Global InHouse Centers (Captives) On The Rise And Challenge Core Vs NonCore
Global Domestic Centers (GICs), formerly known as heists, are on the rise. Hundreds of new startups are emerging, and existing businesses are significantly expanding their capabilities. It's clear that companies are using offshoring more aggressively, and many are doing so while building out their capabilities. What explains this acceleration in growth for companies that build their own capabilities rather than relying on third-party service providers?
Factors that determine the use of accelerated GIG
Companies creating their own captives have a long history since offshoring began to flourish during the Y2K movement. However, this movement is dominated by third-party service providers. Currently, there are several factors contributing to the acceleration of the emergence of new prisoners and the expansion of existing ones.
1. Boom after COVID
The first reason is the post-Covid boom, which is forcing companies to try to do more with less. Using offshore work is an obvious way to do more with less.
The accelerating trend also comes at a time when labor supply in North America and Europe is still tight, and that shortage looks set to continue into the recession. There is a shortage of qualifications, especially in the engineering and IT sectors.
It also helps companies promote jobs abroad due to the availability of such skills abroad. Large pools of mature labor are now available in various countries (especially India, the Philippines, Eastern Europe and, increasingly, Central and South America).
2. Reducing costs and risks and increasing attractiveness for small companies.
Besides the need to save money, using multiple GICs or captives is more attractive because the costs and risks of setting up a GIC are now significantly lower than in the past. India today has a mature market with a sufficient number of leaders who are already established or operating in this environment and who can be hired.
There is now an infrastructure that companies can take advantage of by doing it themselves, significantly reducing risk and cost. Legal operators thrive in law firms that can quickly create legal frameworks. Recruitment services and tax consultants available.
Historically, smaller companies have not outsourced jobs to inmates due to economic conditions. But now the cost has dropped significantly. If 15-20 years ago a company wanted to open its own offshore, it needed 1000-2000 people. The economy has now shrunk to 30-40 people.
As a result, GIGs or captive companies now make sense for smaller companies. The idea that only the largest and most complex companies can own their own business has now been disproven.
3. The nature of the technology stack has changed.
Another factor driving GIC's growth is that as we enter the digital age, technology stacks (operating platforms) are becoming more tightly coupled, dynamic and connected to business operations.
This challenges the old concept of "core" and "non-core" that allows companies to remove large technology assets from their environment. The idea was to outsource non-core functions to third-party service providers who could do the job better. When it comes to digital technology, this idea becomes less and less important. Creating, developing and maintaining a platform technology stack is becoming increasingly important.
This episode focuses on the core composition of the platform technology group, namely the permanent team. Platform technology staff require the same team to continually work on the platform over time. Technology services personnel are the technology services component of a company's technology group. This forces companies to have more control over the creation and maintenance of their technology stack.
The need for a resilient team is critical. It is very difficult for third party service providers to provide a permanent team. Their business model is set up as a work factory that produces work through managed components or standard operating procedures (SOPs) and hands off the work to as few juniors as possible, who can then complete it. Then young people gain experience and move on to more complex jobs. Thus, the supplier's workforce changes or is replaced.
But in the digital age, companies need engineers who have deep understanding of both the platform and the business and develop skills. The longer they last, the more complex and valuable these skills and knowledge become.
As a result, the economic models of third-party providers and their talent pyramids are increasingly out of step with the need for permanent teams. This requires rethinking the career path of engineers. This is often best achieved when the company controls the team. As a result, many companies are now moving more work to and from their GIC centers due to the significant training benefits for permanent teams.
Floods are not driving this migration and I do not believe all work will be outsourced to captives or GICs. There is no doubt that this is helping to accelerate the growth of GIC/Bandi. But I don't think this will be the death of third-party services.
In this digital world where the workforce is becoming increasingly important, every business will need active support from third parties as it moves forward. Over the next 5-10 years, more and more companies will implement more features in-house. However, they will still need long-term partnerships for their technology stacks and operating platforms. Aggregate demand is likely to increase, so third-party service providers will continue to grow but will have a smaller market share overall.
