by Stephanie Overby

How captive IT offshore centers are driving IT innovation

News Analysis
Sep 11, 2015

Companies like Amazon, Tesco and Honeywell are looking to offshore IT subsidiaries to deliver digital transformation.

innovation digital transformation ts
Credit: Thinkstock

New launches of captive centers offshore continued to increase in the first half of 2015, according to research from outsourcing consultancy Everest Group. Companies in the manufacturing, telecommunications and technology industries, in particular, expanded their in-house presence offshore in the first and second quarters compared to last year. Manufacturers, for example, set up 18 new in-house centers in the first half of this year, compared to just six during the same period in 2014, according to Everest Group.

[ Related: Offshore captive centers are again a thriving outsourcing model ]

And these wholly owned service centers, which traditionally served as back-office delivery centers, are beginning to play a key role in IT transformation efforts. “In the past, global in-house centers (GICs) were playing service delivery roles for the enterprise,” says Salil Dani, vice president of global sourcing for Everest Group. “While most of the GICs continue to play this role even now, there are some GICs that are taking ownership for digital transformation for the enterprise.”

There are a number of drivers behind this new shift in responsibility. More mature captive centers have established their credibility as reliable service delivery organizations, in some cases having implemented successful pilot projects in the digital transformation space, says Dani. In addition, some companies are finding the skills for these initiatives offshore.

Tesco, for example, operates its Hindustan Service Centre (HSC) in Bangalore. While it began as a back-office service center for the multinational grocery giant’s operations, the unit now develops mission-critical projects for global transformation, according to the company. Ecommerce powerhouse Amazon and conglomerate Honeywell are also looking for similar contributions to the business from their captive centers offshore, says Dani.

Companies looking for more strategic contributions from their offshore centers do face some challenges, however. Finding a large base of digitally savvy talent can be difficult outside of India and a few locations in Eastern Europe, according to Dani.

“Even in India, the scalable talent pool is often small—a few full-time employees per [GIC], and largely concentrated in cities such as Bangalore, Hyderabad, and Mumbai,” Dani says. “This constrains the extent to which enterprises can leverage their global network of GICs in offshore and nearshore locations to drive enterprise-wide transformation.”

Additionally, there may be limits to which a faraway center can support true end-to-end ownership of digital transformation efforts. “Given that digital processes are associated with significantly enhancing customer experience, these often involve significant [interaction] with business users and other corporate teams that usually reside onshore,” Dani explains.

Why offshore captive centers partner with startups

Offshore captives are also increasingly partnering with startups to drive innovation in the areas of data integration, mobility solutions, big data analytics, cybersecurity, customer experience improvement and marketing solutions, according to Everest Group. “There is also early evidence of partnerships in process improvement and automation [such as] workflow tools and employee engagement platforms,” Dani says.

These engagements come in many varieties. Some in-house centers are setting up incubators or acquiring startups while others collaborate with startups on hackathons or open innovation initiatives. In certain instances, captive centers are working with startups as part of their relationship with an external IT service provider.

The benefits include faster speed to market, decreased cost of innovation, and brand enhancement that helps with captive center talent recruiting, according to Dani. Captive centers working with startups may also be laying a foundation for broader startup engagements with the parent company and facilitating internal cultural acceptance of increased agility and responsiveness, he says.