Prospect of Selling Captives Comes into View for Cash-Strapped Corporations

The economic pain that the pandemic is delivering to the global economy is having all sorts of ripple effects. One of them is the sudden prospect of major corporate customers selling off captive centers in order to overcome a worrying cash crunch. Some market analysts believe that as many as half of captives could end up on the chopping block, a sudden reversal of fortune that is causing CXOs to reopen their playbooks on selling assets to global consultancies.

“When something drastic happens like the COVID-19 pandemic… companies tend to rethink their strategy,” said Scott Furlong, partner at Information Services Group (ISG). He adds that more  companies  have “discovered” that their operations cannot scale up or down as nimbly as might have been imagined.

Captive centers are a longstanding feature on the global outsourcing landscape, allowing mostly multinational organizations to maintain outsourced operations remotely under a company subsidiary. Such operations are set up out of the desire to maintain company culture and to closely guard intellectual property and customer data. They are also reputed to have less employee attrition.

ISG’s proprietary database (4,000 captives for 2,500 enterprises) indicates that around 439 captives have been set up in the last five years, according to the firm. Around 150 are estimated to be located in Latin America.

A ballpark investment cost for a 300-seat captive operation, sources say, would run approximately $7 million, including fees for advisors, legal, capex, infrastructure building, knowledge transfer and first-year lease.

The decision to sell may hinge on a number of factors. “How much do I sell to improve my cash situation? How can I get a buyer interested?” These are the questions being asked by companies who own captives, says Prashant Kelker, also a Partner at ISG.

“Many didn’t have the means nor the ability to move their captive call center agents to work-from-home in the most productive manner because this required investment dollars and knowledge to support such an operation”

Other questions are: “What do I keep so that I can continue with my original intent of building seamless workflows? And how do I do this with a new provider when call centers are just one of multiple touchpoints in the overall customer engagement strategy?”, Kelker said.

New Conditions, New Game

Furlong says companies often set up captive shared services because of one of the following reasons: “They want to maintain better control over their operations, particularly if the call center is performing direct contact with key customers; They believe they can save more money without a profit motive if outsourced;  They don’t believe the service provider market can deliver the services as well as they can.” But, Covid came along and changed the game.

For both captives and outsourcing companies alike, 2020 has brought along dramatically new conditions.  The spread of the virus has impacted all sorts of delivery operations. In many instances, organizations have been unable to respond effectively. Lags in service quality may lead corporate customers to consider working with third-parties.

With many governments across the globe issuing stay-at-home orders, the widespread result has been a drop in business. “Enterprises even asked customers to return after 72 hours due to the unavailability of agents. Average handling time, first call resolution rates, call abandonment rates and queues drastically increased amidst lockdown,” said Namratha Dharshan, a director at ISG.”

“Many didn’t have the means nor the ability to move their captive call center agents to work from home in the most productive manner because this required investment dollars and knowledge to support such an operation,” she added.

Some companies which operate captives – such as   Amazon and Uber – have established major new cost cutting goals following the fallout from the pandemic.

In 2016, Uber opened its first captive center in Costa Rica, investing around US $3.5 million. The company recently indicated that it has around 30,000 employees working with third-parties in 25 locations globally, based largely around language needs.

Amazon also opened its first captive center in Costa Rica in 2008, with 75 employees, growing that number to more than 9,000. By 2016, Amazon was operating four exclusive centers, with more than 28,000 meters of office space and over 2,100 employees. The Costa Rican operations include customer service support, engineering, back office and software support.  Job numbers have surged since that time.

Amazon saw revenues rise in the first quarter of the year, but it has been complaining of rising costs as well.  The company sold more products during the first three months of 2020 – revenue rose 26 per cent to $75.5 billion – in response to demand from consumers staying at home under shelter-in-place orders.

But Amazon’s leaders say they expect to put a big part of that back into costs. The company  hired 175,000 new workers to handle the surge in demand. However millions have also been losing their jobs, muting the potential for continued growth.

The company disclosed that net income declined 30.5 percent to $2.5 billion in the first quarter of 2020, compared to $3.6 billion in the same period a year ago.

Critical Cost-Cutting Mission

For some companies, the mission to cut costs is urgent. Uber chief Dara Khosrowshahi announced his intention to cut $1 billion in fixed costs in March.  It is yet unknown if Khosrowshahi will consider taking on more outsourcing partners or selling captives outright.

We reached out to Ime Ekanem, shared services management lead at Uber, for a comment, but received no response.

Kelker of ISG said some companies which own captives are looking to sell “in a way that their customer touchpoints are fluid enough and that a contract with a new provider does not trap them into a service and design that cannot shapeshift with the changing requirements.”

But, should companies head to the negotiating table, IT consultancies will likely be among the first looking to make a deal. When asked if they were aware of any upcoming captive call center acquisitions, Furlong and Kelker  said that pending deals were confidential.

“ISG is actively reaching out to enterprises to assist them in monetizing their captive operations and we are helping several clients with valuation, selection of acquiring providers, and the negotiation and deal structure for the outsourcing contract so they can buy back the services once they have sold the operations,” said Furlong. “Because all of the deals are early on in their life cycle and are very confidential, ISG can not disclose any information on their activity.”

Some amount of consolidation of  the smaller BPOs is expected when companies move to take advantage of opportunities in the current climate.  In February 2020, Ernst and Young announced results of its findings from Transforming Paradigms: Global AI in Financial Services Survey, a new global survey assessing the current state of artificial intelligence (AI) adoption by financial services organizations.

It concluded that artificial intelligence will be an essential business driver for financial services within two years. It found that  77 percent of surveyed companies anticipate AI will have high business importance in the next two years and 64 percent of senior executives expect to be mass adopters of artificial intelligence (AI) as well. Amazon has highlighted its use of artificial intelligence and engineering capabilities to solve logistical problems for many  customers during the crisis.

This Too Shall Pass

Brad Dement, a partner at Scott Madden, believes that the major business disruptions for outsourcers and captives operators are not likely to return.  Therefore a selling binge is unlikely.

The impact has been devastating,  DeMent says, noting, “Some of the insights we have received indicate that many were completely unprepared for this, which is not surprising. But, organizations were able to get their footing and resume operations, in some capacity, after a few weeks.”

As workers shifted to home offices, organizations noted that poor internet connections, barking dogs and curious children impacted the typical business environment.

DeMent said that call volumes also increased dramatically under covid  and call centers were not prepared for the sustained volume spike.

Call centers and BPO operations also lost the support of their basic infrastructure for things like cleaning, building maintenance and transportation.

DeMent concludes that both captive and outsourced operations experienced similar disruption. However, he suggests the intent will not be to sell, but to insert new structures and clauses in contracts.

New contracts, he said, will place emphasis on infrastructure and data security needed to support home offices in case there should be a re-occurrence. The crisis was “very disruptive” but eventually BPO operations and captives pulled it together.”

Long term, he says, “we are projecting more emphasis on self-service applications, digitization of service calls through chat-bots and virtual agents, and utilization of ERP functionality we may not have known existed.”