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Perspectives

Global In-house Centers: Making the Shift from Stagnant to Strategic (Part 1 of a Four-Part Series)

2018-11-05


Businesses are struggling to transition their in-house service centers from cost centers to hubs of innovation. We’ve identified three areas of focus to get more out of their investment.

With the emergence of the digital economy, the identity of the global in-house center (or GIC, once known as a “captive”) is rapidly changing. While businesses first turned to offshore in-house service centers as a pathway to cost arbitrage, the past couple of years have seen a renewed influx of companies from a wide array of industries create GICs — and with a different focus. The role for these newly created GICs is to pursue innovation-focused efforts and to accelerate the enterprise’s exploration of new digital technologies, such as advanced analytics, machine learning, robotic process automation, blockchain and artificial intelligence.

It’s not surprising, then, that companies with established GICs are beginning to reassess their service centers with a more critical eye. Many are not satisfied with how the GIC cost equation has evolved, and they’re looking for more bang for the buck. Pressured to become more innovative, agile and digitally-focused, they want their GICs to serve as a resource for innovation and their digital enterprise goals. As a result, many are beginning to reexamine their investment.

The issue is, just as their parent companies are struggling to adapt to the new realities of the digital economy, so too are established GICs, which are challenged to adopt emerging technologies, lower their operational costs, and hire and retain digital talent.

What’s Old Is New, Again

First developed in the early ‘90s, GICs were embraced by many multinational companies, such as Texas Instruments, GE, Citigroup and American Express. The GIC movement has seen a rejuvenation in the last couple of years, gaining interest from new industry sectors and new parts of the world. According to Everest, GICs have grown to 25% of the global services market today, with the number of GIC setups expanding from 120 new centers globally in 2013, to 155 last year.

But these aren’t your grandfather’s GICs. The new GIC participants include digital giants such as Apple, LinkedIn and Facebook, as well as the biggest names in retail and financial services that are looking to GICs as centers of innovation. Nearly half (46%) of the new or expanded GICs in 2017 were digital-based, Everest says, with the greatest proportion offering advanced analytics and intelligent automation capabilities.

The question is whether established GICs can adapt to the new landscape. With pressure mounting for all businesses to be more agile, discover new market opportunities, and quickly get up to speed with new digital technologies, they’re now looking to their GICs for help. Rather than a cost center, businesses today want their GIC to serve as a center of innovation, and many have serious doubts as to whether their current GIC setup is up to the task.

Stagnating Early in the Maturity Cycle

Challenges for GICs have always existed, including high attrition levels, dysfunctional relationships with the parent company, and inefficient governing structures, according to at least one GIC author and researcher, who estimates that 60% of offshore GICs will struggle, particularly when the parent company fails to anticipate and handle these challenges.

But a big issue, from our observations, is the tendency for established GICs to get stuck in the early stages of the maturity curve (see Figure 1).

Source: PM Power Consulting http://pm-powerconsulting.com/blog/purpose-maturity-in-gics/

Figure 1

Here’s how we see the maturity curve progressing:

  • Level 1: The first stage of maturity is not difficult to establish: providing a cost advantage by executing a particular, usually back-office, business process.

  • Level 2: As they perform the same tasks over a period of time, many GICs advance to a more mature stage, where the GIC employees function as subject matter experts, and improve quality and scalability through process standardization and optimization. For many GICs, however, this is where they stagnate: as low-cost centers offering high-quality processes.

  • Level 3: Most GICs find it much more difficult to move to the next stage of maturity: acting as a strategic entity that drives innovation and accelerates the parent company’s foray into new and digital-enabled products and services. At this stage, the GIC offers ideas on new products and services, aligned with the parent company’s own business strategy, as well as the talent needed to execute and deliver on these innovations.

  • Level 4: Even further along the maturity curve, the GIC would help the parent company expand into emerging markets, by conceptualizing and executing on low-cost, high-quality products and services that would be relevant for consumers in its geography, and ultimately in other global markets. This could be in India (which houses roughly half of the world’s GICs), China, Latin America or one of the many other burgeoning areas where GICs are emerging. The GIC could also provide knowledge of and access to the many start-ups in the ecosystem that could accelerate innovation and serve as strategic business partners.

  • Level 5: Finally, fully mature GICs are those that are fully aligned with the parent company and its strategy, with no difference in status or enterprise standing between the executives in the GIC and business leaders in the home office. No longer is the GIC seen as a distinct entity; it functions more as a strategic innovation center that enables the parent company to retain its competitive edge, and just happens to be in a different country.

Globally, senior executives are increasingly seeking the value that can be achieved from more mature GICs, and it’s clear there is often a capability gap. In a recent Bain study, while global CXOs said they expected Indian GICs to play a more active role in leading investment priorities in the next three to five years, they also gave their GICs low performance grades, highlighting leadership quality, domain expertise and automation (including machine learning and artificial intelligence) as areas for improvement.

Three Challenges to Overcome

To help their GIC evolve into a role that’s relevant today, businesses need to focus on three areas where many GICs face challenges:

Productivity and operational cost pressures.

Many GICs struggle to optimize their operational and productivity models, resulting in higher than acceptable costs. This is often the result of poor governance, a lack of automation, reliance on legacy IT infrastructures and a business model that is difficult or costly to scale.

Organizations need to evolve GIC applications, platforms and infrastructure to contain costs, streamline operations and allow for growth aligned with enterprise goals.

Slow digital adoption.

Many GICs have not kept pace with digital marketplace dynamics and changing business priorities. With slow adoption of the cloud, big data, advanced analytics, robotic process automation and artificial intelligence, GICs can struggle to add demonstrable, sustainable value to the enterprise.

Organizations need to accelerate the GIC evolution toward digital, including operating models, relationships and ventures. Doing so would enable the GIC to transition to an innovation hub and revenue center, and develop a relevant value proposition.

Difficulty acquiring and retaining top digital talent.

GICs can also find it difficult to develop and retain employees with the necessary digital skills, domain expertise and leadership qualities. In GICs with poor career advancement opportunities, employee attrition can be high, and it can be difficult to attract top talent with dynamic skills to accelerate the digital agenda.

Organizations need to develop a sustainable way to shift the GIC talent pool from legacy to digital, from operationally-focused to innovation-oriented, and from functional experts to business experts.

Moving Forward

For some businesses, it will be worth the challenge to work with their existing GIC to transition to the realities of the digital age. For others, it may be time to consider changing their business model or strategy altogether. Each company’s GIC journey is unique, and the right solution will vary based on the business’s particular goals and objectives.

Moving forward, many organizations are choosing to evaluate their current GIC capabilities and operations to determine future investment and direction needed for sustained success. Given the current pace of evolution in the marketplace, we believe this is an essential next step. By doing so, they can ensure their sourcing model will move them in the direction they need to go for sustained success.

This is the first in a series of articles on how businesses can optimize their GIC strategy. Subsequent installments will address the issues of GICs’ productivity and operational cost pressures, digital adoption and talent acquisition.

We invite you to visit our GIC landing page and take our no-obligation GIC assessment. For more on this topic, you can also watch our webinar, “GIC Trends from the Outside-in."

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Global In-house Centers: Making the Shift from Stagnant to Strategic (Part 1 of a Four-Part Series)