Indian Offshore IT Services Is Facing Disruption From Within
- By Yatish Rajawat
- March 20, 2023
The center of gravity of MNC-owned Global Captive Centres (GCCs) and their vendors — the IT services providers — is shifting.
The ability of the Indian IT service vendors to scale up and down in response to client demand for all kinds of projects, from strategic to operational and support, was their biggest strength.
COVID-19 was a significant turning point for GCCs of global corporations in India. Their resilience in shifting to a work-from-home model in days showed their flexibility in scaling up.
They also scaled up operations and supported critical processes suffering due to the pandemic restrictions in developed countries. This affects how offshore services will grow in India and other low-cost countries.
These centers have a long history in India, some as old as 30 years, but their scale has reached a tipping point in the last 5-10 years. Employing more than 1.4 million employees, there are now more than 1,500 such centers. Research estimates another 500 more such GCCs are coming up in the next two years.
GCCs are client-owned-and-operated service delivery centers, typically in a non-domestic, low-cost location. They provide service resources directly to their organization. The people working in a GCC are legal employees of the client organization, not the vendor. The India GCCs do everything from simple data processing to R&D for global corporations.
India has a 50% global share of these GCCs — the largest for any single country. The rest of the GCCs are in East Europe, Australia, and other South Asian countries. And these GCCs are reaching a new stage in India, both as individual companies and as a sector, exacerbated by developments in recent years.
COVID-19 proof point
The resilience, flexibility, and scaling ability of the GCCs were tested during the COVID-19 meltdown. The ability to scale and shift to a hybrid model helped them get involved with digitization or innovation processes during the lockdowns.
As the U.S. and Europe locked down, their companies wilted and considered the future more deeply. All efforts at digitization, new product development, diversification, and innovation were shifted toward the GCCs.
The COVID-19 period helped companies recognize that innovation and services of all forms could now be outsourced to the GCCs. Models could be tried at arm's length, developed, and fine-tuned without involving the HQ's bureaucracy in decision-making. A few people in the C-suite could, with the aid of the head of the GCC, develop teams of people in a distant location to drive core innovations.
The cost-price repercussions of this shift or change should certainly worry the boards and CXOs of the Indian IT industry. The impact is industry-wide, but the response will have to be at the company level. The emergence of customer GCCs as a tangible competition will affect pricing, employment, and recruitment and will change the dynamics of the offshoring industry.
Competing with the Customer
Each company must decide and determine its approach to this shift. But what does competing with the customers' GCCs mean for the IT services industry?
When vendors compete against customers, the first casualty is margins. Transparency of costs is the biggest outcome when vendors and customers compete.
Global majors now know with fair precision how much it costs to build and run teams of tens of thousands of people in India or other East European countries. They know the salaries of each headcount and the rental costs in large cities like Bengaluru, Hyderabad, and Gurgaon. They know the learning curve of IT services companies in managing operations.
More importantly, they have an alternative for processes or operations they do not want to outsource but still want to do at a lower price.
For instance, it is currently cheaper for an investment bank such as JP Morgan to build a new risk management system in Mumbai than in the U.S.; ready talent in the financial capital of India for risk management is eager to work for a global investment bank and get exposure to global risk management practices. These are much-touted and highly sought after.
Even the pay is higher than salaries paid at local banking majors. You learn more, the salary is better, and your profile can be built for global roles.
This shift in the employee's aspiration may be subtle but is more powerful. There is now a chance that a GCC head can aspire to take over as the CTO of the global company, as has happened in a few instances.
GCC are better paymasters at all levels but particularly good at entry level, while the average salary for graduates is INR4 to 6 Lakhs (USD5,000 to USD7,500) GCCs pay between INR6 to 10 Lakhs (USD7,500 to USD12,000). GCCs pay higher than Indian IT services companies because they are not considered a natural career choice for graduates. Uncertainty exists in most graduates' minds as to how long a cost center will continue, even one which is bringing down costs.
Secondly, the roles and responsibilities in the GCCs were seen as support to the main entities, with the exposure limited to the entire process. These limitations forced GCCs to pay more at all levels. But some of these limitations are going away partially.
More GCCs are handling whole processes, and employees are gaining experience and even being transferred to the U.S. and European countries. This is a significant draw for employees as now GCCs are using H1B visas to send them to U.S. offices. A U.S. posting also allows employees to settle, which is still a dream for many Indians.
More than 50 GCCs are employing more than 10,000 professionals. The largest ones, like JP Morgan, have more than 50,000 employees. Such a large size means an enormous depth of and range of processes within the GCCs; this allows for lateral and upward movement. The size makes these GCCs more attractive to potential employees, reducing hiring and retention costs.
This virtuous circle used to work in favor of Indian IT services companies. But now the signs of disrupting the pricing power are there, and the older offshore services providers like WIPRO, Infosys, and TCS are ignoring this change.
The smaller vendors are already seeing pressure from employees for higher salaries. Employees have started moonlighting for GCCs as they all allow part-time work and pay highly for it.
Offshore services providers are coming down heavily on moonlighting and even reducing the flexibility of the employees to work from home. This is detrimental to the employees, and they will join the recruitment pool of the GCCs as they are recurring much faster.
The size and nature of these GCCs not just alter the state of the Indian IT services industry but also impact educational institutions, technology adoption and skill requirement, and other issues. All these impacts will be covered in the second part of this article.
Yatish Rajawat is the founder of Centre Innovation in Public Policy, a think tank based in Delhi. His area of research includes everything digital affecting policy, people, and the biosphere. Feedback or contact at [email protected].
Image credit: iStockphoto/NiseriN; Charts: Yatish Rajawat