The captive outsourcing story is turning sour or so it seems after the latest market buzz that Citigroup is planning to pull out of its local business process outsourcing unit, Citigroup Global Services (formerly eServe).

While Citigroup continues to maintain that "the bank's policy is not to respond to market speculation", industry sources say "it makes sense for Citigroup to exit the business since it's not core to its operations".

Its BPO currently has close to 8,000 people spread out over its two centres in Mumbai and Chennai.

Some of the names floating for the buyout of eServe include IBM, Automatic DataProcessing, Infosys, EDS, Genpact, Capgemini and private equity players like Blackstone and General Atlantic.

Genpact denied comment saying that it is in its silent period. While IBM and Capgemini too maintained the no-comment stance, a senior Capgemini official, on condition of anonymity, said: "We have studied Citi Global Services, it seems to be a decent company and has a good set up." However, the official was concerned about the valuation of the Citi's BPO arm, which market rumours pegged at $1-1.2 billion.

Some analysts feel that with Citigroup Inc announcing that it would slash 17,000 jobs and move 9,500 jobs to low-cost destinations (a major chunk is expected to be moved to India), its BPO arm which has been operating as a Citi captive from its Mumbai and Chennai centers would be a major beneficiary.

A Citigroup spokesperson, when contacted, said: "This is a global decision and we do have any details as yet. We would not like to comment at this stage."

Besides, it was just last November that e-Serve International changed its name to Citigroup Global Services. The company officials said they were planning to set up an international site in Delhi by June this year with an investment of around Rs 100 crore (Rs 1 billion).

An analyst, on conditions of anonymity, said the company would prefer to grow organically and hence increase the headcount of its Indian BPO arm. He added that Citigroup might also look at an acquisition rather than outsourcing the work to other Indian BPOs.

Whichever way the dice rolls, the fact remains that global companies have generally backed out for two reasons. Either the operations have become too big to manage and hence a third-party involvement makes sense, say analysts. Or the organisation is not interested in managing the day-to-day activity of another business.

In a recent Forrester report on captive units, Sudin Apte, senior analyst and country head, had stated: "Over the next three years, at least 40-60 per cent of the current captives would have embarked on some exit strategies, and for the next year, it expects the number of new centres to gradually taper off as the news about struggling existing centres gets around."

As a result of these issues, firms quickly realise that setting up a captive centre is not an endpoint itself but just a stage in their offshore and outsourcing evolution.

Taking the cue, a number of early entrants have sold their captives and opted to outsource, and some others now leverage partners more than in the past, in their revised initiative to build the offshore ecosystem, the report noted.

The going is getting tough for the captive units due to increasing wages, skyrocketing attrition and lack of integration and management support. Most of the captives serve the parent company's global operations and thus over a period of time these captive units do not get the cost arbitrage factor even if they are in the low-cost countries.

And if the firm does pull out, it won't be the first instance. In 2001, HCL Technologies acquired a majority stake (51 per cent) in Deutsche Bank's BPO arm and in 2005 acquired the remaining 49 per cent.

In 2002, it was the turn of Mumbai-based WNS Holdings and in 2004, GE Capital International Services divested 60 per cent of its stake in its BPO arm (now renamed as Genpact) to General Atlantic and Oak Hill Capital Partners at an estimated price of $500 million (around Rs 2,000 crore or Rs 20 billion).