Will GCC Disrupt India’s IT Services Industry?

GCCs are in-house development centers set up by large transnational companies and India has a large presence in this segment. By some estimates, about 45% of all GCCs are located in India, with the largest centers including Bangalore, Pune and Hyderabad. GCC provides employment to highly trained professionals in many sectors, not just IT.

There were over 1,580 GCCs operating in India at the end of FY23 and now there are about 1,700. These centers employ over 1.66 million highly trained personnel and the sector is worth $46 billion. NASSCOM estimates that revenue will grow at a compound annual growth rate (CAGR) of 11.4% between FY2015 and FY2023. The largest GCC in India employs around 50,000 people, and at least 15 have more than 15,000 employees. The parent MNC has at least 5,000 GCC-based individuals in senior executive positions.

Obviously this is great for high-level talent as they get more employment opportunities, and it is understandable that NASSCOM is pushing for a fourth wave of GCCs (hence the “4.0” in the title of the report). According to NASSCOM’s analysis, the first wave (circa 2010) established GCCs as outposts, the second turned them into satellites of their respective MNCs, while the third (current) turned them into portfolio hubs. In the fourth wave of the future, GCC may become the transformation center.

As statistics show, most of the top 2,000 global companies – Fortune 2000 – have already set up GCCs in India. The first two waves saw functions such as IT, finance, accounting and human resources as key drivers, and the initial reasons for relocating to India revolved around cost-arbitrage.

But the third wave has seen centers of excellence operating in areas such as AI/machine learning, and product development for banking, financial services and insurance (BFSI). In addition, GCC is also setting up outposts and satellite locations in Tier-2 locations to further reduce costs.

High-end research is increasingly conducted in areas of company-specific interest in GCC centers of excellence. Apart from IT, research and development is being done in Pharma and Biotech. Automotive related R&D and semiconductor design are also areas of high interest. NASSCOM believes that the GCC can be a “wormhole” for Asian multinationals to quickly figure out US business practices and enter the North American market. GCCs can also become sandboxes for the exploration of novel work models such as the gig economy and hybrid work.

But the GCC model replaces the IT services/outsourcing model. Rather than outsourcing all IT-related tasks, a business setting up GCC is betting that integrating IT-related skills internally will help it function better. GCCs not only digitally transform their businesses. They also drive research and development on new technologies and specific products and platforms for the business, and may also generate intellectual property (IP) for the parent.

NASSCOM estimates that the engineering R&D component (ER&D) of the Indian GCC region is around $25.6 billion. Although GCC revenue currently accounts for only 25% to 30% of the IT services industry, GCC is witnessing very rapid growth. Employment figures also suggest that GCCs are now employing more people than the IT services industry. Faster growth rates and higher employment means these internal facilities can quickly bridge the gap in terms of market size and revenue.

NASSCOM must support any model that brings high-level jobs to India and encourages the growth of this ecosystem. It should not discriminate between the GCC and the IT sector as a matter of policy. But if the world’s largest companies are moving away from the outsourcing model, the IT services business will at least see a diminution of potential opportunities. This in turn could result in lower revenue and lower margins for IT firms.

If large companies believe that setting up a GCC will be more revenue-enhancing than outsourcing (cutting costs), then IT services businesses will have to find ways to remain relevant to the Fortune 2000. It is unclear how the industry will adapt and remodel its strategies to meet this new challenge. Investors will also have to review their valuation of IT companies as GCC penetration increases.

Updated: June 20, 2023, 03:53 PM IST