How GCCs stole the thunder from IT firms

While half of the company’s India workforce works on technology and data analytics, it is also increasing its focus on artificial intelligence (AI) and generative AI applications. For instance, the bulk of the development and maintenance of its voice assistant chatbot, Cora, is executed in India.

Then, there is Visa Inc, the American multinational financial services corporation. It employs consultants and data scientists in India as part of its in-house tech division. They build the company’s proprietary AI and machine learning (ML) algorithms, says Sushmit Nath, head of Visa Consulting & Analytics, India & South Asia. Visa Consulting and Analytics is the multinational’s payments advisory arm. The in-house tech team uses anonymized data to build AI models for risk, credit assessment and advisory and offers them to customers within the country.

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“Our India capability centre specifically designs and develops tech for the Indian and the South Asia market. But we also have tech teams based in Singapore and San Francisco, who work on developing models and solutions for our products, which we take cues from,” says Nath.

For Notion Labs, a US-headquartered company known for its eponymous productivity and note-taking application, India is its biggest engineering centre outside of the US. “India has some of the best engineering talent in the world, which is why we plan to expand here, going forward,” Ivan Zhao, chief executive officer (CEO) of the company, told Mint on 18 April. He added that engineers in India are working on technologies that include Notion’s AI and automation capabilities.

Natwest Group, Visa and Notion are just three of the estimated 1,600 multinational companies that have reduced their dependence on Indian IT services companies. Instead of outsourcing software development work, they have built their own technology divisions in the country. These in-house development centres are today called global capability centres (GCCs).

Earlier, such organizations were known by a rather unremarkable term— ‘captive centres’. They mostly handled call centres, data processing, document management and customer care functions. Such functions moved to India because of the cost arbitrage the country provided. Well, outsourcing to an IT services company is even cheaper but for many corporations, a captive unit meant less backlash against outsourcing. Over time, these captive centres matured. Slowly but surely, they took on cutting-edge roles; they moved up the value chain.

All estimates now point to a future that is bright and beautiful.

About 150 companies set up their GCCs in the last two fiscal years alone, stated ‘GCC 4.0 – India Redefining the Globalization Blueprint’, a report by industry body Nasscom and Zinnov, a management consulting and advisory firm.

By 2025, India is expected to have over 1,900 GCCs employing 2 million people and earning $60 billion. By 2026-27, Nasscom forecasts the number of GCCs in India to rise above 2,000. Consultancy firm Deloitte India predicts the cumulative GCC revenue to rise to $75-80 billion in the next four-five years, from the current $40-45 billion.

Further, the estimated 1,600 GCCs themselves have established more than 2,740 units in the country. One example is AstraZeneca India Pvt Ltd, which runs the bio-pharmaceutical company’s GCC. It has also set up a ‘clinical data and insights’ unit—the unit uses its experience in the pharmaceutical domain to generate insights from different data sources, using AI and ML.

Consider the numbers mentioned above for a moment. By setting up in-house development teams, GCCs are undoubtedly eating into the outsourcing and offshoring pie of Indian IT services providers—in a world without GCCs, much of this work would have been lapped up by them. If the GCC sector’s revenue totals $80 billion in a few years, it implies a lost revenue opportunity of a similar size for the IT services club.

Yet another measure of GCC’s growth is office real estate rentals. Unsurprisingly, GCCs are mostly concentrated in cities like Bengaluru, Hyderabad, the national capital region, Mumbai, Pune, and Chennai— the access to talent here is easy. As a result, office stock occupied by GCCs across the top six cities has crossed 200 million sq ft, and is growing rapidly with time, stated a report by real estate consultancy JLL, in April this year.

Sensitive edge

The GCC versus the Indian IT services conversation is not really a new one. What is probably changing is the scale and nature of in-house development.

Many large corporations already have their tech centres in India. Now, even mid-sized companies are looking at the same model, partly driven by the need to control sensitive data that feeds into their AI systems.

Despite the pandemic, and talks about the risk of concentration in one geography, global mid-sized companies, typically in the $20 billion revenue range, are expressing interest in setting up their tech capabilities, says Gaurav Gupta, partner and GCC industry leader, Deloitte India. “They may have outsourcing relationships with Indian service providers already but are exploring a model that has already worked for the larger firms,” he says.

According to Gupta, when companies look at high-end tech deployments, which includes sensitive customer data or intellectual property (IP) developments, they prefer keeping the work within their own boundaries. He adds that organizations need “geopolitical flexibility to manage a globally spread-out tech stack”, which outsourcing partners and third-party contractors do not provide.

Punit Sood, head of international hubs at NatWest Group, says that cost is not the top reason to set up a GCC any longer. Rather, it is confidentiality and regulations because as a bank, NatWest would rather have an in-house employee look at their customer data than a vendor.

“When we work on building data analytics-based projects and deployments, we handle a lot of sensitive data that belongs to our clients across the supply chain. Building a tech product based on sensitive customer data is not ideal for outsourcing,” says Sreenivas Pamidimukkala, the chief information officer at Mahindra Logistics, a third-party logistics company.

The Indian Parliament recently cleared the Digital Personal Data Privacy (DPDP) Bill. It will impose stricter regulations in terms of how a company can share personal data for outsourced projects. This wasn’t something strictly regulated in India before.

Nonetheless, Sood believes that the GCC versus IT services conversation is less about competition and more about “complementary co-existence”.

For instance, if Sood wants to quickly pick up a new technology and build capabilities quickly, he would always start by partnering IT services providers. “The IT services companies would have already pre-empted such demand and built capabilities around it,” he explains. That said, over the next 18-24 months, Sood aims to have 70% of Natwest’s technology work done in-house from the current 50%.

Pamidimukkala also does a balancing act between in-house tech development and outsourcing. Mahindra Logistics has about 140 employees working on various technologies, spread across six departments and three offices in Mumbai, Gurugram and Hyderabad. The company’s capabilities include building and maintaining employee onboarding, financial systems, vendor payment systems, sales lead generations, and even cybersecurity tools. Mahindra Logistics is exploring the use of large language models sourced from the Microsoft Azure platform.

However, the company does partner with IT services providers such as Tata Consultancy Services (TCS) to build its tech infrastructure. It is developing a ‘data lake’— a pool of data that will help its customers visualize their supply chain.

Pamidimukkala believes IT service providers have built “very specific capabilities in core and emerging technologies already”, adding that this is not feasible for a logistics company to develop, in terms of cost and efficiency. Also, talent management. For a non-tech firm, it is always a challenge to retain talent keen on cutting edge technologies.

Desirability curve

To be sure, the Indian IT services sector is currently much bigger than all GCCs in the country, both in terms of revenue and talent. In 2022-23, India’s technology industry revenue, including hardware, is estimated to cross $245 billion, according to Nasscom. And the industry continues to be a net hirer, adding nearly 300,000 employees, taking the total employee base to about 5.4 million.

But GCCs are competing for the same talent pool Indian IT services companies are after and are ‘poaching’ talent. There are many reasons why.

Over the past three years, GCCs have gone from managing small teams to bigger ones, especially with the influx of new technologies. As attrition in the IT services sector shot up, GCCs capitalized, netting senior-level talent, especially those with niche skills in data analytics, blockchain and other specific use-cases. Data shared with Mint by staffing firm Xpheno shows that while the net addition of employees for GCCs was a third of IT services in 2021-22 (170,000 vs 520,000), the same is expected to become nearly comparable at the end of 2023-24 (200,000 vs 300,000).

While the number of net additions in the GCCs has not drastically shot up, captive centres in India are roping in more experienced talent as they build niche projects.

The experienced talent is now driving many innovation projects. Indeed, this explains why the GCCs are also referred to as global innovation centres.

According to Sood, until about five years ago, innovation in new areas of technology would have comprised about 5-10% of the work being executed at the GCCs of various companies in India. “Today, this is up to around 30-35%, and in the next five years, this should rise to 50-55% in terms of what companies, including us, use our India capability centers for,” he estimates.

AstraZeneca India Private Ltd rebranded itself as a global innovation and technology centre in April 2022 to reflect its new technology capabilities. The centre played a key role in the development of the Oxford-AstraZeneca covid-19 vaccine by integrating dozens of additional supply chain partners, establishing electronic connectivity, stress testing and continually modifying the adverse events (allergies, for example) reporting systems.

AstraZeneca India also uses a number of technologies like extended reality (XR)—which includes augmented reality and virtual reality—to visualize how a particular drug interacts inside the body, and how it targets certain types of cells.

Then there is Walmart Global Tech, which offers technology and omnichannel solutions to help businesses transform and grow their operations. The India division has three units—in Bengaluru, Gurugram and Chennai. They develop AI and ML algorithms that decide product placement strategies, as well as technologies like smart substitution that identify the next-best items for online commerce—customers typically purchase a substitute product if the product they desire is not available. If the customer approves or rejects the substituted item, the algorithms learn from the feedback, improving the accuracy of future recommendations.

Global companies now also have their India centres of excellence and are investing in setting up incubators and accelerators. They are partnering educational institutions and Indian startups.

GE Healthcare’s India Edison Accelerator, for instance, nurtures and works with startups to leverage its Edison platform and develop healthcare solutions. Edison applications can integrate data from different sources and apply advanced algorithms to generate clinical, operational and financial insights.

SAP AG’s India research and development unit, SAP Labs India, has a ‘SAP Startup Studio’. That’s an accelerator programme to provide mentoring, infrastructure, technology support to seed early-stage startups.

Ericsson, too, has set up its third Global AI Accelerator in Bengaluru. It has a 5G Lab in Mumbai and a centre of excellence and Innovation lab for 5G at the Indian Institute of Technology-Delhi to develop 5G-based apps and business models to improve agricultural yields, healthcare solutions, and smarter cities, among other solutions.

Apart from cutting edge products and solutions—a magnet for tech talent—there’s yet another reason why such in-house centres can possibly win the war for talent, going ahead. As international brands, GCCs rank higher than Indian IT service companies on the “desirability curve”, Prasadh MS, head of research at Xpheno, believes. Along with comparatively higher compensation packages, this desire makes it easy to woo talent away from the IT services cohort.