Are Offshoring / GCCs coming a full circle?

The world of offshoring and outsourcing has witnessed a rather interesting cycle of evolution. Companies initially dipped their toes in by establishing captive centers in India; remember Texas Instruments in Bengaluru (circa 1984)? Then came the outsourcing boom, driven by a relentless pursuit of cost savings and the panic of Y2K. Somewhere in the middle captive centres started opening up. Near Shore centers keep getting popular for short spurts and go back into seeming oblivion. China never really picked up for services. Now, we seem to be witnessing a resurgence of captive centers, also known as Global Capability Centers (GCCs), particularly in the tech sector. I find this "interesting". Why you ask?

The early days of offshoring saw companies setting up captive centers to directly access India's skilled workforce at a lower cost. However, with cost arbitrage as the primacy concern, outsourcing to established third-party providers emerged as a more flexible option, large potential skill base thus allowing companies to focus on their core functions.

GCCs: Catering to the Evolving Needs of MNCs:

Today, priorities are evolving yet again. The three clear trends are:

• Shifting Priorities: Companies are no longer solely focused on cost reduction. They need partners who can contribute strategically to their growth and innovation agenda. GCCs can fulfill this role.
• Focus on IP: Data security and IP protection concerns are driving companies to manage critical functions in-house through GCCs.
• The Hybrid Approach: The future might be a hybrid model with a mix of GCCs and selective outsourcing for specific needs, depending on the project and skillset required.

India - Gift that Keeps giving:

India's strengths continue to make it a prime location for GCCs. Whether it is about the Talent pool (in terms of IT professionals, engineers, data scientists and other professionals), rapidly evolving ecosystem or continuing cost competitiveness.

But certain challenges remain. Talent retention has always been an issue. I do remember years when the average attrition in the Indian Tier-1 outsourcing companies touched 25%. The rapidly increasing size of the startup eco-system only adds to the pressure.

Managing a captive centre effectively requires a mindset different from that required for outsourcing. There is a need for forming, for instance, a strong in-house, and local leadership team to create longer term tenability.

The success of GCCs hinges on delivering strategic value beyond just cost savings. They need to become innovation hubs and be able to solve business problems whether technology enabled or not.

The Next Phase of Offshoring

Predicting the future with certainty is impossible, but here are some exciting possibilities for the next chapter of offshoring and outsourcing, particularly in the tech sector:

• The Rise of "Nearshore" Sourcing: Companies are starting to consider locations closer to their headquarters and in near time zones for smoother collaboration and cultural alignment Some locations in Latin America, some East European countries might start finding favour again till cost makes these untenable for large establishments. So the potential trends are:
• Skill-Based Sourcing: In situations where cost arbitrage is not the primary focus, but skill is, locations with skill availability will find favour. This implies potential involvement of a larger number of gig-workers. A mix of in-house (GCCs), nearshore, offshore, and even freelancers could become the norm.
• Automation and AI Reshape the Landscape: Repetitive tasks will continue to be automated, impacting the types of jobs outsourced. AI could play a bigger role in project management, communication, and many aspects of software development, influencing the skillsets needed in offshoring.
• Focus on Security and Ethical Sourcing: Data security concerns will likely remain a top priority. Companies might favor partners with strong security protocols and ethical labor practices.
• Evolving Role of GCCs: Captive centers, likely will transform further. More of the existing ones will transform to become innovation hubs focused on cutting-edge research or act as training grounds for future tech talent within the company.
• And the full circle will be outsourcing companies catching up with the above potential directional trends. The circle will start again.

The future of offshoring will likely involve a more dynamic and strategic approach, with companies tailoring their strategies based on specific needs and project requirements. One thing is certain: the offshoring landscape is constantly evolving, and India, will continue to remain well-positioned as the leader in this exciting new chapter.