India’s nearly $170-billion IT outsourcing industry, which has seen its growth shrink over the years, is now facing the challenge of global in-house centres, or GICs, hoovering up work.

Over the last few years, about 35-40% of the outsourcing work has moved to GICs, and “this is a continuous process", said Harish Pillai, vice-president and country head, Randstad Sourceright India, a talent management solution provider.

GICs, traditionally referred to as captive or contact centres, are typically offshore units that emerged during the 1990s as large companies, such as GE, Texas Instruments, Citigroup and American Express, began embracing the model to perform designated operations, mostly related to technology. According to an Everest Group report, GICs account for about 25% of the global offshore services market.

India accounts for over 45% of the GICs in the world. According to a 2017 Nasscom and Bain and Co. study, there were about 1,100 GICs in India, employing more than 800,000 people and generating approximately $23 billion in revenue.

The trend of GICs getting more work is evident as companies are gradually increasing their engineering headcount in India. One person with direct knowledge of the matter said Australian telecom company Telstra has plans to double their India capacity to 1,000 people in the next few months from 450-500 currently. Similarly, Philadelphia-based telecom major Comcast has plans to move a major part of its previously outsourced work in-house, the person added, requesting anonymity.

Leading investment banking firm Goldman Sachs, which set up its Bengaluru operations in 2004 with just about 290 employees, now has over 5,000 people working. Four months ago, it had announced an investment of $250 million to create a new 1.2-million sq. ft. office—its third largest in the world—in Bengaluru. The company now employs about 2,500 engineers in the city and this number is expected to rise in the coming months.

“Our Bengaluru centre has become one of the firm’s global centres of innovation focused on the development and application of artificial intelligence, machine learning and data analytics to help solve business problems for our worldwide network," Gunjan Samtani, head of Goldman Sachs in India, had said in a statement on 30 May.

As companies start moving more work in newer digital technologies such as automation, data analytics, machine learning and artificial intelligence, they are depending more on their in-house talent pool, as services companies are not able to easily attract top talent at the right levels, said Pillai.

He added services companies may not have compelling employee value propositions for high quality candidates in digital technologies as they may not be involved in complete product roadmap unlike GICs, which can provide a lot more exposure to candidates due to their ability to cater to the complete lifecycle of the product, without any issues related to data security and patent protection.

IT industry lobby Nasscom, too, acknowledges that GICs have moved beyond cost-cutting centres to focus on high-value activities such as intellectual property (IP)-creation, building competencies around emerging technologies, setting up centres of excellence and taking full ownership of vendor management. As a result, companies are investing heavily in GICs and a large chunk of this money is coming from IT budgets that would have otherwise been allocated to IT outsourcing.

Quality and retention of talent seem to be the two major factors driving large multinationals to bring more work in-house. IT services companies are unable to attract and retain quality talent.

“A machine learning scientist gets paid at least 20-30% higher in a GIC. It is not easy for IT services companies to match the GIC compensation levels because of cost-price pressures as well as to maintain internal parity in salaries. However, for a GIC, the high compensation is only a fraction of what they would incur if they were to get similar level of resources/services from a services firm," Pillai said.

The spike in the number of GICs is evident from the hiring trends. “Earlier 50-60% of the talent hired into GICs came from IT services companies. Today, a similar percentage of hiring is being done from other GICs, which is a clear indication of how much the GICs have grown," Pillai said. A recent example of this is Fiserv, a fintech company, partnering with Randstad for ramping up in large numbers in Chennai toward expanding their India centres.

“Relentless and reckless outsourcing by some companies in the past have led to depletion of knowledge internally…these companies have now started to move their critical work in-house," said Arup Roy, Research Vice President, Gartner. General Electric and General Motors, which were traditionally among the biggest outsourcers, have also recently moved much of their work in-house.

To be sure, the IT outsourcing industry’s raison d'être still exists as the pie is big enough. “Companies will continue to outsource externally especially the SLA (service level agreement) driven work such as infrastructure management, uptime of applications, etc.," said Siddharth Pai, IT consultant and venture capitalist.

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