This article was originally published in DataQuest India and has been reproduced here with permission.
Contrary to perception, the rise of global capability centers presents a unique opportunity for the established technology service providers in India to further build on their remarkable growth story
The growth of Global Capability Centers (GCCs) has been one of the biggest drivers of the offshore outsourcing services market in India’s IT-BPM sector. India’s IT sector is expected to grow to ~$175 billion by this year, according to Nasscom, and GCCs have thrown open a deluge of business opportunities to the established technology service providers in the country.
Traditionally called global in-house centres (GICs) or captive centres, GCCs are offshore delivery centers owned and managed by large MNCs. They have moved from providing low-end transactional services (e.g., infrastructure management, application management, shared services for various business processes) to being truly global innovation centers focused on engineering and product development to applications of artificial intelligence, machine learning and data analytics to help solve business problems.
Today, India has more than 1,250 GCCs, according to a Nasscom-Zinnov report on GCCs in India, with a large number of them driving core business agenda (engineering and product development) for their parent entities. According to Nasscom, the GCC market has grown from more than $19 billion in 2015 to over $28 billion in 2019. And per a Teamlease study, GCCs will hire as many as 1.5 lakh people in the next two years.
Since GCCs provide services directly to their parent organizations that were earlier outsourced to established IT services organisations, there continues to be a myth that the IT outsourcing sector faces loss of business!
However, our viewpoint is that the emergence and spread of GCCs present a great opportunity for the established IT service providers, apart from opening up a wave of opportunities for GCCs themselves. Moving ahead, the relationship between the two entities could be described as one of highly productive coexistence.
Let’s take a detailed look at what these opportunities are, across which areas, and the impact they will have on GCC business in the future.
New GCCs at the heart of business innovation
There’s a marked change in the character of new GCCs that are being set up of late. Where they once provided back-end support to parent organisations, today they are focused on core value creation and innovation. Most start off as global innovation hubs driving IP creation and be a true extension of the global enterprise.
There are a large number of GCCs opening in India each year. These new GCCs represent the quintessential innovation-led business prospects, which may be characterized as “small wave” opportunities to IT service providers. This is a typical Build-Operate-Transfer (BOT) model, where the service providers help establish and manage the GCC in the initial phase and transfer the operations over a period of time. This support typically starts in new technology areas like R&D, product development and analytics. and may gradually expand into AI/ML, deep learning, RPA, and other areas.
In today’s business environment, the pace of technology change is rapid. Therefore, tech service providers could continuously engage with a single new GCC to create new CoEs and tech hubs. The sum-total of these “small wave” opportunities adds up to a huge opportunity for established service providers in the IT industry, which can make competitive bids for helping the GCCs during the process of potential industrialization of their technology CoEs.
Innovation, the main mantra in large GCCs
Large or mature GCCs, with 1000+ employees, initially started their journey in the 1990s as shared services organizations. The current focus of these GCCs is to move faster up the maturity curve – from hiring to cost arbitrage delivery centers to now becoming a truly global innovation arm for their enterprise. These GCCs seek to “carve out” their managed services or non-core work to established tech services players.
Large GCCs are a strong magnet for attracting quality talent. However, in their quest to be data-driven, innovation-led companies across digital, analytics, and cloud, they want to quickly scale up in these technology areas. But while these large GCCs have the wherewithal to drive the strategy, they continue to need support in terms of execution of such new-age technology programs. This is where the established IT service providers could add value to large GCCs.
Both these scenarios (“carve-outs” and execution support in innovation programs) are volume-driven, big-wave opportunities for tech services companies because the sheer number of large captives outsourcing or carving out their non-core operations and striving to focus on innovation programs which give more bang for the buck has increased significantly over the past few years.
“Buy-out” opportunities in small and midsize GCCs
Small and midsize GCCs are usually the Fortune 1000 or Fortune 2000 companies, with annual revenues in the $1-2 billion range. These GCCs face a dilemma as they are unable to scale due to limitations of size or capability. Due to operational stagnation over time, many find it difficult to move up the maturity curve and meet the expectations of the parent entity to be a global innovation arm. Also, mid-level GCCs face challenges in attracting talent, and hence are neither able to provide stable non-core operations nor drive innovation agenda through new technology CoEs.
Many such GCCs are ready to offer themselves for buy-out by the tech providers once they realise there is not much value they could extract in their existing set-ups. The idea of GCC takeover arises because a business unit once considered an “asset” may no longer be one today – unless they deliver tangible value again. For many organizations, it makes sense to offload the “stranded asset” and “quit the game,” and stagnating GCCs are always ready to give up such assets especially in times of rapid technology evolution.
The tech services players could build a holistic value proposition as part of the buy-out by including the Innovation agenda of these mid-size companies as part of the overall takeover.
It isn’t a zero-sum, but a positive-sum game!
What drives the high number of GCCs that are setting up shop in India over the next couple of years? The answer: Innovation and Value Creation! GCCs today aren’t just cost centers but are evaluated in terms of their ability to enhance customer experience, Net Promoter Score, or drive new business models.
This directly translates into new business prospects for tech companies in India. For example, GCCs are the largest segment of Capgemini’s India business, contributing to about two-thirds of our domestic revenue. The rise of GCCs in India is an opportunity for tech providers to complement GCC operations to ensure their Innovation agenda is kept firing while continuing to help them optimize their non-core operations.
It’s indeed a win-win opportunity for the GCCs ‒ as well as the tech service providers!