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Perspectives

Sustaining the GIC Cost Advantage (Part 3 of a Four-Part Series)

2018-12-18


Many organizations are unprepared for the care and feeding required for maintaining the original GIC allure of low costs over time. (Part 3 of a four-part series)

As discussed in the first article in this series, businesses face three key challenges when it comes to moving their global in-house centers (GIC) up the maturity curve. One of these challenges is encouraging the GIC to adopt digital technologies, and a second is managing operational costs over the lifespan of the GIC.

Historically, the argument for establishing a GIC has been focused largely on cost savings, and for good reason. The savings are often realized in the first months of the setup, and continue over the next couple of years. What many organizations don’t realize is that — when the workforce structure, governance policies, productivity measures and operational models are not carefully managed — the costs can begin to escalate at the three- to five-year mark. For businesses and GICs that aren’t equipped with the management talent to oversee these complex areas, the cost savings can quickly dwindle and undermine the GIC’s value proposition.

Here’s a closer look at each of these four areas:

Managing the workforce structure.

Many businesses that start a GIC are dealing with dynamics that make it difficult to — in the parlance of the third-party service provider world — “manage the pyramid,” or control the cost of its team.

This is best understood by deconstructing the typical service provider setup, in which a delivery team might consist of one senior manager, four or five lower level managers and then several team leads who manage groups of junior-level resources.  Over time, the service provider works to achieve a certain level of efficiency and productivity on the team that allows it to flatten out the pyramid — essentially, getting work done with slightly more junior resources than it started with — and diminishing the size of the pyramid overall. People also shift into more senior roles, potentially in other engagements, after acquiring enough experience.

In a GIC, there’s less opportunity to optimize the shape and size of the workforce pyramid. Because the GIC doesn’t serve multiple clients or experience the same growth rate as a provider, there’s far less upward mobility for the junior-level resources. In a sense, the workforce pyramid stagnates, both in size and shape.

Further, in competitive offshore markets such as India, the most effective way to retain talent is often to increase compensation, even for individuals performing the same work as they did when they started. This makes it difficult to retain workers and simultaneously maintain an optimized cost profile. As the experience levels increase, along with pay, the cost differential between the GIC workforce vs. headquarters begins to diminish. This can happen toward the third or fourth year (or two to three pay raise cycles) of the GIC being established. 

Figure 1

Setting governance policies.

One way to offset these workforce dynamics is to increase the amount of work the GIC performs by expanding its capabilities to additional enterprise locations or business departments over time. Getting that cross-organizational uptake to happen, and establishing the GIC as a shared resource, however, takes governance — which means additional management overhead that many businesses are unprepared for. Often, the GIC is left on its own to figure out how to market its skill set to various departments and encourage them to make use of its capabilities.

Managers’ reluctance to work with the GIC can stem from many factors, including their concern about the impact on job functions within the department, and a belief that the work is too specialized to be relocated. Too often, resistance to change can spur internal battles over shifting work from onshore to offshore. Even with a “successful” GIC, then, it can come down to whether people throughout the organization will use it.

When third-party service providers are used, contractual obligations can help diminish these internal battles and drive change. Without a contract in place, a GIC model requires a governance model that establishes who’s responsible for driving work to the GIC. Most GICs have a senior manager and management team leading the location, but the question is where they fit into the organization as a whole, and who’s shouldering the KPIs that determine its effectiveness. By addressing these issues, businesses can ensure the role of the GIC expands in a healthy way.

Defining an operating model.

Closely related to the governance issue, a clearly defined operating model is needed to define how onshore business units will work with the GIC. Incentives and KPIs connected to GIC use are required; it can’t be up to the GIC leadership team to rally support for its services.

In some cases, businesses establish a top-down mandate for each business unit to leverage the GIC for a certain percentage of its work. While this can create friction, it’s an effective way to get the results required. The operating model needs to define how the GIC will manage its demand and supply of work, as well as who in the organization is accountable from a metrics and financial perspective for making sure that happens. While this is not a simple exercise, it’s essential for ensuring the ongoing cost advantage of the GIC.

Increasing productivity through automation and innovation.

Just as businesses themselves rely on robotic process automation (RPA) and other digital innovations to drive ongoing productivity enhancements, so does the GIC. Such innovations can be hampered, however, by the insular environment of a GIC compared with that of a service provider.

Whereas the GIC is reliant on self-generated ideas to reduce cycle time or speed time to market, the pace of innovation at a service provider is driven by the idea-sharing that takes place in the broad population of workers cycling through. With the continuous flow of new people also comes an influx of new ideas — many that have already been implemented for different clients and can serve as a proof point of success.

Businesses that want to increase innovative thinking within the GIC need to take measures to increase the dynamism of the relatively static environment by introducing new talent into the mix, establishing partnerships with start-ups or importing ideas from headquarters.

Moving Forward

Without a clear strategy for controlling operating costs and workforce productivity levels, existing GICs will struggle to move to the next level on the maturity curve. As businesses evaluate their GIC investment and determine next steps, the GIC cost challenge will be essential to overcome.

This is the third in a series of articles on how businesses can optimize their GIC strategy. The first article discussed the changing role of GICs and the need to move up the maturity curve. The second addressed the need for businesses to spur digital adoption in their GICs. The fourth installment will discuss the need to acquire and retain employees with the necessary digital skills, domain expertise and leadership qualities.

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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Sustaining the GIC Cost Advantage (Part 3 of a Four-Part Series)