Monetization is defined as parent companies sell or exit the majority ownership and management of their offshore captive operations to an external party. Captive GIC monetization meets the need of parent organizations to focus on core business and to raise cash. But the buyers aspire to acquire industry-specific capabilities, grow to global scale and grow size of existing book of business and its maturity.

OUTLOOK: Attraction to acquire captive merely to add scale has lessen with time. With growth & maturity of marketplace, private investors may not find it attractive to invest in “me-too” operation in an overcrowded market. Captive transactions will occur for more tactical than strategic reasons, thereby, shifting the balance of negotiation in favor of service providers

REASONS TO GO CAPTIVE Vs CURRENT SITUATION:

• Lack of maturity of Service Providers to offer the services – Service providers with right credentials available who can provide such services;
• The desire for direct and complete control – Increasingly considered as management distraction if provider can deliver same services;
• Regulatory restrictions – Potential to multi-source. Retain such work which is proprietary but outsource what’s possible;
• A risk perception in sourcing from a service provider – With the track record of many years and the scale at which the work is being performed, the risk perception has certainly reduced;
• The cost-value equation – Providers can potentially provide better cost-value equation. Possible to leverage their cross industry & customer capabilities and innovation programs;
• Having a large enough scale for captive viability – Despite scale, captives risk saturation over time in terms of retaining employees and offering careers;
• Corporate culture will not allow outsourcing services – Change in management attitude and/or potential to multisource

DRIVERS OF MONETIZATION:

• Service providers to offer variable cost and capacity models with much higher level of flexibility
• Offer flexible arrangements that provide the desired ‘Degree of Control’
• Share risks (and commensurate rewards)
• Enable client to focus on their core business – to free up of key SMEs and management resources
• Align and benchmark with prevalent cost-value equation for type of service rendered

IN SUMMARY: If the way forward is to monetize the GIC, with right due diligence one of the following two models prevails

• Ownership Transfer of Captive: Depending on the maturity of the specific service area, the opportunity for captives to earn attractive valuations is diminishing over time. Captives operating in new and niche areas offer an attractive set of capabilities to service providers, will continue to offer attractive monetization. Captives that have reached critical mass of employees are potential candidates for monetization (Ex: ~Half a dozen Financial Services captives in India).
• Conversion of Mature Captive into Service Provider: Parent company convert captives into 3rd party service firms without exiting ownership – i.e. shifting growth curve of the captive without a change in ownership, allowing to cash out at higher valuations at a later point. Ex; One of the financial services captive in India after sold by a US major experienced significant growth in its enterprise value in a span of 3 years.

Recommended Reading

Offshoring Strategies: Evolving Captive Center Models (The MIT Press)

The evolution of a rapidly growing mode of offshoring, captive centers: basic models, strategies, and case studies of Fortune Global 250 firms.