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pg 4. GCCs IN INDIA - To be or not to be...

pg 44. Indian Economy: Trend Indicators

pg 41. Interview: Mr Sashidharan Balasundaram, ISG Research

pg 46. PhillipCapital Coverage Universe

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MANAGING DIRECTOR & CEO Vineet Bhatnagar

EDITORIAL BOARDManish AgarwallaKinshuk Bharti Tiwari

DESIGN & ILLUSTRATION Chaitanya Modakwww.inhousedesign.co.in

EDITORRoshan Sony

HEAD- INSTITUTIONAL EQUITIES Kinshuk Bharti Tiwari

RESEARCHAUTOMOBILESSaksham KaushalAmar Kant Gaur

AGRI INPUTSDeepak Chitroda

BANKING, NBFCsManish AgarwallaSujal Kumar Pradeep Agrawal

CONSUMERVishal GutkaPreeyam Tolia

CEMENTVaibhav Agarwal

ECONOMICS Anjali VermaNavneeth Vijayan

ENGINEERING, CAPITAL GOODS Jonas BhuttaSandesh Shetty

HEALTHCARE, SPECIALTY CHEMICALS Surya PatraHrishikesh PatoleRishita Raja

IT SERVICESVibhor SinghalKaran Uppal

INFRASTRUCTUREVibhor SinghalDeepika Bhandari

LOGISTICS, TRANSPORTATIONVikram Suryavanshi

MEDIA, CONSUMER DISCRETIONARY Ankit Kedia

METALS Vikash Singh

MIDCAPS Deepak AgarwalVineet Shanker

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STRATEGYAnjali VermaManoj Rawat

TECHNICALSSubodh Gupta

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4. COVER STORY

GCCs IN INDIA – To be or not to be...By Vibhor Singhal & Karan Uppal

41. INTERVIEW

Mr Sashidharan Balasundaram, Senior Manager, ISG Research

CONTENTSLetter from the MD I would like to continue expressing my sincere gratitude to all

frontline COVID-19 warriors; words cannot adequately capture

their courage in fighting this crisis. As always, I hope you and your

loved ones are staying safe and doing well. While the prolonged

uncertainty, ups and downs, and anxiety continues, the silver lining

– that we got to spend so much quality time with our loved ones –

has been appreciated by many. We live in a different world now, and

for the foreseeable future, it will be a ‘post-covid-19’ world. But the

indomitable human spirit has prevailed and we have adapted both

personally and professionally, faster-than-anticipated, to a virtual

way of working. The show must indeed go on, and it has gone on,

considering everything that has happened.

The pandemic has had an economic fallout across sectors. But

what has turned out to be adversity for one, has emerged as an

opportunity for others. While the Indian IT services vendors have

seen a significant jump in the demand environment for their services,

the other part of the Indian IT ecosystem – the captives (or the

Global Capability Centers (GCCs)) have faced multiple headwinds

like Business Continuity Planning (BCP) issues and financial stress for

their parent organizations. This, our technology team believes, can

lead to an unprecedented opportunity for IT services providers – in

terms of acquiring some of these GCCs; a win-win situation for both

the parties. Vibhor Singhal and Karan Uppal, from our technology

team, have dug deep into this scenario, and have carried out some

interesting analysis of how the scenario could playout, and of who

could be the potential winners and losers.

In addition to this riveting story, they have also interviewed Mr

Sashidharan Balasundaram, Senior Manager at ISG Research, one

of the largest global IT consulting firms – to understand the GCC

landscape in India, and how the current pandemic could impact it.

Cheers and Best Wishes, Vineet Bhatnagar

44. Indian Economy: Trend Indicators

46. PhillipCapital Coverage Universe Valuation Summary


COVER STORY

BY VIBHOR SINGHAL & KARAN UPPAL

pg. 6 INDIAN GCC LANDSCAPE How it all began___________________________________ pg. 9 EVOLUTION OF GCCS IN INDIA From cost efficiency to value creation ___________________________________ pg. 18 FUTURE GROWTH POTENTIAL What’s in store for GCCs in India___________________________________ pg. 22 INSOURCING-OUTSOURCING CYCLES Third-party vendors or captive centres?___________________________________ pg. 25 FOCUS SECTION GCC Monetization – a massive opportunity for service providers___________________________________ pg. 35 CRYSTAL GAZING Potential buyers and sellers___________________________________


The Indian IT industry, ever since its birth five

decades ago, has always been composed of two

critical parts – the third-party IT services providers

(TCS, Infosys, Cognizant, etc.) and GCCs (Global

Capability Centres – the captives). Both have their

own important place in the ecosystem, and have

grown together over the last five decades.

This year, the Covid-19 pandemic has had a wide-

ranging multi-dimensional impact on various

industries. With the world moving to WFH (Work

from Home), technology adoption has seen

unexpected and unprecedented acceleration

across enterprises and consumers. This has led to a

significant reset in the demand environment for the

technology industry, especially for Indian IT services

vendors.

As for the GCCs – when they were forced to shut

operations due to the lockdowns imposed by

various governments (including India), the world

realized that many of them did not have credible

Business Continuity Planning (BCP) and were not

prepared for a WFH scenario. It is expected that

the economic/financial crisis has led (or will lead) to

many of the MNCs struggling financially, eventually

leading them to terminate/postpone their plans to

set-up/expand their GCCs in India/ROW. It is also

widely anticipated that many MNCs might actually

shut down their GCCs, by selling them off to IT

services vendors – to effectively monetize their

‘non-core’ assets to remain financially viable.

This presents an unprecedented opportunity for

the Indian IT-services vendors, to acquire these

talent houses, and boost their inorganic growth,

while expanding their geographical, vertical and

technological reach. It promises to be an interesting

time ahead, with both parts of the Indian IT

ecosystem looking to grow together while also at

the cost of each other.


INDIAN GCC LANDSCAPE

How it all began An overview of the Indian IT Services Industry and GCCs in India

The beginning of the Indian IT industry

India’s IT services industry was born in 1967 with the

creation of Tata Consultancy Services. In 1974, Burroughs

(an American mainframe manufacturing company) asked

TCS (its India sales agent then) to provide programmers for

the installation of system software for an American client.

This led to the birth of the Indian outsourcing industry.

Simultaneously, the first software export zone, SEEPZ – a

precursor to the modern-day IT park – was established in

Mumbai in 1973. It has been almost five decades since then,

and the IT industry has come a long way. It not only provides

critical support and services to thousands of companies

across the world, but it is also the largest private sector

employer in the country.

In the 70s, the Indian IT industry struggled. The state then

was hostile to it, imposing high import tariffs, as high as

135% on hardware and 100% on software. Eventually, in

1984, a New Computer Policy (NCP-1984) was formulated,

which offered a package of reduced import tariffs (by 60%)

on hardware and software. This gave life to the Indian IT

industry, that has today achieved a size of US$ 200bn –

contributing to 7% of the country’s GDP.

The beginning of GCCs or captives

However, what is left unsaid most of the times, is the role

of captives or GCCs (Global Capability Centres) in this

growth and evolution of the industry. The history of captives

in India started in 1985, with Texas instruments (TI) setting

up its captive/R&D centre in Bengaluru. TI was attracted

to India because of the country’s engineering talent and

costs advantage. What followed was an avalanche of global

companies setting up their captives in India, initially as cost

centres, that have now evolved into full grown centres of

innovation and IP creation.

The global technology outsourcing landscape

The global technology industry stands at US$ 2.5trillion

(FY19, including ER&D, excluding products). It grew by 5.4%

in 2019. In contrast, the global sourcing industry stands

at a mere US$ 300bn, just 12% of the global tech spend.

However, global sourcing spend has outgrown global tech

spend with a CAGR of 7% over the last five years.

The Indian outsourcing business

The Indian outsourcing industry stands at US$ 156bn

(FY19: NASSCOM, including ER&D, excluding products)

representing 53% market share of global sourcing – making

it the leader in the industry, by far. A large part of the Indian

IT outsourcing industry comprises of the glamour boys such

as TCS, Cognizant, Infosys, and Mindtree, and a plethora

of third party service providers. However, a decent chunk

of it is composed of the captive centres – the GCCs – set

up by various global companies in India. In 2019, GCCs

contributed US$ 28bn to the Indian outsourcing industry,

Global sourcing landscape (FY19)

Sour

ce: N

ASSC

OM


making up for 20% of the overall business. Over the last five

years, GCCs have seen a higher CAGR of 9.9% compared to

the total Indian IT outsourcing industry CAGR of 8.4%.

India has evolved as one of the hotbeds for setting up

GCCs over the last two decades

Over this period, the GCC industry has taken a huge leap,

not just in numbers, but also in the quality of the services

it offers. From a cost-arbitrage driven model, to a value

addition one, Indian GCCs have come a long way.

Salient features of the current GCC landscape in India

• No of MNCs with GCCs in India: 1,250+

• GCC Market size: US$28bn

• Employed workforce: c.1mn

• Global 2000 firms with GCCs in India: 383

• Key countries: USA, UK, Germany, France, Switzerland,

Japan, Canada, Singapore, China

• Key verticals: Software/Internet, BFSI, Consulting,

Healthcare, Telecom, Automotive, Manufacturing

• Key cities: Bengaluru, Hyderabad, NCR, Mumbai,

Chennai, Pune

Distribution of GCCs in India based on HQ location

Source: Nasscom, Zinnov


Distribution of GCCs in India by verticals

Location-based split of GCCs




EVOLUTION OF GCCs IN INDIA

From cost efficiency to value creation Mapping the last four decades of GCCs in India

It all began with Texas Instruments

The first wave of offshoring started in 1985 with

Texas Instruments setting up a first captive/R&D

centre in Bengaluru, India. Texas Instruments was

attracted to India’s engineering talent and costs

advantage. The 1990s is when the first wave

of offshoring happened in India; many MNCs

were testing and proving this model/concept by

assigning non-core designated functions.

In addition to the cost advantage, the first wave

of offshoring was also driven by organizations that

wanted to focus on areas of core competency.

Processes that did not significantly impact

revenues were lifted, re-engineered, and shifted

to offshore centres, where skilled graduates

delivered services. Results were measured based

on pre-defined benchmarks on dedicated time

lines, leaving no scope of subjective judgement

for evaluation. But now, owing to rapid disruptions

Before 2004 2004 to 2009 2009-2014 After 2014

Key Focus First time offshoring, cost arbitrage

Cost arbitrage and mature delivery

Business impact and thought leadership

Competitive advantage for the enterprise

Vertical Adoption Hi-tech, airlines, financial services (BFSI), telecom

Ecommerce, internet, manufacturing, professional services

Broad-based adoption by all major industry verticals

IT Services ADM, technical support SI, testing, package imple-mentation

Infra outsourcing, consulting, platform-based solutions

Cloud migrations, cybersecu-rity, core modernizations

BPO Data processing, document management, customer care

Finance and accounting, procurement, HRO

Legal Process Outsourcing (LPO), analytics, KPO, plat-form-based solutions

Analytics, automation, BPaaS

ER&D Product support, digitizing engineering drawings, mi-grations of CADs to systems

Product design, prototype testing, 3D modelling, 2D to 3D conversion

Engineering analysis,product conceptualizations

India/APAC based product designs, industrial IoT, digital twins, designing

GCC Evolution

across industries, technology is becoming a

central part of business strategy. Hence, GCCs

have transitioned from being just offshore centres

providing cost arbitrage – to centres of innovation

and IP creation. Enterprises are rapidly adopting

digital technologies, building new products and

services, transforming their business models

through these GCCs.

IT Services: Traditional application managment

to Cloud/AI

For IT services, offshoring to captives began with

traditional custom application management and

application support in the 1990s. In the early

2000s, the services being delivered out of captives

got expanded to package implementations,

testing applications. Later, Infrastructure

Management Services (IMS), consulting, platform-

based solutions, cloud, and cybersecurity


gained prominence. Software giant Microsoft,

for example, has been running its research lab

in India since 2005. The lab employs a large

number of PhD scholars conducting research on

theory and algorithms, machine learning and

artificial intelligence, systems including cloud,

security and privacy, programming languages,

networking, and technologies for the emerging

markets. Another example is of IBM’s India R&D

centre – it was set up in the 1990s mostly to

support its global business; but today, it is working

on modern technologies like artificial intelligence

and robotics. It is using data analytics to deliver

predictive agricultural insights for farmers with low-

end smartphones to help boost yields and lower

input costs.

BPO: From Data processing, customer care to

analytics

American Express, General Electric, and British

Airways were the first ones to set up an in-house

BPO facility in Gurgaon in the early 1990s.

The early reasons for considering offshoring

to India were centred around reducing costs

and minimizing the effort spent on “non-

core” activities. These activities – such as data

processing, document management, customer

care (primarily voice, to begin with) – were the

first to be outsourced to Indian captive BPO units.

With increasing confidence of the companies in

the capabilities of their Indian operations, higher

value-added activities such as processing of HR,

accounting (F&A) and other non-core functions

were also offshored. Today, apart from non-core,

functions like analytics and insights are also being

offshored to Indian units.

ER&D: From high-volume work to cutting edge

R&D

At the onset of the 1980s, the Engineering,

Research and Development (ER&D) segment

catered primarily to offshore requirements of high

volume, low value activities such as scanning and

digitization of engineering drawings, migration of

Computer Aided Design (CAD) from one system

to another, converting 2D drawings into 3D, etc.

The major driver for offshoring during this phase

was largely cost-related, as the high-volume

activities required limited application of domain

knowledge. However, some organizations saw

unlimited competency of Indian engineering

talent, and started setting up captive centres, like

Texas Instruments, to carry out activities like chip

designs. Posts the 1990 era, the captive centres

gradually elevated their scope of offshore activities

in terms of the value proposition and knowledge

intensity. India centres began to service higher-

end engineering activities such as 3D modelling,

2D to 3D conversion, finite element analysis,

computational fluid dynamics (CFD) analysis,

drawing up technical specifications for tenders,

plant engineering, redesigning for improved

cost/performance ratio and value engineering.

Today, Indian centres are also working on product

conceptualization, designing India/Asia Pacific

specific products for local markets, Industrial

Internet of Things (IoT), digital twins, etc.

India is now a destination of choice

Indian units serve various verticals like telecom,

utilities, heavy engineering, pharmaceuticals,

automotive, aerospace and electric/electronic

machinery design. The country is clearly the

destination of choice for auto majors like Ford,

General Motor, Cummins, Johnson Controls,

Nissan, Toyota and BMW for engineering design

work, which they do either through captive centres

or third-party service providers. Companies

like Ford, DailmerChrysler, General Motors,

Caterpillar, Texas Instruments, Motorola, Bechtel,

and Emerson have set up captive units in India.

Boeing has a research and technology centre

in Bengaluru, which plays a crucial role in areas

like materials and processes, flight sciences, and

structure and software. Rolls-Royce has R&D

centres in Bengaluru and Pune, focussing on areas

like data analysis, electrical systems, computer-

aided design and aerospace projects.


Initially attracted by the country’s engineering talent, Texas Instruments (TI) became the first multi-national company to set up an R&D centre in India (in Bangalore) in 1985. It started its India operations with the development and support of Electronic Design Automation (EDA) software systems, which are used for integrated circuit design. In 1989, the company set up another R&D facility in Bangalore to enhance its operations in the Asia Pacific region.

In 2006, it opened another R&D centre in Chennai to focus on the wireless segment. Through its Indian operations, TI works in the areas of library and software tools, SoC, signal processing technologies and microcontrollers. Many of TI’s strategic businesses globally are integral to the R&D work that takes place in TI India. Almost every product that

Texas Instruments sets up first R&D centre in India in 1985!

it develops has the involvement and contribution of the company’s engineers in India.

In the past decade, TI has recognized the semiconductor market potential in India. Today, with seven sales and applications support operations across eight cities in India, it has one of the largest pres-ences in the country amongst semiconductor companies. TI India has made significant inroads into various market segments like industrial, telecom, medical, consumer, and automotive. It works closely with customers to design products for large emerging segments including industrial, automotive, energy, electronic manufacturing, education, and healthcare.

Texas Instruments in India – Timeline and key developments

Source: PWC

CASE STUDY


Timeline – from being captives to becoming GCCs

Originally called captive centres in the early 1990s, they were

offshore facilities that performed designated functions for

large organizations. The 1990s marked the early adoption

period, as a lot of MNCs established and ramped up the

captive centres in India. However, due to unprecedented

digital disruption in industries worldwide, the role of Indian

captives has evolved from being designated function-

oriented captives to becoming value providers.

1985 - Initiation: TTI set up its first R&D centre in India in

1985, the first multinational to set up a technology centre

in India, starting an era of offshoring in the country. Initially

attracted by India’s engineering talent, today, many of its

strategic businesses globally are integral to the R&D work

that takes place in TI India. Almost every product that it

develops has the involvement and contribution of the

company’s engineers in the country.

1990-98 - Early adoption: During this phase, many

companies established and ramped up captive centres in

India. Initial adopters were from verticals like hitech and

telecom and involved IT related work like ADM (Application

Development and Management). BPO captives were still

few. Some examples of the work profile included application

development, maintenance, Y2K issues, service desks, end-

user computing, server and storage management, network

and voice management, remote infrastructure monitoring,

and support and IT service management.

1998-06 – Rapid growth: Global financial services sector

(BFSI) rapidly adopted the captive model during the

explosive growth phase. BPO captives also started during

this phase. In 2006, captives delivered US$ 8bn worth of

services. Indian engineers’ coding skills and their comfort

with English brought a lot of jobs to Bengaluru. MNCs that

had spent over five years came here in a big way because

of talent, out-of-the-box thinking, and the ability to use

global tools seamlessly. More than 78 global banking and

financial services companies, including Goldman Sachs,

Deutsche Bank, JP Morgan and Standard Chartered, set up

captive units in India to employ a combined 250,000 people,

according to Zinnov.

2006-09 – Introspection: Many captives faced the

dilemma of their relevance and cost while some of them

were monetized due to the global financial crisis hitting in

2008-09. The biggest example of captive monetization was

TCS acquiring Citigroup Global Consulting Services (CGSL),

Citigroup’s BPO captive, for US$ 505mn in an all-cash deal in

Oct 2008. Similarly, Wipro acquired Citi Technology Services

Source: PWC


(CTS), the technology and infrastructure outsourcing arm

of Citibank, for US$ 127mn in Dec 2008. Both transactions

involved multi-million multi-year Masters Service Agreements

(MSA) for providing services to Citibank.

However, growth continued, and new captives continued

getting added. Captives delivered US$ 10.6bn worth of

services in 2009.

After 2009 – Coming of Age: Many captives reoriented

themselves and are now being seen as business partners

rather than a back office. Captives are now taking end-to-

end ownerships in product development and processes.

Following are some of the recent examples – a) Tesco’s

captive is now managing mission-critical applications, apart

from managing global operations; b) Bosch’s captive now

offers services to customers other than Bosch; c) Ford’s India

captive is the second-largest software development centre

for Ford globally, and also its global analytics hub.

Digitisation is changing the way MNCs are leveraging their GCCs

Developing products from India for India and the world

Global firms are looking at developing countries for R&D

because these countries are becoming huge consumers, with

India and China at the forefront of this trend. In fact, markets

are shifting to what used to be called the developing world

or the emerging world. Development activities require a lot

of local content; sitting in the US, Germany, or Japan one

cannot develop products that will be used in India or China.

Multinational companies are using their centres in India,

to not only develop products that can be sold in India, but

also to be tested in the Indian market and then sold in other

countries.


Quick example # 1

JP Morgan India employees are creating global solutions for the bank

Quick example # 2

Samsung tweaked its washing machine design to better suit India markets

Quick example # 3

ABB – end-to-end engineering of smart sensor for electric motors developed in India

JP Morgan has global technology centres in Bengaluru,

Mumbai, and Hyderabad. These centres are at the

core of JP Morgan’s new tech playbook, including

blockchain, API (application programming interfaces),

and AI (artificial intelligence). A third of its 50,000 tech

employees are based in India. Overall, it employs about

34,000 people in the country.

In a media interview, JP Morgan’s CIO Lori Beer

mentioned that most of the technolgy talent in India

consists of its own employees, as the bank wants to

build core products and services completely different

and wants to build it internally. Indian teams are

creating global solutions with complete product

ownership. Beer manages a tech budget of more than

US$10bn, one of the largest technology budgets within

the BFSI sector.

The projects piloted out of India include trade finance

and next-gen payment platforms in investment

banking. Here, Beer also piloted the concept of ‘virtual

branch’ – where 300 clients across the globe were

connected to a branch. Cross-border payments, which

require documentations, were created virtually. This

was replicated in many Asian countries, Latin America,

and Mexico. The CIO mentioned that applications

built out of India were enabling four lines of business

– retail, investment banking, wealth management,

and commercial banking. The new roles in which JP

Morgan has begun hiring talent include architects,

data scientists, hybrid cloud, and cyber security experts.

The bank has developed several digital innovations

including Finn, a mobile only bank with tools designed

to help customers take control of their money. JP

Morgan’s Chase Business Quick Capital delivers small

business customers same day access to capital in a

digital way.

Samsung has five R&D centres in India. It developed its ActivWash washing machines in India to meet the unique demands of local customers.

Dipesh Shah, Managing Director, Samsung R&D Centre, Bengaluru, in an interview to Fortune India explained that in India, people don’t trust an automatic washing machine to do its job; they still prefer to rub collars and cuffs themselves first. “This was strange behaviour, because it’s an automatic washing machine, but people still had to do this additional manual job. So, we provided a sink on top of the washing machine, which allows people to do the rubbing. This product is now sold worldwide”

At Samsung, he explained, in the 1990s, the cost factor was important, and the second was the availability of talent. In the beginning, Bengaluru helped the company scale up really fast, in the rapidly changing mobile market.

“Samsung India R&D contributed to development of 3G and 4G for the global world. 4G was done from Bengaluru. When this kind of jump comes in technology, you need a lot of people to scale it, and take it worldwide. Bengaluru really helped in scaling these.”

The Bengaluru centre is one of ABB’s

seven R&D centres in the world. In

Bengaluru, the company has a global

research centre, a business R&D unit

for product development, and a global

engineering and services centre in

the same building. This is unique

because even though ABB does a

lot of R&D in Europe and the US, it

houses different functions in different

countries or cities. Bengaluru is its only

centre where different functions – from

conceptualisation to remote monitoring

analytics – are at the same location. ABB

started an R&D centre here, because

of the availability of talent and the

availability of business cases and

customers in the market.

ABB India’s unit developed a

smart sensor (used to monitor the

performance, efficiency, reliability

and lifespan of electric motors); it was

both conceptualized and developed in

India. It can be retrofitted to almost any

low-voltage motor and connected to the

industrial IoT. With the smart sensor,

ABB can monitor vibrations, and voltage

of motors, and using analytics, it can

predict ways to improve the efficiency of

the motor. The company has many more

products developed in India – such

as solar pumps for rural areas with no

electricity. These products are now sold

around the world.

Source: Fortune India Source: Fortune India


Quick example # 4

SAP Labs India – developing software products for the world

Quick example # 5

Royal Dutch Shell working on a waste-to-fuel project from India, for global deployment

Quick example # 6

Lowe’s set up its first technology centre outside the US in Bengaluru

SAP’s R&D centre in Bengaluru is present in

India since the last 20+ years. It employs more

than 8,000 people and is already the second

biggest R&D location for SAP globally, after its

headquarters in Germany.

Initially, the goal of SAP Labs India was to

meet local requirements catering to localized

software and legal requirements. However,

over the last 20 years, focus has changed

to developing and conceptualizing more

products in India, to be used both domestically

and globally. SAP Fashion Management

Solution is completely conceived, designed,

and developed out of SAP Labs India. The

product enables fashion companies to manage

their business processes across one large

data system. This product was developed in

collaboration with global brands like Giorgio

Armani, Adidas, Luxottica, and Tommy Hilfiger.

The platform brings wholesale, retail, and

fashion-specific processes in one back-end

system, and is now being licensed by more

than 125 customers across the globe.

In an interview to Fortune India, Dilipkumar

Khandelwal, Managing Director, SAP Labs

India, said “Today, there is no software or

product development or (strategic initiatives

for SAP in the next five years) that’s not been

developed out of India. Today there is not a

single thing which goes out of SAP, which

doesn’t have a significant India footprint. A

large part of the work for building a global

software meeting the global requirements is

done out of India”.

Royal Dutch Shell has a technology centre in Bengaluru, one of the three centres of the British-Dutch company; the other two are in Amsterdam (Netherlands), and Houston (US).

The Shell Technology Centre in Bengaluru is developing the IH2 technology for global deployment. It was invented by the US-based Gas Technology Institute (GTI) in 2009, and has been further refined through joint development with Shell-owned CRI Catalyst Company.

Shell’s IH2 is more advanced than other waste-to-fuel projects, and the price of this fuel is expected to be quite competitive with oil prices. More importantly, the fuel produced through this process is much cleaner, and will meet Bharat-6 specifications, the new standards for pollutant emissions implemented in India in 2020.

Lowe’s, a home-improvement company,

competes with its larger US rival Home

Depot, and generates a majority of its

revenues through sales from its offline

stores. It announced its first captive centre /

GCC in India in 2015, where the goal was

not just costs arbitrage, but also to focus on

the next-generation customer experience

by laying emphasis on technology and

analytics to provide its customers with a

more personalized shopping experience. This

Bengaluru-based centre enabled Lowe’s to

become an omni-channel home-improvement

company and was its first technology

innovation centre outside the US.

The mandate was completely different

from being a single-function cost-arbitrage

model. Instead, the GCC’s focus was on

enablement of omni-channel retail, analytics,

and personalized shopping experience.

Lowe’s wanted to increase the share of

online revenues and was looking to leverage

Bengaluru’s start-up culture and talent pool.

This centre started with just 11 employees,

but in about 12 months the team size was

over 300.

Source: Fortune India Source: Fortune India


GCCS: Growing in size and revenue

As of now, India has 1,250+ GCCs, with a talent pool of

more than 1mn employees. The total market size of GCCs

in India is US$ 28.3bn (up from US$ 19.5bn in FY15, 10%

CAGR in the last five years). Within that, the market size of

Engineering Research & Outsourcing (ER&D) is US$ 15.7bn

(up from US$ 10.2bn, 11% CAGR in last five years) while IT-

BPM is US$ 12.6bn (up from US$ 9.3bn, 8% CAGR).

The ER&D market size has grown faster than IT-BPM over

GCC evolution in IndiaGCC distribution (ER&D and IT-BPM),

market size (USD bn) and growth

the last five years due to increasing focus of enterprises on

building products and platforms, and the rising penetration

of software across industries. The IT BPM market size has

seen a CAGR of 8% to US$ 12.6bn, driven by volume

growth in IT BPM work, infrastructure management, etc.

As per Nasscom, ER&D will dominate the GCCs market

with an increased focus on digital transformation and

end-to-end ownership of global product developments

from India. The key verticals where mainstream software

product development is happening is BFSI, retail, media and

professional services.

Talent split in GCCs

In the talent split of the GCC landscape, IT-BPM employs

about 590,000 people, while ER&D is at around 410,000.

Within ER&D, the largest share of talent (70%) is in Software

Product Development (SPD) followed by Embedded

System Design (ESD) and Mechanical Engineering Services

(MES). SPD is the order of the day among ER&D GCCs, re-

emphasizing the digital transformation focus. Within IT-BPM,

the talent split between IT and BPM is around 60:40.

Talent split of GCCs within ER&D and IT-BPM

Note: Within ERD - Software Product Development (SPD), Embedded System Design (ESD), Mechanical Engineering Services (MES)

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As MNCs across verticals shift to cloud infrastructure, the

emphasis on ADM and IMS is rising. India’s role in global

engineering is demonstrated through large work in ADM

and SPD. In BPM, large work around finance & accounting

and knowledge services points to MNCs shifting their global

Share (%) of captives in IT exports is flat

Despite strong growth, GCCs’ share in total IT exports remains stable

Although more enterprises are leveraging GCCs for their

core technology projects, the share of the Indian GCCs to

total export has remained stable in the last 4-5 years. While it

appear that due to strong growth of GCCs in India over the

last 5-10 years, insourcing by MNCs is eating into the share

of Indian IT services players, the current share of Indian GCCs

to the total export revenue for the industry stands at 21%,

which has been stable (the share was 20% in FY15). However,

Indian IT services companies continue to compete with GCCs

for incremental revenue and digital talent.

business services to India, and increasing focus on data

analytics to solve business-focused problems. Going forward,

as per Nasscom, as GCCs gain ownership, Procurement

(VMO) and S&M (pre-sales) will lead the next leap of growth

in BPM workloads.

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FUTURE GROWTH POTENTIAL

What’s in store for GCCs in IndiaThey are transforming into the global sourcing hubs from just single-function providers

GCCs have come a long way from when they first started – as

cost centres to take advantage of cost-arbitrage and India’s

talent pool. Today, GCCs are perceived as competency

centres and business enablers for the organisation.

Increasing collaboration between IT & R&D teams has led

to significant changes in their governance model. Adoption

of Agile has allowed IT functions to be integrated and

shared, and the work now involves a full lifecycle of product

development. GCC employees, too, are now hired from tier-

1 institutes; they have a defined technical career path.


Indian GCCs are ready to take the next big leap over the

coming decade

GCCs are transforming into a global sourcing hub for

the parent organisation’s entire IT and business process

needs. They are all set to become hubs for the digital

and futuristic products of global companies, and evolve

from being enablers - to being strategic business partners.

Single-function GCCs will expand into other functions and

new multi-function centres will be set up. There will be

increasing focus on business value and innovation, which will

be adequately supported by high quality talent, technology,

and leadership, hired from the best universities/companies.

Overall, partnerships between GCCs and ecosystem players

will become deeper and wider, leading to an enhancement in

the quality and quantity of their work profile.

GCCs will focus on these three key aspects over the next

decade:

• Adoption of digital technologies

o Building new-age technology CoEs around AI/ML,

Cloud, IoT, etc.

o Transitioning to hyper-converged infrastructure for

supporting digital work-loads.

o API-led development to reduce the time-to-market for

new age applications.

• Delivery model transformation

o Adoption of productized models for product and

application development.

o Becoming hotbeds for multi-function shared services

centres.

• Future skills development

o Re-skill the workforce and acquire niche skills.

Domain Software/In-ternet

BFSI Semicon Telecom Auto Electronics Industrial

AI/ML Creating generic malware signa-tures, ML based security solutions

AML pattern detection, improving CX

Developing new age chipsets for next-gen AI/ML solutions, smart nano-chipsets

Enhancing network capabil-ity with AI/ML, improving user device interac-tion through AI

AI solutions for autonomous cars,

Home automa-tion using AI/Ml and IoT, Ml based cyber security solutions

Intelligent power solutions using AI, AI led video surveillance for human detection & tracking

IoT IoT led payments building high-end reference platform, IoT led platforms

Marketing assistance

IoT led solutions for smart cities, building infrastructure, connected engines

Data Analytics Customer ana-lytics, Contextual extraction, Dis-ease detection

data analytics in cash manage-ment, payment analytics, cash management analytics

Network analytics, edge computing solutions

monitoring driver behaviour, warranty diag-nostics, demand forecasting and product mix prediction

predictive analyt-ics solutions for control systems

Cloud / Cyber Security

Connectivity platforms, SaaS, PaaS, IaaS solutions

Fraud detection GPU accelerated cloud containers

home automa-tion products, Cloud SDN solutions

connected cars, infotainment systems

RPA Chatbots, Loan/Claims process-ing automation

Blockchain Global payment, P&C Insurance, Capital Markets

Supply chain

Digital Tech adoption across verticals


MNCs with GCCs in India from thelargest global 2000 firm

Regional split: Global 2000 firms withGCCs in India

More than 1600 firms have not leveraged the India advantage yetNorth American firms have the highest penetration with over 176 firms having a GIC in India, followed by Euro-pean firms

Six key domains have emerged as new-age technology

hotbeds, where GCCs in India can present a value

proposition to assert their increasing importance on the

global technology landscape:

• Artificial Intelligence (AI)/ Machine Learning (ML)

• Internet of Things (IoT)

• Data Analytics

• Cloud / Cyber security

• Remote Process Automation (RPA)

• Blockchain

GCCs should make significant headway in these domains

over the next decade. BFSI and industrial verticals are where

majority of the use-cases have been developed till date, –

but their applications are only expected to expand, as these

technologies gain momentum and credibility.

A MAMMOTH opportunity for expansion

The opportunity for the expansion of GCCs remains HUGE–

not just in terms of numbers, but in terms of their scope of

work. As per Nasscom, only 383 of the Global 2000 firms

have GCCs in India. Around 80% of the Global 2000 firms are

yet to leverage the Indian opportunity. Within the regional

split, Americas and Europe lead, with 28% and 22% of Global

2000 firms having GCC presence in India, followed by APAC

at 10%. Potential growth opportunity of the Indian GCC

landscape remains immense.

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Challenges for GCCs

Companies across the globe are actively deliberating

setting up their own captives versus engaging with a third-

party service provider. This dilemma itself is a testimony of

the value that GCCs provide. However, GCCs are also not

without their share of challenges:

• Domain knowledge: Even after over four decades of

being in operations, GCCs in industries such as insurance,

BFSI and energy, still do not have enough people with

adequate skill sets and deep domain knowledge; this limits

the growth potential.

• Leadership: Leaders who have an ability to match both

technical and business perspectives are very rare in the

Indian GCC ecosystem. Leaders with the adequate skillset

prefer to work for third party vendor, where they can see

a clear career path to the CXO position, as opposed to a

longer and uncertain future in GCCs.

• Talent attraction: GCCs are facing a significant challenge

in attracting talent, as a number of newer GCCs and

start-ups are coming up with competitive talent-attracting

policies. The Indian start-up ecosystem has undergone

exponential expansion over the last decade, leading to

salary levels reaching unprecedented levels. This has

become a severe headache, not only for GCCs, but also for

traditional Indian IT vendors; the USP for both is their cost-

arbitrage models.

• Financial constraints/cost arbitrage: While Indian GCCs

have traversed the value chain and are now increasingly

demonstrating their effectiveness as centres of excellence

(COEs), the cornerstone of their existence remains the

cost-arbitrage model. However, an increase in the quality

of work being delivered and higher competition to attract/

retain talent has meant greater pressure on maintaining the

cost arbitrage.

• Technology disruptions: With the technology disruption

caused by digital transformation, GCCs are facing

difficulties in keeping pace with the transformation, both

in terms of infrastructure and talent. Simple case in point

being availability of data scientists (for analytics) and

people trained in cloud application development (cloud).

The last decade has been an eventful one – with multiple

crises, technology disruptions, and the rise of the right-

wing across the world. Many of these events have directly

impacted the growth of GCCs in India – an impact that might

be long-term:

1) GFC crisis: (2008-09) – The 2008-09 GFC crisis’ impact

was limited to a handful of sectors - primarily housing,

BFSI. India did not see any major effect on its economy,

and actually benefitted from increased outsourcing. But

given the propensity to conserve cash, in times of crisis,

most MNCs prefer third-party services vendors over

setting up their own captives in India.

2) Eurozone sovereign debt crisis: (2011-12) – The 2011-

12 Eurozone debt crisis was born out of the GFC crisis,

but directly impacted the credit rating of European

countries, leading to an overall weak macro and demand

environment in EU. This led to the postponement/

cancellation of plans of many EU companies to set-up/

expand their captives in India and elsewhere in the world.

3) Brexit: (2016) – As Britain voted to move out of the EU

Union in 2016, it created large financial implications for

companies with business across Europe. They had to

split their operations between UK and EU; many of them

opted for Eastern Europe (Austria, Hungary, Poland)

as destinations for their captive units rather than India.

In fact, the city of Cluj-Napoca (in Romania) – which is

famously touted as Silicon Valley of Eastern Europe – was

born out of the Eurozone debt crisis and Brexit.

4) Covid-19: (2019-20) – The world is currently reeling under

the Covid-19 pandemic, and will take some time to come

out of it. It is an unprecedented healthcare crisis, fast

taking the shape of an economic and financial crisis too.

The calamity has impacted GCCs operations in two ways:

a) As GCCs were also forced to shut operations due

to the lockdowns imposed by various governments

(incl. India), the world has realized that GCCs did not

have credible Business Continuity Planning (BCP) and

were not prepared to Work-from-Home (WFH), unlike

IT services vendors, which promptly and efficiently

migrated to WFH.

b) The economic/financial crisis has led (or will lead) to

many of the MNCs struggling financially, eventually

leading them to terminate/postpone their plans to set-

up/expand their GCCs in India/ROW. It is also widely

anticipated that many MNCs might actually shut down

their GCCs, by selling them off to IT services vendors –

to effectively monetize their ‘non-core’ assets to remain

financially viable.


INSOURCING-OUTSOURCING CYCLES

Third-party vendors or captive centres?Both approaches reduce costs on non-core activities

Ever since the dawn of the IT outsourcing industry, the

companies have had this perennial dilemma – whether to

outsource to a third-party vendors or set-up own captive

centres /GCCs. Both models have their own advantages

and disadvantages – but both offer one value proposition

unequivocally – both lower costs incurred on the non core

aspects of business.This one agenda has driven the growth

for both third-party vendors and GCCs over the last three

decades – and this will not change in the next three. What

keeps changing, however, is the proclivity towards either

of the two, depending on the parents’ financial condition,

state of technology development and disruption, and global

macro-economic factors.

Historically, global MNCs have switched from one model to

another – from insourcing to outsourcing and vice-versa –

primarily due to three factors:

1) Financial state and business priorities of the company:

Outsourcing today is as much a business decision as

a cost decision. Hence, the business outlook/strategy

and the financial state/preferences have dictated the

insourcing-outsourcing decision for companies. A

company in good financial health and/or looking to

grow its business across emerging markets, typically

tends to favour insourcing. A company with stretched

financials, just looking to save costs on IT, tends to prefer

outsourcing. In fact, many a times, the same company

switches from one model to another, depending on its

priorities. Classic example is UBS – discussed in detail

later in this article.

2) State of technology development/disruption:

Technology is no longer just an enabler, but also a USP

for many businesses. The advent of digital technologies,

especially, has completely changed the perspective of

global leaders about technology. As a new technology

raises its head, it becomes a key differentiator and

business USP for companies. In that phase of technology,

companies tend to prefer insourcing – to keep control on

their “IP”, the technology. But as technology becomes

commonplace, the same companies prefer to outsource

its development/maintenance – looking to save costs

rather than innovate. A classic example is the auto

industry. In the early 2000s, when infotainment systems

were key product differentiator, auto OEMs across the

world preferred to develop it in-house, in their own

GCCs. As the decade turned, and the technology

became commonplace, it is now the first piece of

business they want to outsource.

3) Global macro-economic factors: Global events, too, play

their part in determining the trajectory of the insourcing-

outsourcing cycle. Events such as GFC provided

boost to outsourcing while ones like Brexit impacted

it negatively. The current Covid-19 pandemic, which

is fast transforming from a healthcare to an economic

to a financial crisis, is expect to negatively impact the

insourcing cycle, and lead to many GCCs being sold

and/or further outsourcing to the third-party vendors

(discussed in detail in the next section).

To illustrate the different insourcing-outsourcing cycles, we

deep-dive into the case of UBS. The Swiss bank is a prime

example of how enterprises prefer different models (third-

party vs. captives) at different points of time, depending on

different business requirements and the macro environment.

The covid-19 pandemic is one macro event that will force

many enterprises to rethink their IT outsourcing strategies.

While few might decide in favour of setting up captives,

majority will look to sell their captive units – to monetize

non-core assets and reduce operating costs. That is the main

thesis of this report – discussed in more detail in the next

section.


UBS remains a key BFSI client for almost all IT vendors across

the world. It has been, by far, one of the largest and most

diversified clients for the outsourcing industry. It has had a

long and interesting history of outsourcing.

• UBS started its own captive, ISC (Indian Service

Centre) in Hyderabad in 2006, which rapidly grew to

2,000 employees, providing services that were not yet

commercially available in the market.

• Later, as a shift in strategy to “BUY” rather than “BUILD”,

it sold the ISC to Cognizant in 2009 for US$ 75mn.

The sale marked the start of the next stage in the

development of the UBS offshoring and outsourcing

strategy – where it engaged various vendors across the

world.

• Today, UBS has multiple IT outsourcing vendors on its

rolls, including Accenture, Cognizant, Infosys, Wipro, HCL

Tech, Luxoft and ePAM.

In 2013, it began building up its own capacity in India and

elsewhere. Today, 10,000 people work at UBS in India –

almost 6,000 employed through external providers, and over

4,000 on its own payrolls.

Current scenario

UBS remains a key account for many vendors. For Wipro

and Luxoft, it is one of their top clients – while it contributes

a substantial share of revenues for Cognizant and ePAM.

Accenture and Infosys, too, derive a decent share of their

BFSI revenues from UBS.

CASE STUDY:

Perfecting the insourcing-outsourcing cycles

The flip-flop of UBS’s outsourcing strategy UBS is a key client for multiple vendors

In 2018, UBS started to focus more on increasing its internal IT staff, at the expense of external vendors


Moving to insourcing

In October 2018, UBS reported a 7% jump in its staff count

to 63,684 people, from 59,470 a year ago. This was a result

of it expanding its captive centres in Mumbai/Pune, which it

intended to use as global insourcing hubs. Thereafter, UBS

decided to keep 60% of its IT services in-house; almost 70%

was outsourced to third-party vendors in 2018. The company

took this U-turn in its outsourcing strategy on two counts:

• Expanding captive centres is one of its largest levers for

cost reduction, which in turn is a strategic pillar of its

corporate transformation plan.

• The management believes that the typical business

processes outsourced ten years ago (like data inputting)

can be digitized or automated. With the speed of

digitization picking up, classic IT services providers (like

Wipro, Cognizant, etc.,) are struggling to keep up with

this speed.

Over the next year, as the company increased its overall

workforce count by 3%, it reduced its external staff by a

whopping 25% – from 21,805 in June 2018 to touch 16,277

in June 2019. This was supposed to lead to significant

cost saving for the company. Key details about this new

outsourcing strategy:

• In 2018, more than 30% of UBS’s staff was offshored. It

decided to shift more activities from high-cost to low-cost

locations, using its own offshore and nearshore shared

services centres.

• With the opening of a second site in Pune in 2018, it now

operates six offshore service centres in India, China, and

Poland, and two nearshore centres in Switzerland and the

US.

• For its outsourced services, it decided to consolidate

third-party vendor locations from 35 in 2018 to only

9 by 2020. This was to reduce costs and improve risk

management.

• It is internalizing select activities, currently performed by

external providers, to enable higher productivity, lower

costs, and to build critical in-house knowledge. Over

June 2018-19, it increased internal staff by over 3,000.

Majority were hired into its offshore centres in India. This

increase was more than offset by a huge reduction of

5,500 in external headcount, leading to an overall decline

of roughly 2,289.

• It intends to further reduce the external headcount,

through automation of processes, specifically in

operations and IT.

• It has reduced vendors by 45% since 2013 and aims to

push this above 50%. In addition, it has implemented

measures to further tighten its internal demand

management. “To say it in very simple terms: We will buy

less, cheaper, and smarter.”

• Automation is expected to be a key driver for cost

efficiency.

While UBS’ insourcing strategy intends to cuts vendor

revenues, it represents a strategic bet on India. The company

and its management realize the strategic significance of

India, with the huge pool of engineers, mathematicians,

statisticians, physicists, and other highly-qualified science

and technology graduates. Hence the importance of India as

a delivery / innovation centre for UBS is definitely increasing.

But at the same time, it also represents the perfect flip-flops

that MNCs undergo, in terms of their outsourcing strategy,

from captives in one decade to third-party in another.

Significant reduction in UBS’s external workforce over 2018-19

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BS


GCC Monetization – a massive opportunity for service providersPhillipCapital India’s IT research team’s exclusive database provides details of India’s GCC landscape

To understand the massive opportunity represented by

the GCCs/Captives, PhillipCapital India’s IT research team

has created an exclusive and exhaustive database, which

represents the overall GCC landscape in India. It contains

the following aspects

• List of the MNCs (1,200+) operating their GCCs/captives

out of India

• Verticals that they belong to (e.g. BFSI, retail,

manufacturing)

• Geographic region they belong to (America, Europe,

APAC)

• Services provided by the GCCs to the parent (IT, BPO,

ER&D, etc.)

• Headcount

• Location

PhillipCapital’s database gives a broad-based understanding

and insights into the GCC landscape in India. In terms of

geography, 66% of all GCCs operating out of India are

headquartered in America, 25% are from Europe, 7% are

from Asia Pacific, and 1% from the Rest of the World.

Geographic distribution Service-line distribution

Vertical distribution

FOCUS SECTION

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The Indin GCC landscape - PhillipCapital India database

Key GCCs in different verticals operating out of India

Geography

Total Americas UK Germany Rest of EU Japan RoW

Software/Internet 258 17 2 21 1 16 315

IT & services 109 7 3 11 3 6 139

Manufacturing 82 8 15 25 8 5 143

BFSI 56 9 2 11 1 6 85

Healthcare & Lifesciences 57 3 9 11 2 4 86

Telecom 47 5 1 6 1 10 70

Industrial 25 4 5 25 1 2 62

Hi-Tech 28 0 3 9 9 7 56

Automotive 18 3 14 15 8 4 62

Media/Entertainment 26 8 1 2 0 3 40

Consulting 33 6 1 4 0 2 46

Semiconductors 26 2 1 3 2 1 35

Retail & CPG 22 4 1 6 0 2 35

Travel & Transportation 9 3 0 7 1 2 22

Oil & Gas 9 2 0 4 0 0 15

Aerospace and defence 7 1 0 6 0 0 14

Total 812 82 58 166 37 70 1225

IT-BPM 449 43 10 48 6 30 586

ER&D 248 24 40 93 27 29 461

SPD 9 1 0 1 0 0 11

IT-BPM & ER&D 60 4 7 17 4 8 100

IT-BPM & SPD 36 6 1 5 0 3 51

Consultancy 10 4 0 2 0 0 16

Total 812 82 58 166 37 70 1225

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Software/Internet Manufacturing BFSI Healthcare Automotive

Adobe Akzo Nobel JP Morgan Abbott Fiat Chrysler

Google Adidas Goldman Sachs AstraZeneca Ford

Microsoft BASF BNP Paribas GlaxoSmithkline Honda

Oracle Danaher Nomura Mylan Hyundai

Pegasystems Cummins AIG Pfizer John Deere

Indeed Dow Chemical Barclays Boston Scientific Komatsu

Go-Jek Dupont American Express Johnson & Johnson Continental

Retail CPG Travel Aerospace Telecom Energy

AB inbev Amadeus Airbus AT&T Exxon Mobil

GAP Expedia Boeing Verizon Baker Hughes

Hersheys Fedex Bombardier Telstra Castrol

Lowe’s Sabre Lockheed Martin Sprint Shell

Modelez Travel Tripper Safran Ciena Total

Pepsico Kuoni Thales Ericsson Valvoline

Target Maersk Collins Aerospace Netgear Halliburton


Amongst verticals, software/internet forms the majority share

followed by IT and services, manufacturing, and BFSI.

Software/Internet

• This vertical represents 26% share of the total with MNCs

like Adobe, GE Digital, Google, Microsoft, Temenos,

Oracle, Pegasystems, Servicenow, Indeed, and Go-Jek

operating out of India.

• 82% of the Software GCCs are headquartered in

Americas, 13% are from Europe.

• Bengaluru and Hyderabad have the highest proportion

of MNCs in the software/internet domains. New product

development, testing and support work happens in these

development centres.

o For example, Temenos’ Bengaluru and Chennai

offices are involved in designing and supporting

leading banking products like T24 (Temenos’ award

winning core banking platform).

o Similarly, Pegasystems, which has two development

centres with 1,500 employees in Hyderabad (1,100)

and Bengaluru (400), carries out its new product

development and support work from its captive

centres.

o Servicenow launched its new innovation centre in

Hyderabad in 2018 for product engineering and

developing ServiceNow’s next generation AI and

machine learning capabilities.

IT & Services


like Fujitsu and Ripple operating out of India.

• 78% of the IT and services GCCs are headquartered in

the Americas, 15% in Europe.

o Ripple claims to be the only enterprise blockchain

company with products in commercial use by

hundreds of customers across 55+ countries.

o Fujitsu global delivery centres in Pune, Noida and

Hyderabad cater to its US operations.

Manufacturing


like Akzo Nobel, Adidas, BASF, Caterpillar, Cummins,

Dow Chemical, Danaher, and Dupont operating their

GCCs/captives out of India.

• 57% of the manufacturing GCCs are headquartered in the

Americas while 33% are in Europe (6% in UK and 10% in

Germany).

Geography

Americas UK Germany Rest of EU Japan RoW

Software/Internet 32% 21% 3% 13% 3% 23%

IT & services 13% 9% 5% 7% 8% 9%

Manufacturing 10% 10% 26% 15% 22% 7%

BFSI 7% 11% 3% 7% 3% 9%

Healthcare & Lifesciences 7% 4% 16% 7% 5% 6%

Telecom 6% 6% 2% 4% 3% 14%

Industrial 3% 5% 9% 15% 3% 3%

Hi-Tech 3% 0% 5% 5% 24% 10%

Automotive 2% 4% 24% 9% 22% 6%

Media/Entertainment 3% 10% 2% 1% 0% 4%

Consulting 4% 7% 2% 2% 0% 3%

Semiconductors 3% 2% 2% 2% 5% 1%

Retail & CPG 3% 5% 2% 4% 0% 3%

Travel & Transportation 1% 4% 0% 4% 3% 3%

Oil & Gas 1% 2% 0% 2% 0% 0%

Aerospace and defence 1% 1% 0% 4% 0% 0%

Total 100% 100% 100% 100% 100% 100%

Common size – geography-wise

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Geography Total Americas UK Germany Rest of EU Japan RoW

Software/Internet 82% 5% 1% 7% 0% 5% 100%

IT & services 78% 5% 2% 8% 2% 4% 100%

Manufacturing 57% 6% 10% 17% 6% 3% 100%

BFSI 66% 11% 2% 13% 1% 7% 100%

Healthcare & Lifesciences 66% 3% 10% 13% 2% 5% 100%

Telecom 67% 7% 1% 9% 1% 14% 100%

Industrial 40% 6% 8% 40% 2% 3% 100%

Hi-Tech 50% 0% 5% 16% 16% 13% 100%

Automotive 29% 5% 23% 24% 13% 6% 100%

Media/Entertainment 65% 20% 3% 5% 0% 8% 100%

Consulting 72% 13% 2% 9% 0% 4% 100%

Semiconductors 74% 6% 3% 9% 6% 3% 100%

Retail & CPG 63% 11% 3% 17% 0% 6% 100%

Travel & Transportation 41% 14% 0% 32% 5% 9% 100%

Oil & Gas 60% 13% 0% 27% 0% 0% 100%

Aerospace and defence 50% 7% 0% 43% 0% 0% 100%

Common size – vertical wise

• Majorly, manufacturing MNCs have their ER&D centres in

India where they develop and support key products for

the Asia market.

o Caterpillar’s India presence includes state-of-the art

manufacturing facilities, research and development

centres, service and support organizations.

o In April 2018, Dow Chemical inaugurated a state-

of-the-art application development hub, ‘Dow

India Technology Centre’ (DITC) in Navi Mumbai,

with highly skilled, research and development

specialists with capabilities in analytical science,

material science, process optimization, and IP search

analysis to support business units in India and extend

application support to markets in the region.

Retail & CPG

• There are about 35 retail and CPG GCCs in India.

• It represents 3% of overall GCCs with MNCs like AB

inbev, GAP, Hersheys, Lowe’s, Modelez, Pepsico, and

Target operating out of India.

• 63% of the retail and CPG GCCs/captive centres are from

the Americas while 31% are from Europe.

o Target employs around 2,100 people in Bengaluru

who carry out administrative support, business

analytics, supply chain management, finance and

accounting and other roles.

o Unilever’s technology and innovation centre in

Bengaluru currently provides IT services to its global

operations.

BFSI

• This vertical represents 7% share of the total, with MNC

banks such as JP Morgan, Goldman Sachs, Deutsche

Bank, Nomura, BNP Paribas, Barclays, Allianze, AIG, and

American Express operating their GCCs/captives out of

India.

• 66% of the BFSI GCCs/captive centres are headquartered

in the Americas while 26% are in Europe.

• BFSI vertical MNCs’ IT-BPM centres are also one of the

largest employers in India.

o AIG’s analytics and service team supports commercial

insurance by providing insights through accurate and

comprehensive data capture, catastrophe modelling,

risk engineering, advanced portfolio analytics, and

actuarial services.

o BNP Paribas’ India centre provides application

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services and operations support to the group

including development of new applications, features,

extensions, interfaces, upgrades as well as enhancing

and maintaining existing applications.

Healthcare

• This vertical represents 7% share of the total with MNC

pharma companies such as Abbott, AstraZeneca,

GlaxoSmithkline, Mylan, Pfizer, and Johnson & Johnson

operating their GCCs/captives out of India.

• 66% of the healthcare GCCs/captive centres are

headquartered in the Americas while 27% are from

Europe.

• Majority of the healthcare and life sciences GCCs are

operating as ER&D centres for the parent.

o For example, in 2016 Abbott picked up an entire

under-construction space in Mumbai to set up its

innovation and development centre.

o AstraZeneca has its Global Technology Centre (GTC)

in Chennai, which provides IT services and support

to the group with an employee strength of +2,400.

AstraZeneca also has a R&D centre in Bengaluru to

support AstraZeneca’s global established medicines

portfolio. Its team of 90 employees consists of

scientific experts in the fields of regulatory science,

clinical science, and patient safety.

Automotive

• There are about 62 automotive OEMs and tier-1 GCCs in

India.

• It represents 5% of overall GCCs with MNCs such as

Continental, Fiat Chrysler, Ford, Honda, Hyundai, John

Deere, and Komatsu operating out of India.

• 52% of the automotive GCCs/captive centres are from

Europe (23% from Germany alone) while 29% are from

US.

o Continental’s R&D centre headcount has doubled to

around 3,000 employees from 1,400 in 2015, and it is

one of the three systems & technology hubs world-

wide.

o In 2016, Ford announced its new technology centre

in Chennai, which is its third R&D base in Asia. This

centre is a hub for product development, mobility

solutions and business services for India and also for

the world.

o Hyundai’s Hyderabad R&D centre coordinates with its

Namyang (Hwaseong, South Korea) centre to improve

synergies between Hyderabad and Namyang, reduce

the time-to-market, and address competitive intensity.

Why would the MNCs sell their GCCs now ?

2005-15 was a period of hyper growth – it saw many new

GCCs set up by companies based out of US, Europe, Japan,

and the Middle East. The total number of GCCs set up saw

a CAGR of 7% between 2005 and 2015. These GCCs had

embraced the at-scale local talent availability and benefited

from lower costs of operations. But from 2015 to the present,

growth of new captives being set up has slowed down – to

1% CAGR from 2015 to 2019 (vs. 7% during 2005-15). Future

growth will be impacted by the financial pressure posed by

the Covid-19 crisis as well.

Covid-19-led impact on demand on several industries such as

retail (non-essential), travel & transportation, manufacturing,

and automobiles is leading to severe pressure on firms to

continue with their existing operations. As the volume of

work falls, it becomes difficult to justify the costs of running

The pace of new GCCs has slowed since 2015

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captive centres. Hence, there has been an active interest

from MNCs to sell their captives at the moment.

So why would parents sell GCCs/captives?

1. Monetization: A GCC/captive is often viewed by

its parent organization as a liquid asset, which it can

relatively easily slice off and sell to generate immediate

cash. This situation is further exacerbated by the

pressures that the parent organization faces due to the

pandemic. An example can be JC Penney, which has filed

for bankruptcy in the US; or Fedex (possibly) hiving off its

captive centre in India to generate some liquidity.

2. Operational: Parent organizations will often sell a captive

that has either served its purpose or never lived up to

expectations. They might find it useful to transfer work

to service providers, as these are much better versed

with latest technologies across diverse spectrums. Also,

parents may realise that having a captive is not as cheap

or efficient as third-party service providers.

3. Strategic: After setting up and running a captive, parent

organizations may realise it is best to focus on their

core business and outsource non-core work to service

providers. Recent examples include ABN AMRO selling

a majority stake in Stater (mortgage services player in

Benelux and Germany) to Infosys to focus more on its

core business – selling mortgages. Similarly, HCL Tech

acquired Volvo’s external IT services in Nordics business

as that was not the core business of Volvo group.

Why would service providers want to acquire GCCs/

captives?

1. Access to talent: Acquiring a GCC/captive will help

a service provider get access to niche talent, which is

difficult to tap from the market due to unavailability of the

necessary skillsets or lack of domain experience. And that

talent can be leveraged to win new clients in the market.

For example, TCS acquired certain assets of GM’s captive

in 2019; 1,300 employees of General Motors India were

transferred to TCS. Through this deal, TCS got key talent

in the advanced automotive ER&D space, which it can

leverage for its other clients and also to win new clients.

2. Access to key IP or technology: A service provider

would benefit from the key IP or technology by acquiring

the captive. When TCS bought GM’s captive in 2019,

it benefitted through GM’s key technologies being

delivered out of its India centre. GM had established

GMTC-I in 2004 in Bengaluru, and it contributed to GM’s

global programs across propulsion systems, vehicle

engineering, controls development, testing, creative

design and special projects. It houses a design studio

and an engineering centre with state-of-the-art, in-house

electronics hardware and software testing and validation

infrastructure. TCS can leverage this sort of infrastructure

and technology domain knowledge to win new clients in

the automotive space.

3. Geographic expansion: Acquisition of captives can

also open the gates for a service provider for expansion

into new geographies. Setting up a delivery centre with

capacities in the thousands and then acquiring talent

from local markets can be daunting. Service providers can

really benefit by acquiring a captive in such geographies,

with pre-existing delivery infrastructure. A good example

would be HCL Tech’s acquisition of Volvo’s external

IT business; here, HCL on-boarded 2,500 Volvo IT

employees, which made HCLT the largest Indian-heritage

firm present in the Nordic region.

4. Vertical expansion: Besides geographic expansion,

a service provider can expand its vertical delivery

capabilities by acquiring a captive, or create a completely

new vertical for itself. For example, the acquisition

of PSA Group’s R&D centre in Germany by French

engineering major Segula Technologies expanded the

latter’s capacity by 2,000 employees and gave it a strong

presence in Europe’s largest automotive market. Europe

has very large R&D spending and while Segula already

has a presence in automotive R&D, this acquisition

expanded its capabilities, reach, and client exposure.

In terms of leveraging the R&D centre further, Segula’s

MD mentioned that the company wants to use the

competencies of these 2,000 engineers to increase

Segula’s market share with other German automakers

such as Volkswagen, BMW, and Daimler.


Case Study # 1

TCS to acquire Postbank Systems from Deutsche Bank

Case Study # 2

TCS to acquire staff and select assets of Pramerica Systems from Prudential Financial

Year: 2020No of Employees: 1,500

In October 2020, Tata Consultancy Services and Deutsche Bank AG announced an agreement under which TCS will acquire 100% of the shares of Postbank Systems AG (PBS) from Deutsche Bank AG. PBS is a full-range captive IT service provider; it offers project management, application management, and infrastructure support services to Postbank and other subsidiaries of Deutsche Bank (DB).

PBS and its c.1,500 employees will become part of TCS, deepening the relationship between the two organizations. This will add to TCS’ scale in Germany and strengthen its growth outlook. TCS is ranked by analysts as the fastest-growing IT service provider in Germany, with a 10-year CAGR of over 24%. The transaction is expected to be complete by the end of 2020, and is subject to both parties finalizing further agreements and regulatory and government approvals.

For DB, this deal will help in its restructuring plan to reduce costs. As per media articles, its cost restructuring plan is centred around cutting 18,000 jobs with half of those job cuts expected to be in Germany.

TCS is already a IT services provider to DB. For TCS, this acquisition will further deepen its relationship with DB, and help gain more market share in DB’s overall spend, as it paves the way for fetching more business in other transformational and strategic projects within Deutsche Bank. TCS can leverage the domain skills of 1,500 employees to expand in other accounts in Germany in BFSI and other verticals. It gets ready infrastructure and talent in Germany, from where it can service the larger European market. Lastly, language and culture are still huge barriers in Europe, which are addressed for TCS via acquiring local talent. The company will earn a revenue of EUR 460mn (USD 543mn) over the next five years from this deal.

Year: 2020No of employees: 1,500

In October 2020, Tata Consultancy Services and Prudential Financial Inc. (PFI) announced an agreement under which TCS will acquire staff and select assets of Pramerica Systems Ireland (Pramerica), a subsidiary of Prudential. PFI will retain the Pramerica Ireland entity, which will continue to operate from Letterkenny and will focus on providing regional business services, reporting under its global asset manager, PGIM.

Pramerica’s 1,500 employees will be transferred to TCS. As part of TCS’ new Global Delivery Centre in Ireland, they will continue to provide PFI with a range of business, digital, and technology services, while also expanding TCS nearshore capabilities to provide the multifunctional, digital services and solutions to other customers in Ireland, the UK, Europe and the US.

This transaction is yet another example of global banks and insurance companies shedding non-core assets as they navigate through economic uncertainty. For Prudential, shedding the operation is expected to help the insurer trim costs, as it aims for US$ 750mn in savings by the end of 2023. For TCS, acquiring Pramerica will bring multi-year services contracts, strategy expertise and a development centre in Ireland. It will also enhance TCS’ capabilities in Insurance from Ireland, to service EU and US customers. Pramerica Systems has 80% IT services work while 20% is BPS (actuarial and customer engagement processes). TCS will be offshoring a lot of that work and will redeploy these teams to service other customers from a new nearshore centre in Ireland. It will generate a revenue of USD 300mn over the next five years from this deal.

CASE STUDIES:


Case Study # 3

Infosys signs the largest deal in its history with Vanguard, takes over 1,300 of its employees

Case Study # 4

Infosys acquires 75% stake in ABN AMRO’s mortgage services unit (Stater)

Year: 2020No of Employees: 1,300

In 2020, Infosys entered into a multi-year agreement with Vanguard, which is perhaps the biggest deal the company has ever signed (approximately USD 1.5bn as per media articles). Through the partnership, Infosys will assume day-to-day operations, supporting Vanguard’s Define Contribution (DC) recordkeeping business, including software platforms, administration, and associated processes. Also, approximately 1,300 Vanguard employees, currently supporting the full-service recordkeeping client administration, operations, and technology functions, will transition to Infosys. All Vanguard employees currently performing these roles will be offered comparable positions at Infosys, in close proximity to Vanguard’s offices in Malvern, PA, Charlotte, NC, and Scottsdale, AZ. Transitioning employees will receive the same salary and comparable benefits for a transition period of 12 months.

Martha King, MD of Vanguard Institutional Investor Group, will move to Infosys to head the latter’s Mid Atlantic Retirement Services Centre of Excellence and serve as its Chief Client Officer. As per media articles, Infosys has set up a 3,000-seater facility in Bengaluru to service the deal, which includes BPS services and digital transformation work, to take Vanguard’s record keeping services onto a cloud platform.

For Vanguard, the deal allows the company to focus on its core business – retirement services and asset management. Additionally, it has successfully avoided negative media attention (had it laid off 1,300 employees) by transferring employees to Infosys.

Infosys acquires key talent in the core retirement-services industry via this deal, which it can leverage to grow in other BFSI accounts in the US. Infosys currently serves half of the top-20 retirement service firms in the US, helping clients to manage risk, improve participant experience, and deliver better retirement plan outcomes through technology services and digital solutions. Since it is a large deal, it provides revenue visibility; also, there is the possibility of increasing the scope of the deal in future.

Year: 2019No of employees: NA

In March 2019, Infosys signed a large deal with ABN AMRO, the third largest bank in the Netherlands, headquartered in Amsterdam. As a part of the deal, Infosys acquired 75% of the shareholding in Stater N.V., a wholly owned subsidiary of ABN AMRO Bank N.V., that offers pure-play, end-to-end mortgage administration services in the Netherlands, Belgium, and Germany. Infosys paid EUR 127.5mn for a 75% stake in Stater. ABN AMRO will continue to hold the remaining 25%. Stater is a market leader and one of the largest mortgage service providers in the Benelux region, operating across the mortgage and consumer-lending value chain, with deep capabilities in digital origination, servicing, and collection. Stater also brought deep European mortgage expertise and a robust digital platform to drive superior customer experience for Infosys’ clients.

At the time of acquisition, Stater serviced 1.7mn mortgage and insurance loans for approximately 50 clients in The Netherlands and Belgium. The company was started in 1997, and had a solid client base, including many of the largest Dutch and Belgian banks for their most important product – mortgages.

ABN AMRO’s management revealed that while mortgages are a key product for the bank, providing administrative mortgage services is not a core activity. Hence, the management is quite happy to hand over majority control to Infosys, where it will continue to hold 25% stake, and will remain a strategic client for Stater. As the same employees were going to service ABN AMRO, comfort level is also ensured.

For Infosys, as it was already operating in mortgage services, this deal has only added revenue in a similar line of business, along with access to a key client – ABN AMRO. Also, Stater gave direct access to the key markets of Netherlands, Belgium and Germany. Infosy

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