by Stephanie Overby

Digital transformation boosts captive offshore center growth

News Analysis
Sep 14, 2016
Emerging TechnologyOutsourcingTechnology Industry

As enterprise demand for digital transformation grows, expect to see more global in-house centers.

outsource in house ts
Credit: Thinkstock

Global in-house centers — wholly owned captive offshore operations that deliver offshore IT services to their parent companies — today provide a quarter of the offshore and nearshore digital services market, according to outsourcing research firm Everest Group. And that percentage is likely to grow as enterprise demand for digital transformation continues.

[ Related: Digital transformation will shape 2016 ]

“Global in-house centers (GICs) are typically more strongly integrated with the core business as they are perceived as an extended team of the parent or onshore organizations,” says Aditya Verma, co-director of Everest Group’s global sourcing practice. “They typically have specialized knowledge of the business as they cater to only one customer (the parent organization) as compared to a multi-tenant service provider.” Enterprises are typically more comfortable sharing core business knowledge or intellectual property with the company’s own employees than with a third-party service provider who works with other customers or even competitors.

[ Related: Digital transformation: Why it’s important to your organization ]

“GIC talent models are also more tightly integrated with the parent through the use of employee exchange and mobility programs,” says Prashray Kala, co-director of Everest Group’s global sourcing practice. “Therefore, GICs are not treated at arms-length as a service provider would be.”

Of course, captive centers are not instantly seen as part of the enterprise family. A newly established GIC may be viewed similarly to any other low-cost offshore provider in the early days. Integration and trust must develop over time. And the fact that these subsidiaries can become more integral to the enterprise than third parties is nothing new; that’s always been a key part of the value proposition of captive centers.

However, integration with the parent company is becoming increasingly important for many organizations due to a number of key business drivers, say Verma and Kala, including escalating consumer demands, the rise of disruptive technology, cost pressures and shrinking go-to-market timelines.

The traditional IT services market has witnessed between eight and 10 percent growth in recent years while the digital services market is expected to witness 100 to 120 percent year-over-year growth, according to Everest Group. Mature GICs are uniquely situated to deliver many digital services that enterprises are looking for today, including analytics, social media, cloud, mobility, automation and Internet of Things. According to Verma and Kala, these digital technologies have emerged as a significant focus for GICs for a number of reasons:

GICs often play the role of talent repository for the enterprise: “GICs have established their foundation with a significant pool of talent and an insider’s view that is essential for providing strategic insights to support digital-related transformation,” Says Verma. “GICs offer an opportunity for the parent enterprise to tap into a globally distributed talent pool that enables them to balance the skills portfolio in short supply elsewhere in the organization.”

GICs can foster cultures of innovation. “Most GICs play a strategic role in building internal innovation capabilities for the parent and act as innovation hotspots to foster and propagate the cultural shift to innovate,” says Kala. Additionally, best-in-class GICs partner with start-ups and niche solution providers.

GICs cater to the parent company’s business priorities. GICs are an integral part of the enterprise operating platform and are more closely intertwined with business functions “This platform offers a lucrative opportunity for GICs to further integrate digital solutions and delivery capabilities across these functions to ensure synergies for the parent,” Verma says.

Small to midsize buyers (defined as those with less than $5 billion in annual revenue) are increasingly setting up captive centers as well, according to Everest Group, fueled by setups in the manufacturing and telecom sectors. “As the market has matured, the small to medium buyers are becoming more comfortable with the GIC model,” say Verma.

“[Also] the nature of work being put in these GICs is skewed towards engineering and R&D as opposed to the traditional operations work such as finance and accounting. This enables GICs to be successful and sustainable even with small scale.” What’s more, while large scale GICs once took up to a decade to achieve maturity, these smaller captive centers are often able to deliver full value within two to four years, according to Everest Group.

Cultural differences and alignment with business objectives historically have been the biggest challenges for captive offshore centers. But as they have taken on higher-level deliverables like digital services, these GICs must also rethink their talent acquisition models. “The GICs are undergoing fundamental shifts in their operating models… from being centered around arbitrage to skill-centric, functional orientation,” says Kala. “This shift is significantly impacting the relative emphasis on talent attributes required for success.” Domain, functional, and technical knowledge are now table takes; digital services require skills in the areas of collaboration, analysis, creativity and innovation.

Facing a limited pool of ready-to-work professionals, quickly evolving technologies, and stiff competition for talent, captive centers must look beyond their traditional recruitment channels of campus placement, employee referrals, third party recruiters, and online job postings. Instead, they need to develop an alternate pipeline of talent by partnering with startups, crowdsourcing, recruiting from alternate industries and developing hybrid sourcing arrangements with service providers, say Verma and Kala.

Everest Groups recently conducted a survey with more than 40 large captive centers and found that around 40 percent are currently partnering with startups and 65 percent plan to do so in the future, In addition, about half the respondents currently hire from alternative industries and 75 percent plan to do so.