GCCs eating into IT firms’ revenues

Bengaluru: Technology captives of global enterprises are slowly eating into the business of IT services and engineering services companies, posing a threat to their revenue growth. Technology captives or Global Capability Centres (GCCs) in India are increasingly functioning as the backbone of their global operations. Their roles have largely transformed from support centres to driving key functions including new product and services launch from Indian centres. Such transformation has led to a situation where more enterprises are insourcing (doing their own technology work) than outsourcing to third party vendors like IT firms.

According to experts, the ease of opening of GCCs in India has increased the pace of insourcing by global enterprises.

“GCCs are increasingly doing more technology work out of Indian centres. No longer, the GCCs are working as support centres, rather important research and development work is driven out of these centres. So, such insourcing is posing as a threat to business growth of engineering services firms. Though IT firms are also facing a similar insourcing threat, the extent is low,” Pareekh Jain, an IT outsourcing advisor & Founder of Pareekh Consulting, told Bizz Buzz.

The pace of insourcing by global banks has increased in recent years with BFSI-focussed GCCs taking up important technology work, which used to be outsourced to IT firms earlier.

Last year, NYSE-listed financial services firm State Street had consolidated its operations in India acquiring 49 per cent stake State Steer HCL Services for $170 million. Through such acquisition, the BFSI player had taken over important technology work from IT vendor.

Similarly, UK-headquartered financial services major Lloyds Banking Group had opened its new technology centre in Hyderabad last year, which was a sign of more technology work getting insourced by the bank.

In a report, Kotak Institutional Equities has flagged up such concerns faced by IT firms from rising insourcing by global enterprises.

“Earlier, we believed insourcing could be limited to select vendors with weaker quality of delivery and higher attrition, but it appears to be across a broader range of companies,” the report wrote.

According to data from a Nasscom-Zinnov report, India had 1,580 GCCs with 1.66 million employees by the end of FY23. In 2023, more than 20 new GCCs have come up in tier-I cities such as Mumbai, Pune, Hyderabad and Bengaluru.

According to global consultancy firm EY, India is likely to be the home of 2,000 GCCs incoming years.

“The ease of opening of GCCs has been considerably improved over the years. That is the reason that many mid-level companies are opening technology centres in the country owing to India’s sound technology talent base,” said a source in the technology industry.