Captives cut outsourcing to Indian IT to solve digital challenges inhouse

One-fourth of the 300 odd captives set up across the world in last 12 months were in India

India is witnessing captives cut outsourcing to Indian outsourcing vendors and move work in-house as they adopt emerging areas such as artificial intelligence, cloud and digital technologies.

The focus to move work in-shore comes at a time when global firms are investing in digital technologies and automation and even outsourcing companies are struggling with the shift.

One-fourth of the 300-odd captives on pure engineering and engineering design set up across the world in the last 12 months were in India.

“The number of captives on pure technology services, especially on digital technologies like artificial intelligence, are growing too,” said Pareekh Jain, of HfS Research India.

James R Fowler recently said 70 per cent of the services were outsourced before he took over the responsibility as chief information officer, General Electric. He decided to make it 50 per cent. “We made a decision for 50:50, and there is still a role for contractors to play, and business partners to play. But I have to bring intellectual property in-house. We have moved from being project managers to product managers, where each of our products is treated like a commercial product,” he told Business Standard in an interview in December.

According to media reports on Wednesday, US-based retail firm JC Penney would increase its workforce to 1,000 at the captive unit in Bengaluru set up last year to reduce dependency on outsourcing to companies like TCS, Infosys and other Indian IT players.

A couple of months ago, Australian telecom major Telstra, which has been outsourcing technology work to Infosys for nearly 10 years, spoke of its plans of setting up captive unit in India. The firm’s large service provider Infosys will help it set up a unit with 200 people initially. The company is expected to work on emerging technology areas at lower costs at the India captive.

Another US-based company, Lowe’s, a home appliances retail major that outsources technology services to Indian companies, set up a captive in India in 2015. These apart, industry experts say one-fourth of the 300-odd captives on pure engineering and engineering design set up across the world in last 12 months were in India.

Indian IT services firms like TCS, Infosys and Wipro are not seeing the digital technology growth offsetting the decline in traditional technology services. US President Donald Trump’s stringent immigration law is expected to add to the cost of service delivery to clients in the US, the biggest market.

“If setting up captive or insourcing becomes a trend, there may be some headwinds as the Indian firms will see fresh competition from their clients’ captive since such internal technology teams will focus more on digital technology work,” said Jain. Companies such as TCS, Infosys, Wipro and others are competing with global peers in developing digital technology capabilities.

Early last year, India’s software lobby Nasscom said global in-house centres or captives have become an integral part of the fast-growing Indian IT and business process management sector and contribute 20 per cent share or $22 billion exports from India. India has nearly 1,050 captives employing 790,000 professionals.

With a focus on digital technology like AI and machine learning, companies, experts say, seem to be realising the need to have a balance between captive support and outsourcing.

Industry veteran and former CFO of Infosys T V Mohandas Pai, however, believes setting up captives is “usual” and they have “hardly impacted the growth of outsourcing” IT services business to India. “Captives are not new to Indian IT services companies. They do not offer as much economic value as they do on the strategic front. For global businesses, captives have always been expensive.”