PDF: 2962 pages, 5.2 MB - Bay Area Council Economic Institute

Global Reach
• A 15% appreciation in the rupee since mid-2006, from 46 to the dollar to about 40 in
early 2008, narrowed the wage gap with home countries, raised local currency costs in
India, and eroded margins in contracts with U.S. firms, which accounted for 60–70% of
the India BPO market. (More recently, the global economic downturn and a rapidly
falling dollar reversed the situation; the exchange rate in late 2009 settled at around 48.)
• Mixed messages about extension of the Software Technology Parks of India (STPI)
program has created uncertainty among software developers and exporters, as well as
among technology part developers. The tax exemption offered to software firms under
the scheme initially had a March 2009 sunset date and was only extended for one year to
March 31, 2010.
As the 6:1 “India cost advantage” at the beginning of this decade has shrunk to less than 3:1, it is
estimated that more than 60% of foreign captive centers are likely to close, relocate outside India,
or see their operations shift to larger third-party vendors who can operate more efficiently. While at
least 500 western companies now operate captive centers in India, Forrester Research finds that it
costs approximately 20% more to run a captive than to outsource to an external provider. According
to a Zinnov survey of 594 companies, the number of overseas technology firms opening new
India captives declined from 76 in 2004 to 48 in 2006, to just 15 in 2007. this trend has continued
into 2009.
Other studies point in the same direction. A 2007 Forrester Research survey comparing client perceptions
in 2003 and 2007 showed that 14% fewer businesses expressed preference for an offshore
back office or R&D solution; 23% fewer saw value for the money; and 6% fewer viewed offshore
vendors favorably in terms of on-time delivery with respect to assignments. AT Kearney found in
the same period that 60% of the companies surveyed said that offshoring did not help them
achieve their expected operational performance, and 34% said they were not able to achieve the
cost savings they had expected.
Several factors appear to influence a captive center’s success and performance:
• Scale is important; a workforce of at least 80 workers is typically needed to be cost-effective.
• Function matters; R&D captives have a better track record than back-office call or data centers.
• Workplace amenities, higher-end work and upward mobility for tech workers help
ensure retention.
• Knowledge of the local real estate market, wage scales, HR practices, and customs is critical.
Several Bay Area examples suggest the mixed experience with offshore captive centers:
• Riya Inc., a San Mateo image recognition search engine developer, opened a Bangalore
office in 2005, hiring 20 engineers. By 2007, rising wages and time zone differences
prompted Riya to close the office and offer half of the engineers jobs in San Mateo on
H-1B visas. Eight of them accepted the new assignments.
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