Tata Consultancy Services, Infosys, and Wipro have long been at the forefront of India's services exports and the creation of highly-sought jobs in information technology (IT) and business process management (BPM). But they are facing a challenge from global capability centres (GCCs), or offshore units of multinationals that provide various support services such as IT, finance, human resources and analytics to their parent organizations.
In the past 12 years, GCCs have outpaced the top three outsourcing firms in both revenues and employee additions. Revenues and employee count of GCCs jumped four times since 2009-10, against three times for the leading Indian trio. For the overall IT-BPM sector, employment grew by 2.3 times during this period.
In a report published earlier this month, industry body Nasscom and consulting firm Zinnov said GCCs grew in three phases. Until 2009-10, their growth was primarily driven by cost advantage. Then until 2014-15, it was through improvements in quality and innovation. Since then, GCCs have been offshoring more activities, even as Indian managers took on global roles. They have also been making inroads into tier-2 cities.
The factors that drove the growth of outsourcing companies helped GCCs too. This includes the availability of a large pool of skilled and English-speaking talent, a favourable business environment created by select state governments, and competitive costs. The pandemic further pushed growth, as companies became more comfortable with remote work. Looking ahead, this momentum could be challenged by the post-pandemic push petering down and a possible backlash against offshoring ahead of the 2024 US presidential elections.
Tier-2 potential
GCCs tend to concentrate around a few cities because of easier access to talent. New and expanding GCCs typically hire from other existing GCCs, leading to attrition. For example, every fourth GCC in India is in Bengaluru. The city also accounts for 42% of real estate stock among the top six cities with most GCCs, indicating it has larger centres and employs more people, according to a report by JLL and CRE Matrix. Hyderabad, which accounts for one in 10 GCCs in India, has a 16% share of office space in the top six cities.
To check attrition, and to leverage on other advantages, GCCs have been moving to smaller cities. A report by Zinnov points out that GIFT City, near Ahmedabad (thanks to infrastructure and tax incentives), Coimbatore in Tamil Nadu (high availability of engineering colleges) and Chandigarh (convenient for employees from Punjab, Haryana, Himachal Pradesh and Uttarakhand) have attracted investments from GCC.
Value drivers
According to Deloitte, the market for GCCs will grow from existing GCCs doing more of the same activities, adding more functions and doing higher value-added activities, as well as new GCCs doing both transactional and higher-value work. The biggest growth is expected to come from higher-value work, which GCCs in India have been moving to. According to a recent Bloomberg report, India accounts for almost 40% of SAP SE’s global research and development and 25% of its patents every year. Similarly, JP Morgan and Goldman Sachs increasingly do higher-end work in India.
This shift is not yet captured in overall industry numbers. In fact, average revenue per employee dropped from $28,700 in 2010 to $27,700 now, partly because of the growth in employees doing transactional work. The numbers are expected to eventually show up. According to Deloitte, the potential value addition from higher-end work between 2020 and 2025 by new GCCs is $10 billion—double that from transactional work.
Risky ride
Whether GCCs in India can maintain momentum will depend on the relative advantages India has compared to other countries, weighed against the potential risks. According to an analysis of global centres of excellence by Zinnov, India comes right at the top when measured against the availability of technology talent, cost of operations, software engineering ecosystem maturity (presence of large companies, technology startups, service providers, engineering schools) and ease of doing business.
However, these advantages have to be weighed against three risks. There has been a global tech industry slowdown in the past few quarters, resulting in huge job losses in top tech companies including Microsoft, Meta, Google and Amazon. These job losses coincide with the preparations for the next presidential elections in the US. The campaigns tend to push back on moving jobs out of the US. This comes on top of concerns around data breaches and cybersecurity.
www.howindialives.comis a database and search engine for public data