and premises setup.) Importantly, moving a process
offshore, which is inefficient or difficult to manage, will
not magically solve the problem. This misconception
— common enough when outsourcing to service
providers — is still more damaging in the case of
captives, since there are no third parties involved with
new process reengineering or transformation skills to
address efficiency issues. In fact, performance can
further degrade once a broken process is moved into
a captive, since the difficulties of remote management
tend to compound the problem. The establishment
of a captive should be treated as an opportunity to
undertake a comprehensive review and reengineering
of inefficient and ineffective processes.
Make Sure the Scale and Scope of Your
Proposed Operation Is Realistic
For highly specialised or knowledge-dependent
activities, sustainable captives can be smaller than
those for standard processing work, but even so,
research and practice suggest that it is difficult for
captive operations of fewer than about 500 FTEs to
survive in the long term. For standard processing in
India, this lower limit can be in the low thousands.
The prime reason is perhaps economic. Captives
usually have relatively high fixed costs, not only from
premises, business continuity and IT-related items, but
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also from management and back-office functions such
as Human Resources (HR), Finance and Accounting
(F&A), recruitment, and ongoing tax, audit and legal
activities.Unless the number of FTEs is substantial,
these costs lead to high ‘seat costs’ that can outweigh
salary savings of even 50 to 60 percent per FTE or
more. Starting small and growing rarely improves
payback times, because this requires a costly and time-
consuming investment in the middle management
layer in order to be successful. Factors that can tip
the balance in favour of selecting a captive approach
over outsourcing are the complexity and risk involved
in the processes to be offshored. If they are central
to the business, are complex or involve development
or use of competitive intellectual property, the
additional costs may be outweighed by the strategic
risk and nature of the work performed. Small captive
organisations will also find it more difficult to attract
and retain talent, as they will often not be able to offer
the same varied career paths as larger organisations.
It is important also to decide the location of the
proposed captive carefully. Each country has certain
characteristics that make it more or less suitable for
particular types of captive facilities. Language and
time zone are obvious considerations here, but often
as important are the tax and regulatory regimes,
access to a talented labour pool, and the robustness of
the local infrastructure, including IT connectivity. And
of course different locations within a country will have
markedly different characteristics, too. Good transport
and infrastructure will be essential to attract workers,
as will the availability of reasonably priced residential
housing. In boomtowns such as Bangalore and
Mumbai there can be a war for talent at the right
levels, and traffic congestion will be an important
factor when deciding where to site your facility. In our
experience, the decision on where to site a captive
is too often driven by anecdote and the personal
preference of senior stakeholders. Location is a major

factor in the ultimate success or failure of the captive.
Therefore, it is surprising that this decision is often
made in the early stages of the project. To ensure
the selection of the most appropriate location, it is
essential that management allocate sufficient time
and expertise to undertake a comprehensive and
objective location selection exercise.
Have a Clear Mandate from Your Senior
Management to Establish the Operation
Building a captive is an expensive and lengthy
business, and it can make significant demands on the
time of senior management. The failure of a captive
or its cancellation during construction could be
publicly embarrassing, waste start-up costs, and often
damage the processes earmarked for transition of
roles offshore. As a result, the decision to press ahead
should be taken only at board level, and only with
the buy-in of all affected business units. At the same
time, sufficient funds must be allocated to the project
from the start. In our experience, establishment costs
and timescales are often not well understood at the
early stages, potentially leading to underbudgeting.
Particular caution should be exercised when
considering the costs and timeframes for obtaining
the requisite regulatory and fiscal approvals together
with the process of premises design and fit.
The mandate for the captive should include clear
rules on how it is to be used. This can be particularly
complicated if the intention is to provide services to
more than one business unit. In such cases, it must be
made plain whether business units are compelled to
use the captive for the relevant services, or whether
they are free to opt out and either remain with existing
service delivery or choose to outsource elsewhere.
Any exceptions to these rules, together with associated
decision rights, must also be clarified. It should also
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be recognised from the start that building an internal
pipeline of business and managing it effectively is an
ongoing process that does not end when the captive
begins operation, but which must respond to changes
in business requirements and service capabilities.
A related issue concerns the equitable allocation
of start-up and running costs of the captive. It is
important that these costs are allocated on a fair and
equitable basis. For example, early adopters should
not be penalised with an unfair proportion of start-up
costs, nor should these costs unfairly burden business
units that are politically weak or have no opportunity to
use the captive services. These considerations should
be addressed within a detailed and comprehensive
business case, which will need to specify internal
allocations and also set out the financial case for the
captive on a profit-and-loss basis, as well as providing
an accurate view of cash flows for internal budgeting
and calculation of foreign currency requirements.
Finally, make sure that the mandate is genuine. Even
the approval of the board of directors can turn out
to be an empty rubber stamp if the requirements
to establish the captive are at odds with the culture
of the parent company. Two issues are common
here. The first is around the speed and nature of the
decision making process. Establishing the captive in
a timely fashion will require authority over significant
budgetary and operational matters to be devolved
to the project team and its steering committee.
Does this fit with the traditions of the parent, or do
decisions usually follow lengthy discussion and wide
engagement?
The second issue commonly occurs when the
captive is intended to serve more than one division
or business unit of the parent company. Are these
entities accustomed to working together, or do they
traditionally operate independently? Regrettably,

often in the financial sector, different business units
within the same company act as de facto rivals
rather than partners. Certain business units will enjoy
significant autonomy and may not be subject to the will
of the parent that initiated the captive, even though
the business case for the captive at the overall group
level is compelling. This can jeopardise the smooth
running of the captive. Such issues need to be clarified
at the start, because attempting to resolve them once
the project is underway can drain management time
and energy and result in costly delays.
Ensure the Project Team Has the
Necessary Experience
Previous experience in building offshore service
centres is essential. Also, ensure that your team
has some knowledge of operating in the target
country. Captives tend to be targeted toward low-
cost, developing countries, and these can often be
challenging and frustrating places to do business. The
attempt to impose corporate practices and timescales
common in the U.S. or Europe will simply not work,
and instead it is essential to adapt to the local customs
and to understand and manage the resulting risks.
In addition to top-quality project skills, the team will
also require subject matter expertise in the following
areas:
• HR
• Finance
• IT
• Regulatory, compliance and legal
• Risk
• Security
• Communications
• Office design and fit-out
• Facilities management
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• Tax and treasury
• Service management and governance
We have found that companies typically underestimate
the requirements for skills, local knowledge and
commitment. HR is usually a problem here. In India
in particular, the strong competition for resources,
together with the dynamics of the hiring process and
the complexity of incentive packages and HR policies
in a market of high churn (greater than 60 percent per
year has been experienced in some locations) mean
that HR should be treated as a front-end function
and resourced appropriately. Indeed, not just the
size of your offered packages — and premiums will
need to be paid if your brand is little-known locally
— but the relative proportions of different elements
such as salary and health insurance will be specific to
the local market. Be prepared to revisit your packages
frequently, and be aware of rampant wage inflation
in some parts of the world. It is usually worth seeking
local HR advice.
A further consideration for financial services companies
is the need to demonstrate to regulators that the
offshoring process provides at least the same level
of control exercised in the original country. Vetting
of staff and protection of personal data is easier to
control in a captive than with an outsourced service
provider, but it is still impossible in some markets
to conduct the same level of background checks
expected in the home market and logistically difficult
to adequately vet staff where the churn rate is high
and significant rapid growth is required.
Another key area, and one with significant lead times,
is IT. Particular challenges here include establishing
adequate network coverage with appropriate
security and back-up safeguards for the network and
systems, and ensuring that local systems are correctly
integrated with the systems of the parent company.

In other cases, the requirement for subject matter
expertise can easily be overlooked. Capital structure
requirements, for example, can have significant
economic consequences for how the captive will
perform. How many classes of shares will there be,
and what will be the rights of minority shareholders
in the jurisdiction? Also important here are tax
considerations. Where is the captive domiciled for
income tax purposes? What is the capital gains tax
regime? Many countries have tax breaks for overseas
companies establishing local operations. For example,
Pakistan provides a 15-year tax holiday for international
call centre programmes. In India, similar schemes
exist.
Finally, be aware that it is far more difficult for a parent
to set up a new operation in a country where it does
not already have a significant business presence. In
such cases, all legal, regulatory and tax issues will need
to be learned from scratch, as will the peculiarities of
the local financial and banking systems, and this can
be a lengthy and costly business. These areas can
also be unforgiving. For example, it can be difficult,
if not impossible, to achieve certain permissions or
registrations if they are applied for retroactively or out
of sequence.
Understand Dependencies Among the Set-
Up Activities
Do not ignore the dependencies between your project
work streams at the risk of significantly extending your
timelines and increasing your costs. As an example,
telecom circuits will need to be ordered well in
advance of fit-out, and the ability to do so will depend
on an active bank account, which in turn will require
legal incorporation and company registration.
Regulatory issues are often poorly understood for the
target country and constitute a potential bottleneck for
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virtually all activities. As an example, for Indian captives
STPI registration requires a wealth of documentation
and can be a significant headache. The process is split
into several stages, and many project teams have
had to scramble against tight deadlines to complete
documents that could have been worked on at leisure
earlier.
Build and Maintain Momentum!
Setting up a captive is tough. For most of the project
team this will be a new experience, and the learning
curve will be steep. Some of the team will be working
remotely or in isolation, and it can be easy to become
overwhelmed by the complexity of the job. We have
found that building and maintaining momentum —
and thus enthusiasm in the project team — is a key
success factor. One way to achieve this is to get at
least part of the operation up and running quickly, and
then incrementally build on this progress, rather than
aiming for a ‘big bang’ approach in which everything
is timed to be 100 percent complete on Day One. The
captive will eventually require a full F&A function, for
example, but not all the processes involved will be
required from the start. Instead, elementary payment
systems should be established first with other
processes added as appropriate.
Don’t Forget to Market Your Facility
Locally
It can be surprisingly hard to recruit the right people
to the captive, particularly at mid-management levels,
where skills can be scarce. Ensure that you have funds
in your budget for local marketing and search activities.
This will allow your captive to compete effectively with
rival and better-known companies in attracting top-
quality staff. Attendance at recruitment fairs can be
valuable here, and it will almost always be worthwhile
to engage local recruitment professionals. All this

work should start well in advance of the golive date of
the captive, particularly if your facility is large or you
are aiming on ramping it up quickly. At the same time,
do not forget to develop a marketing plan targeted
at potential internal clients in the parent businesses.
You need employees for your captive, but also a well-
phased plan for transitioning work for them to do!
Think of the Future
It is easy to regard the captive build-out as a closed-
ended project that finishes when services start
to flow. This is particularly true in organisations
with a ‘procurement mindset’, in other words, in
organisations that tend to regard sourcing largely as
a one-off purchasing process, with continuing activity
limited to squeezing the service provider. Yet ‘out of
sight’ must not mean ‘out of mind’. In fact, it is vital
that business units view working with the captive in
terms of building and growing relationships — and this
will require much travel and time spent face to face
rather than just the occasional phone call. Business
units should also work to ensure that the captive
operations are closely linked to their evolving needs
and strategies.
An important — perhaps the most important —
element of building the captive is thus to put in place
mechanisms for ongoing governance of the captive,
sourcing and provider management, and service
management. The captive organisation is not a service
provider, nor should it be treated as such; but it does
require that many of the same disciplines be in place to
deal with its customers in the parent’s business units.
Experience clearly shows that managing a captive is
markedly different from managing a service provider.
In some ways, captives are tougher to manage. Their
fully owned nature can lull users into treating them
as casually as an in-house service centre, yet they are
usually staffed by people of a different background
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and culture, living thousands of miles away, who will
often have little or no experience with the parent
company, and will have different career expectations.
Though workers in knowledge processes often regard
the captive as a route to transferring to the home
base of the parent, other employees may expect only
a brief tenure with the company.
In contrast to service provider relationships, we have
often seen that with a greater degree of assumed trust
from the start, and without a strict contract in place,
management processes for the captive tend not to
be formalised, and rather than being built to control
events, develop in reaction to them. We strongly
recommend instead that the captive is viewed and
run from launch as a proper service centre, with a clear
operating model, service and problem management
procedures and measurement tools documented
and in place, and the constant monitoring of agreed
service levels and financial performance.
Maintain Good Project Management
When teams building captives struggle or fail, it is not
usually because of any intrinsic problems with the aims
of the project. Instead, the most common reasons are
those typical of any change project: a weak project
team with a shifting or unclear mandate, insufficient
buy-in from project sponsors, lack of necessary skills,
and lax project reporting and governance.
These general pitfalls seem to be magnified for captive
build projects, usually because communication is
poor as project members spend much of their time
traveling and working in isolation. With the high
degree of dependency between work streams, plus
the strong autonomy and decision rights each work
stream leader will need to ensure momentum in the
project is kept up, the result can be that some key tasks
are duplicated while others end up falling between

the cracks. To prevent this, all team members will
need to be clear on their roles, decision rights, and
their interactions with other work streams. There also
needs to be strong senior executive sponsorship and
governance across all activities to ensure that risks are
managed effectively and alignment is achieved across
the initiative.
Conclusion
Captives can be excellent tools for financial services
companies to improve their services and access new
pools of talent, while at the same time preserving
flexibility and cutting cost. The hurdles to setting them
up so that they can perform effectively, however,
cannot be underestimated. A number of companies
are aiming to lessen some of the establishment risks
by using third-party service providers to help, in a
so-called ‘assisted build-out’ (ABO) model. We have
also seen variations to this approach in which a local
provider supplies local resources for urgent tasks or
those requiring immediate on-the-ground response.
Another common approach here is ‘build-operate-
transfer’ (BOT), in which a provider builds and operates
the captive for a period of time before ownership
is transferred to the parent. Some companies have
also turned to a joint-venture approach and have
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built captives with the capability to operate other
firms’ processes in order to gain the additional
ability to balance demand and leverage the capital
investment.
These and other approaches can indeed mitigate
risks, but they require suitably qualified and motivated
partners. Whatever approach is taken, the decision to
build a captive should not be taken lightly.
LOOKING FOR A STRATEGIC PARTNER?
TPI’s Financial Services experts have served more than
135 unique clients across asset management, banking,
capital markets, mortgage processing, insurance and
private equity with advisors in the Americas, Europe,
Asia and Australia.
We can help you achieve your organizational goals
through objective advice, knowledge of your industry
and experience with sourcing arrangements from
simple to complex.
Looking for a strategic partner? Contact Dr. David
Howie, Director at +1 44 7789 771665 or
david.howie@tpi.net.

ABOUT THE AUTHOR:
Dr. David Howie is an accomplished finance strategy and operations professional. He advises TPI’s clients on aspects of their
finance and accounting service alternatives, providing expertise in financial services, business management and academics.

Prior to joining TPI, David worked at Barclays Bank PLC as a Senior Program Manager responsible for directing major initiatives to cut
costs and improve customer service in retail banking through a mix of process redesign and re-engineering, technology solutions
and strategic outsourcing. While in the Group Strategy and Planning team, he carried out a number of projects, including working
with board-level sponsorship to guide the bank’s approach to corporate governance.

David holds a Bachelor of Arts in Physics and a Master of Arts in Atomic Physics from the University of Oxford. In addition, he
earned a doctorate in Atomic Physics from the University of Oxford and a doctorate in the history and sociology of science from
the University of Pennsylvania.

ABOUT TPI: TPI, a unit of Information Services Group, Inc. (ISG) (NASDAQ:III, IIIIU, IIIIW), is the founder and innovator of the sourcing
advisory industry, and the largest sourcing data and advisory firm in the world. We are expert at a broad range of business support
functions and related research methodologies. Utilizing deep functional domain expertise and extensive practical experience,
our accomplished industry experts collaborate with organizations to help them advance their business operations through the
best combination of business process improvement, shared services, outsourcing and offshoring. For additional information, visit
www.tpi.net.

Americas EMEA India Asia Pacific

Brian Smith Denise Colgan Indy Banerjee Arno Franz
Partner & Managing Director Marketing Director Partner Partner & Regional President
Financial Services, TPI +44 (0)1737 371523 +91 80 4151 8538 Asia Pacific
+1 201 233 2384 denise.colgan@tpi.net indy.banerjee@tpi.net +61 (0)2 9006 1610
brian.smith@tpi.net arno.franz@tpi.net

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