RECENT HIT

Why companies from US, UK,

Chile, Japan, et al. want India as
the captive hub to take them
digital

Concept by Shelley Singh and Muhabit ul haq

Synopsis

More captive centres are being set up in India this year than ever before, as global companies flock to
access its skill base and cost advantage to digitise operations. Unlike intermittent waves of GCC
development in the past, the current trend will only escalate because even smaller companies and global
R&D centres are looking to India to fast-track digital transformation.

What’s common to Rakuten, Falabella, Lululemon, and Delta Airlines? These

disparate businesses from various parts of the globe have zeroed in on one
destination to lead their digital transformation — India. The country is
witnessing an unprecedented post-pandemic surge in setting up new global
capability centres (GCC), more commonly called captive centres, to serve their in-
house tech-services needs. These four are among more than 100 companies that
have recently set up new captives in India, adding to the 1,300 already present in
India. Not just that, around 1,100 are significantly scaling up operations, according
to IT industry body Nasscom.

According to Bengaluru-based business-intelligence platform UnearthInsight,

2021-22 will see almost a quarter-million gross new hiring in technology services,
with GCCs driving the demand for engineers. Nasscom predicts that GCCs revenue
of USD33 billion in FY20 will jump to around USD80 billion by 2025. At present
GCCs employ 1.3 million out of the 4.6 million technology-services workforce.

The allure of finding hordes of digital engineers more easily in India than in their
home bases is driving these companies to the country, setting up GCCs to develop
apps, e-commerce platforms, beef up cybersecurity, scale-up cloud services, build
smart supply chains, and more. There have been intermittent waves of GCC
development in the past, but the current trend will only escalate, as even smaller
companies and global R&D centres are leveraging India to automate and digitise
processes. Eventually, the new jobs created by this wave will catapult India’s IT-
services sector’s traditional-channel delivery to a digital play.

Cost and skills: a winning combination

Bengaluru-based ANSR, which helps companies set up GCCs, has worked with 80
multinationals since 2005 to set up captive centres. “We will be doing the
maximum number of GCCs this year in our 16-year history,” says Lalit Ahuja,
founder and CEO, ANSR. Among the centres ANSR helped set up are those of Saks
Fifth Avenue, Wells Fargo, Target, Lowe’s and more recently Delta, Lululemon, 7-
Eleven, and Giant Eagle. The company also helps set up centres offering sourcing,
real estate, legal, IT and other services in Turkey, Poland, Ukraine, Philippines, and
other destinations. It is working with around a dozen multinationals to set up
GCCs in India, with an average headcount of 600.

KS Viswanathan, vice-president, industry initiatives, Nasscom, sees this as the

third wave of GCCs. The first wave was around the mid-1990s to 2000 led by banks
such as Amex and Citigroup, and large conglomerates like GE. Then came retailers
and consumer products companies like Target. This time around, the companies
are a diverse bunch, from beer maker AB InBev to real-estate management firms
Compass and Real Page to department chains like Falabella and Giant Eagle.

“Cost is a factor, but the companies wouldn’t have come if skills were not there,
particularly digital skills,” adds Viswanathan. The spurt in new GCCs and
expansion of old centres is also a reason behind the current war for talent. IT-
services players, startups, captive centres, and even domestic companies are
competing for limited talent to work in analytics, scale-up cloud, or build systems
powered by artificial intelligence (AI), machine learning (ML), and Internet of
Things.

Buffeted by the pandemic’s tailwinds, GCCs continue to expand. Ahuja of ANSR

believes the pandemic has dispelled myths and eliminated stumbling blocks
around what can be done at GCCs. Besides, he finds GCCs to be 15% cheaper than
outsourcing to third-party vendors. “Employees working in captives have
unhindered access to company resources. They are part of the same organisation,
and won’t let the ball drop or anything fall through the cracks,” says Ahuja of
ANSR.

Tech differentiator

Besides, GCCs are doing bleeding-edge work, creating proprietary systems in

managing retail, capturing new consumer trends and creating more efficient
supply chains. Above all, the companies would like to keep this work in-house, at
least till it becomes a commodity like traditional business-software roll-outs or
infrastructure-maintenance services. Also, stricter global norms on data sharing,
like GDPR in Europe, are pushing companies to do such work in-house rather than
use service providers for sensitive data-analytics tasks.

American retailer Target presents an example of how old GCCs are growing and
new ones are being set up. The company first opened its captive unit in 2005 in
Bengaluru, which employs 3,400 across technology, marketing, HR, finance,
merchandising, supply chain, and analytics. The India centre is building enhanced
digital experiences like self-checkout, digital 3D shoppable experience (enables
shoppers to check how, say, a sofa set might look at home), packaging design,
marketing collaterals, loyalty support and so on. In the next six months, Target
plans to hire 300 more for its tech and business operations in India.

Target in India operates as a fully integrated part of the global team, says Anand
Venkateswaran, vice-president, finance, Target India. “Nearly every aspect of
Target’s global team is represented in Bengaluru, and a strong connection to HQ
(Minneapolis, Minnesota, US) means ideas and results flow seamlessly across the
globe.”

Similarly, New York-based real-estate technology company Compass plans to use

AI and ML to transform how transactions are done. Driving that shift is its India
captive unit, where the company is developing its app, improving search
experience, building core applications and conducting database-development
tasks. Compass’s mobile app, search AI, robotic-process automation, and virtual
tours are done by its Hyderabad centre. The company plans to double the India
headcount to 400 in the next 12-18 months and open new captive units in Delhi-
NCR and Bengaluru in 2022. “The primary reason for scaling up in India is talent
availability,” says Rushi Bhatt, head of AI, Compass India.

Digitising from India

Japanese Internet company Rakuten, with businesses spanning e-commerce,

telecom, fintech, and streaming services works in about 30 countries including
Singapore, Taiwan, and the US. At its India centre, the largest outside Tokyo,
Rakuten is working on computer vision, face detection, face-based payments, fraud
detection, pricing innovation, and demand forecasting, and is building telecom AI
cloud.

Says Sunil Gopinath, CEO, Rakuten India, “Costs become a secondary factor when
you do such critical work out of a facility. India is cost-competitive, but the primary
driver is the ability to do innovation at scale.” Rakuten has 1,500 people in India,
working mostly from home at present. This will go up to around 3,000 in two years.
In 2022, Rakuten will open its largest campus outside Tokyo, in Bengaluru.

In May 2020, Rakuten, often referred to as ‘Amazon of Japan’, acquired InnoEye,

which has offices in India and is building cloud-based 5G telecom solutions. Last
quarter it acquired Altiostar, a vRAN (virtual RAN) and open RAN (radio access
network) specialist, which uses software-based networks for telecom base station

functions. Both will help in building the telecom AI cloud from India.

Gopinath, who worked with Flipkart and eBay before joining Rakuten five years
ago, points out that India’s growing startup ecosystem, which now has over 25
unicorns, is playing a key part in contributing to the easy availability of digital
skills in India.

That was the reason for Santiago-headquartered Falabella to start a GCC in India.
South America’s largest department-store chain would have found it difficult to get
access to even basic skills, leave alone cloud or AI experts, in its home base in
Chile. The USD30 billion company, which also runs a bank and has insurance and
credit-card businesses across seven Latin American countries, started a GCC in
Bengaluru in 2018.

“Talent in India is exposed to the world. Engineers have delivered solutions for
customers in US, European, Australian and other markets. So the decision to move
to India was easy, as we get skills at scale here,” says Falabella’s CIO Ashish Grover,
who has spent a decade with America’s eighth-largest retailer Target. When the
pandemic broke out, Falabella’s India centre helped accelerate store digitisation
and created an e-commerce platform, which is now managed out of India. Its GCC
in Bengaluru has a headcount of 400, which is expected to touch 1,000 in the next
12 months.

For American home-improvement retailer Lowe’s, which has operations across the
US and Canada, the lockdowns following the viral breakout accelerated not only
di i l f i b h b i i lf A l d ki f
digital transformation, but the business itself. As people started working from
home, the demand to redo homes spiked, and the home-improvement businesses,
which were growing at 3%-4% a year, skyrocketed to 25%. Revenue spiked from
USD72.1 billion in 2019 to over USD90 billion in 2020.

“Since the beginning of the pandemic, we have seen our online sales grow
110%-120%,” says Ankur Mittal, senior vice-president - technology and managing

director, Lowe’s India. Its India team has developed key contactless solutions such
as ‘buy online and pick up at store’ with their US counterparts. “We had plans to
digitise operations over the next few years. The pandemic just fast-tracked that,”
adds Mittal.

ANSR had helped set up the India centre for Lowe’s. It was key to developing
solutions to digitise operations, and create new shopping solutions, including
assisted checkout, self-checkout, and touchless lockers. Before the pandemic, the
headcount of Lowe’s India GCC was 2,500. The team has increased by 40% in the
last 18 months. About half of the technology work is being done from India and the
rest in the US.

A shortage of talent

While companies are attracted by India’s talent capability, the sudden growth is
also causing a talent crunch. “There is around a 30% gap in demand and supply,
though it’s better than in other countries,” says Viswanathan of Nasscom. “This
will make it slightly dearer to hire in India, but GCCs continue to expand as they
get the right combination of skills and experience.”

Vikram Ahuja, co-founder of Talent500, adds that salaries for engineers with
digital skills have gone up 130% in the last 12 months and every engineer willing to
join has at least two offers. Talent500, carved out of ANSR, sources talent from 50
countries and is working with 50-60 GCCs, with an average of around 200
employees each. Gaurav Vasu, founder and CEO, UnearthInsight, points out that
the cost differential, compared to the US and Europe markets, will reduce slightly
due to the war for talent, but India remains an affordable destination.

Viswanathan foresees the current wave of setting up captives further picking up

pace. He points out that there are 2,500 global R&D spenders, of which 52% have a
presence in India. Many of the rest are also planning to explore India to help build
automated, intelligent systems, and contactless solutions.

Hiring a few 100 Java programmers is itself a big challenge in San Francisco or
New York, which compels companies to flock to India. The annual CTC in India, at
around USD40,000 for an engineer with five to seven years of experience, is about
half of that in the US, says Arindam Sen, partner, EY India.
In the past, the approach towards a GCC was usually to outsource or sell a centre
to local players. Mastercard sold to Wipro in 2005, Citigroup sold its captive unit to
TCS in 2008, and earlier this year, Cincinnati-headquartered, America’s 13th-
largest lender, Fifth Third Bank, sold its quasi-captive to Coforge. Amit Singh,
executive director of Avendus, which was the sell-side advisor for this transaction,
says, “Because of Covid-19, digital transformation is a matter of survival. That’s
pushing the growth for captive centres now.”

However, Singh believes captives can be expensive in the long run, compared to
outsourcing to third-party providers. When tasks become a commodity, they will
be happy to sell out. However, that could be 8-10 years away. For players like
Avendus, this sudden rush for GCCs is an M&A pipeline being created, which it can
help sell. For IT-services companies, shopping for captives or even sourcing talent
from them will help transform their own digital-capability journeys.

(Note: The maps used are only for imagery. They do not represent territorial
boundaries.)

(Graphics by Mohammad Arshad)

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