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

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

2. SangeetaShankaranSumeshis 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 “India’s most influential women in Finance” by rediff.com in Jan 2012 • She was also rated as one of the top 5 leading Women CFO’s at Women Leaders in India Awards 2011 held at the TajMahal Palace in Mumbai. • Guest speaker at various seminars – KPMG’s seminar on “Prevention of Fraud procurement” ; Indo French Chamber of Commerce; ICAI’s Corporate Forum in Mumbai etc. http://mycfo.in

3. Featured as one of “India’s most influential women in Finance” by rediff.com in Jan 2012 She was also rated as one of the top 5 leading Women CFO’s at Women Leaders in India Awards 2011 held at the TajMahal Palace in Mumbai. Guest speaker at various seminars – KPMG’s seminar on “Prevention of Fraud procurement” ; Indo French Chamber of Commerce; ICAI’s 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 CFO’s 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.

4. 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 CFO’s 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

5. 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. http://mycfo.in

6. 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. http://mycfo.in

7. 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. http://mycfo.in

8. 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 / R&D 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. http://mycfo.in

9. 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. http://mycfo.in

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