Is selling shared service centres a solution to survive the economic downturn?

One of the effects that are a direct consequence of the financial turbulence is an increase in organizations that sell shared service centers (SSCs) in other countries (so-called ´captives´) to wealthy (Indian) suppliers. This instrument to quickly improve the liquidity position was used by among others Citigroup. Here Wipro took over Citigroup’s Indian software development captive for $ 100 million and Tata Consultancy Group (TCS) acquired a captive containing several financial back office processes. This was a transaction of $ 505 million in exchange for a nine-year service contract with a value of $ 2.5 billion. Because only the wealthiest suppliers can finance this type of transaction, it is likely that the frequency of these transactions will remain limited as most suppliers (like any other company) have to rely on banks to finance large acquisitions. Other sales limiting factors are the relatively low financial value of the transaction because due to the low book value and low margins of a typical captive, and the low impact of the deal on the liquidity position (Citygroup: $ 605 million from the sale versus $ 4,000 million capital injection form the United States government to restore the ratios).

A related situation is obtaining a captive as part of an acquisition. An example is the acquisition of Merrill Lynch by the Bank of America. Both had captives in India and the Bank of America had the choice to merge, sell (outsource) or eliminate the acquired captive all together. Wealthy suppliers love to bid for SSCs that are for sale as it gives them the opportunity to obtain market share, customer knowledge and a long-term service contract. In Europe such scenarios are however less like, because here offshore captives are less commonly used yet than in the United States. Furthermore are many European companies hit less hard by the crisis than competitors in the United States.

The examples used so far are a direct result of the credit crisis and have little to do with a sound strategic decision making. However, whether or not to sell a SSC or captive is a question that an organization, regardless of the economic situation, has to ask itself every now and then. When creating a SSC the activities carried out in there can still be considered too strategic or risky to outsource, but this may change when the organization continues to develop. Examples of selling a SSC as part of a sound strategy are the disinvestment by General Electric of a 60% share in GE Information Services (Gecis) to two investment firms, General Atlantic Partners and Oak Hill Capital Partners, for $500 million. Another example is the sale of Indian captives by the British insurer Aviva for $230 million to supplier WNS Global Services. In both cases a solid decision-making and selection process preceded the sale. Dutch examples are the acquisition of KPN´s HR shared service center by LogicaCMG, Philips´ sale of its financial ssc to the Indian Infosys and the acquisition of the financial SSC of Unilever in South America by CapGemini.

To recap the elaborate answer to the question raised by this post: sell a shared service center / captive only for the right reasons: the intellectual property embedded in the SSC offers no longer a competitive advantage and/or a supplier can further realize economies of scale and introduce new best-practices and innovations more quickly.