Market Share For Global In-House Centers (GICs) Strategically Shifting

An increasing number of companies have started their own Global In-house Centers (GICs) (also known as captives), and companies that have existing GICs have been expanding the scope of what those GICs do. This surge in GIC build and expansion is coming at the expense of the third-party services market.

At this point, the volume of the combined work shift materially affects the market share split between the third-party provider industry and the GICs. This market share shift has been slowly building for some time but accelerated during the past four quarters and became increasingly visible by examining the talent flows and hiring in both sectors.

Consider what happened with the number of people employed by both GICs and the third-party service industry in India. The GIC community steadily increased the number of people employed in India while the third-party providers modestly reduced the total number employees in India over the last four quarters.

There is a complicating factor in this analysis. The service providers are shedding excess labor that was accumulated during the COVID boom and accompanying high employee attrition. However, the GICs also experienced similar conditions with rapid COVID expansion and high employee attrition. As the dust settles, we see that the GIC employment continues to expand while the service provider employment is modestly falling.

What Is Driving This Market Share Shift?

There are three drivers for this phenomenon. The first is a growing mind set shift in which companies increasingly view the business functions – which previously were viewed as context or non-core – now as important and more strategic. They still wish to capture the benefits of labor arbitrage and now increasingly see GICs as an excellent home for these workloads.

The second factor is the growing frustration with the third-party service model and an emerging belief that the managed-service model as currently constructed is nearing the end of its useful life.

The third factor is that well-run GICs are now providing services to their parents at a lower cost than can be procured from third-party service providers. This lower cost of services now appears to be sustainable for even many of the smaller GICs, making their value proposition compelling for a much wider range of companies.

Increased Strategic Value Of Previously Outsourced Services

As companies move further into their digital transformation journeys, the relationship between software and their business operations becomes increasingly more intimate. (See my previous blogs on this phenomenon here and here.) As this happens, control over the technology and the need for close coordination between the tech stack and business operations becomes more important and strategic. Hence, companies increasingly find the need to assert more control over their outsourced technology estates.

The changed mind set elevating the importance of control and flexibility is also impacting business process function workloads that are candidates for managed services, or outsourcing the emergence of broad software platforms that underpin and integrate these services. Hence, both the IT and BPO estates that would have been moved or are already in the hands of service providers are increasingly viewed as strong candidates for the GIC vehicle.

AI And Automation

As the prospect of applying generative AI and significantly increasing the amount of automation in business operations becomes a reality, companies increasingly believe that in many cases they would be better off driving these investments themselves without the complications of working though the often-unaligned interest of their service providers. The GIC model offers more control and the prospect of closer integration of tech and operations.

Frustration With The Managed Service And Outsourcing Model

As the managed service industry has matured, many clients are increasingly frustrated with the model. This frustration has a wide number of causes:

• Lack of innovation. In too many cases, companies find that outsourced estates stagnate and fail to adopt innovative practices or technologies at the rate of internally run functions. The causes of this vary but often stem from the misaligned interests between customer and service provider, lack of investment, and lack of attention and direction applied by the customer.
• Bloat. In some cases where services have been outsourced for several years, companies find that the service providers staff these functions with up to 20% more people than required. These unnecessary resources are then passed through to the customer, raising the cost to serve.
• Frustration with managing the outsourced functions. It is always hard for customers to place enough resources into the governance and management function. Outsourced services rarely receive the same level of investment in oversight as internally run functions.

Services Delivered From A GIC Are Cheaper Than Third-Party Services

Historically, most companies believed that it is cheaper to have third-party services providers deliver work from India and other low-cost countries than to build their own operations in these countries. This perception was based on the belief that operations needed to achieve a significant scale of 2,000 or more people before they could become cost-efficient. This was coupled with the belief that it would be difficult and expensive to set up and run these operations.

However, there is now a large pool of qualified talent to build and run these operations. The supporting infrastructure ranging from facilities, telecom, technology support, legal and account support are now in place and readily accessible. This reduces the scale necessary to provide low-cost services and the cost and time to build them.

Hence, many firms now find that operations as small as 100 people can provide compelling economics, and the time and expense to build these operations is dramatically reduced. Once the provider overhead and profit is eliminated, companies now often find it cheaper to deliver these services themselves.

Will GICs Supplant The Need For Service Providers?

A controversy that companies often ask about is whether there will be a need for third-party providers going forward. We believe the third-party provider relationships will actually increase with regard to GICs. We see a huge opportunity for GICs to partner with third-party providers. The third-party service providers have best-in-class recruiting, best-in-class technology, and best-in-class location and legal help. All of these can make a GIC more effective.

We believe there is a large market for those services in GICs. Rather than putting the third parties in competition with the GICs, we see a strong market developing for partnership between the two.

In addition to that, as technology becomes more and more important to everyday business operations, the need for all that talent to drive technology initiatives and the business initiatives is not going down. It is increasing.

Therefore, I believe that it is not a zero-sum game. There will be a growing market but a different market than the one that existed in the past.