If you plan to leverage IT talent in India to build  core digital capabilities and operations for your company, setting up a global capability center is a better long- term option than simply outsourcing to an IT service provider, for the following reasons:

 Strengthen value-proposition for global talent

Placement trends reveal a marked preference among engineering graduates for joining GCCs over third-party IT service providers. The common wisdom is that outsourced work is likely to be routine and repetitive in nature. Innovation focus is primarily around generating efficiencies; deeper innovation is hindered by clients concerns over the protection of IP.  GCCs, in contrast, offer the opportunity to work in core business operations and with strategic digital technologies. GCCs also tend to offer better compensation, work culture, work environment and work-life balances

Build core competencies 

Leveraging of offshore talent can help CIOs to a) address the scarcity of digital skills in the home country and b) do more with available budget dollars.  Digital transformation is a strategic exercise to build new, differentiating capabilities. To be a source of competitive advantage, the associated knowledge, expertise embodied by the employees should be owned (GCC option) and not rented (outsourcing option). Investments in new technology and training should be directed at building intrinsic, in-house expertise. Any knowledge or capability built with vendor employees can be shared with multiple other clients and ceases to be a differentiator

Accelerate transformation 

While digital technologies are generic in nature and available to all, it is their strategic integration with people, processes, and other technologies that creates new customer value. Vendor employees are remote from business operations and lack in-depth knowledge or context about the client’s customers. They experience a work culture and business objectives of the vendor, i.e., very different from that of the client. In contrast, GCC employees are part of the enterprise and very much aligned with its mission. They are closer to customer activity, business strategy, and operations. They are thus in a better position to contribute to productivity and innovation specific to the company’s needs.

Add agility with inhouse talent

Digital operations thrive on agility and collaboration
Mckinsey (2012) called out the emergence of a two-speed architecture to deliver the functionality that the digital enterprise requires. Two-speed architecture implies “a fast-speed, customer-centric front end running alongside a slow-speed, transaction-focused legacy back end….” In this construct, digital technologies are “faster-paced” applications of customer experience, differentiation, and innovation. They are characterized by shorter release cycles, rapid response, and reconfiguration that is sustainable only with the collaborative and agile operating model.  Outsourcing engagements are inherently non-agile and restrictive because of outsourcing regulations, contractual fine print, and data protection laws

Catalyse transformation with COEs

Centers of excellence (COEs) act as catalysts of transformation.
GCCs are set up as shared services centers (SSCs). SSCs drive economies of scale and optimize utilization of service delivery resources across the enterprise. This is achieved by consolidating, streamlining and standardizing services instead of leaving them disparate and fragmented across various regions or functions. Since GCCs also have access to lower cost staffing, they are ideally suited to set up “centers of excellence” for rapid building and deployment of digital capabilities across the enterprise.

Tighter compliance and infosec 

Strong cybersecurity controls are a pre-requisite for the viability of digital operations. The risk of privacy breaches goes up exponentially as customer data and interactions are increasingly digitalized. It is crucial for organizations to control, manage, and monitor privileged access to their networks. A GCC’s governance, risk control, and compliance practices are an extension of the home office. GCCs offer more secure environment and are, therefore, the preferred platform for building digital capabilities.

Improve business disaster recovery 

Online customers expect 24X7 “always-on” service as a baseline requirement. Many large enterprises, such as MNC banks have enhanced the resilience of their operations infrastructure by strategically distributing their core operations through GCCs in different locations. If there is an outage at any one place, service queues seamlessly pass to the other sites. This is challenging to achieve with a service provider since there is limited visibility into or control over his operations

Leverage innovation ecosystem

Most companies realize that relying just on internal ideas and innovation may not suffice to stay ahead of the competition. They seek, therefore, to stay connected with cutting edge developments in relevant fields in the external world.

GCCs create a presence for the organization amongst the talent market in India. There are many examples of GCCs assisting home offices by tying up co-innovation and other forms of collaboration with technology incubators, start-ups, and universities in India’s vast and diverse innovation ecosystem.

Get ownership of business outcomes

As a GCC matures, builds scale, expertise, and a track record of performance and reliability, it takes on greater operational autonomy and responsibilities from the home office. Eventually, a GCC evolves to be an integral part of the enterprise, owning essential functions and initiatives that impact business outcomes at an enterprise level. Vendors, on the other hand, have limitations in rendering services in core business areas since they lack in-depth knowledge of the business and leadership focus is spread thin over multiple clients. Despite substantial upfront training costs, such outsourcing ultimately plateaus off as an SLA driven staffing engagement that is unlikely to outgrow handholding, maintenance, and oversight by the client.

Save costs and build long-term value

Insourcing leads to cost savings by eliminating vendors’ profit margins (which can be as high as 20-30%). Vendors are likely to extract even more if they perceive that switching to another provider or insourcing would be difficult for the client. There is evidence that just the existence of a GCC can cause the vendor to reduce prices – since there is a threat of insourcing.

Outsourcing is also susceptible to other forms of value leakage – provider moving experienced contractors to another client; holding back savings from automation; leveraging experience gained on the assignment to pitch for new clients in the same industry etc.

All vendor contracts must someday end. Vendor employees gain considerable knowledge and experience, paid for by the client, over the term of an outsourcing contract. However, the business loses all the accumulated value upon termination of the contract. The costs of termination are bad enough in case of a contract for commonly available services that are also offered by other vendors. They would be unimaginably high if the contract terminated involves core and strategic capabilities built with vendor employees at great effort and expense

Finally

If you are thinking of leveraging IT talent in India to build digital capabilities and operations for your company, setting up a global capability center is likely to be a better long- term option than simply outsourcing to an IT service provider.

It is also noteworthy that, over the years, the risks and costs of setting up GCCs have been steadily declining. The availability of systems on the cloud and pay-as-you-use, pre-built physical infrastructure have reduced the initial set up time and costs. Experienced leadership is not difficult to source from the huge Indian IT services market.

Whereas earlier 500 -750 FTE was considered as the minimum viable scale, there is an emerging trend of smaller GCCs (e.g., for 50-75 data scientists.) being set up.

Outsourcing is also susceptible to other forms of value leakage – provider moving experienced contractors to another client; holding back savings from automation; leveraging experience gained on the assignment to pitch for new clients in the same industry etc.

All vendor contracts must someday end. Vendor employees gain considerable knowledge and experience, paid for by the client, over the term of an outsourcing contract. However, the business loses all the accumulated value upon termination of the contract. The costs of termination are bad enough in case of a contract for commonly available services that are also offered by other vendors. They would be unimaginably high if the contract terminated involves core and strategic capabilities built with vendor employees at great effort and expense