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Many Indian Tech Services companies and their customers are at odds with one another. On the surface, this is understandable. Their clients – multinational companies that for decades have been outsourcing back-office operations to them – are increasingly establishing their own Indian engineering centers – aka Global Capability Centers (GCCs). In fact, 10% of the more than 20,000 companies that outsource to India have now set up their own centers in the country. We predict it will be more than 20% by the end of this decade. In so many words, several Indian Tech Services CEOs have asked me this: “How can we continue to grow at the rate we’re used to when our customers are setting up shop in India?”
Concurrently, we hear grumbling from the other side – from the multinational firms that established such GCCs in India. Their complaints focus on quality: they want better talent, better leaders to manage the talent, and (most importantly) better software. More and more, having the capabilities of the best digital companies is no longer an appealing luxury; it’s a sobering necessity. Just look at how Tesla came out of nowhere to gain a 4% market1 share in the US Automotive industry, and the largest stock market value of any automaker2.
But for Indian Tech Services firms and their customers, the disharmonies need to end. They will need each other far more over the rest of this decade than they did in the three previous ones. The reason is simple: the digitalization of companies’ products and processes is increasing geometrically. Even with AI automating much of this digitalization work, there won’t be nearly enough digital engineering talent to do it all. Contentious relationships between Tech Services firms in India and multinational companies that need tech talent will rob both of business opportunities they must pursue, and competitive mandates they must meet.
My firm knows of what we speak. We are a consulting firm that has worked on both sides of the equation: with the multinational firms (Fortune 500, large enterprises, and PE portcos) that have set up Indian GCCs (e.g., Sony, Data Axle, Storable, Verizon, Continental, and Wayfair), and with Indian Tech Services firms. Last year, Indian firms such as Tata Consultancy Services, Infosys, Wipro, and HCL generated a collective USD 199 Bn in revenue in 2023, according to nasscom3. Since the very first one – TCS set up shop in 1967 – they’ve rewired a now USD 1.4 Tn-a-year global IT services4 industry.
The first thing both sides must do is end their zero-sum picture of digital talent: the belief that the demand for these skills will stay largely flat. It leads many to feel that every digital engineer hired by a multinational firm means one less digital engineer they will need from a Tech Services firm, and thus revenue lost. Our consulting experience and analysis of the last 20 years on the growth of multinational company GCCs and the Indian Tech Services market suggests otherwise. Both sides will need each other even more than in the past because demand for digital engineering talent will explode.
The second thing Tech Services firms and their multinational customers need to do is determine where they will need each other going forward. The place to start is with multinational companies and their GCCs. As the customer, their ongoing digital needs, of course, will determine the engineering skills that will be in demand for both sides. Then I’ll discuss what the Indian Tech Services firms must do. By the way, this advice also applies to Tech Services firms based outside of India, but which have sizable Indian operations.
It’s important to understand how the need for digital talent at multinational companies has evolved over the last 40 years. The first companies to realize they needed to tap the Indian digital engineering talent market were technology companies. Semiconductor giant Texas Instruments set up its India center in 1984, three years after Infosys was born. For TI and other tech companies, Research & Development is core to survival. They must continually work on the next digital innovation, and back then they didn’t want to rely only on Tech Services firms for access to lower-cost talent.
But in those early years, multinational companies outside of tech – Pharmaceuticals, Media, Consumer Packaged Goods, and others – depended less on digital technology to transform their products. They relied more on the technology to lower the cost of back-office support in Finance, order fulfillment, customer service, and procurement. They were happy to farm out this work to the lower-cost talent of Indian Tech Services firms, especially those with the skills to install enterprise software systems of companies like SAP, Salesforce, and ServiceNow, which have become technology underpinnings for marketing, sales, service, and other business functions.
Today, product digitalization has move front and center. Multinational companies more and more have found they need to digitalize their core products and services, not just their business processes for marketing, selling, and taking orders, and tracking payments for them. Digitalizing their offerings provides competitive advantages, ones they don’t want to share with competitors. Netflix doesn’t share its streaming software or recommendations engine with rivals. As a result, more multinational companies have created their own digital engineering centers in India for such work.
Indian Tech Services firms must adjust. They no longer can claim to be the only ones who know how to tap the Indian digital talent market. Their clients are taking that into their own hands. It is far easier today for multinational companies to set up their own GCCs in India.
So where should Tech Services companies focus? The talent needs of their clients are growing rapidly. One beneficiary will be Tech Services firms that are deep category killers in digitalizing products and services.
Our use of the term “category killer” harkens back to the Retail industry of the 1980s and 1990s. In the US, it was about the rise of retailers such as home improvement giants Lowe’s and Home Depot, and sporting goods chains such as Dick’s and Sports Authority. They ushered in the decline of selling-all-goods department store chains.
The same phenomenon is now happening in Tech Services, only the category killers here have deep digital expertise in an industry, an industry’s products, and the technology that turns those products into digital products. A great example of this is KPIT Technologies. It refers to its target automotive industry as a sector selling “software on wheels.” Based in Pune, India, KPIT has become a digital engineering category killer in building digital products and features for the Automotive sector: technologies for self-driving cars, digital warning systems and others. It has three Centers of Excellence in India, and others in the US, Europe, Brazil, and Asia-Pacific. Over the last four years, its revenue has grown fivefold to USD 418 Mn, and its stock market valuation soared 12-fold to USD 4.9 Bn in early March.
Another Indian Tech Services firm, Persistent Systems, has become a digital engineering category killer of a different type. Its focus is on implementing commercial enterprise software of such companies as Microsoft, Google, and Salesforce. The company began life in 1990 in Pune, doing software product development for Microsoft. But it was a slow path to growth; six years later, revenue was only USD 220,000 and it had only 25 employees. But the growth light went on after the 9/11 terrorist attacks. To survive, Persistent believed it had to shift from being a product supplier to Microsoft to installing Microsoft products at other companies – i.e., be a Microsoft Solutions Provider.
That strategy worked fabulously. By 2003, Persistent’s revenue was USD 10 Mn. The company set up offices in the US and Scotland to expand its customer base. Fast forward 20 years and Persistent has grown into a USD 1 Bn revenue company with a market cap of USD 7.7 Bn. It got there because it brought its deep digital expertise in implementing commercial enterprise software to sectors that heavily depend on it, including Telecom, Healthcare, and Life Sciences.
To become a digital engineering category killer, Indian Tech Services firms will need to weave together all the expertise necessary to provide a superior offering: business process consulting, deep technology knowledge, systems integration expertise, and training to get customers’ employees (or the customers’ customers themselves) to embrace a new system.
The skills of such digital engineering category killers as Persistent and KPIT are in extremely high demand – even in industries such as Automotive, Financial Services, Aerospace, and Life Sciences that have been building their own GCCs in India.
As they watch customers build more and more GCCs, Tech Services companies need to realize that even these GCCs can be their customers. Many are actively outsourcing such activities as managing aging systems and non-core operations that depend on technology (e.g., procurement and benefits administration). Some outsourcing companies are even helping clients set up GCCs.
What’s more, even though GCCs have evolved significantly, many still lack sophistication; they focus on low-level corporate tasks. We would not be surprised if some multinational companies sell their GCCs to Tech Services companies. We have seen this happen, and we expect it to accelerate.
Seeing the bigger demand-supply picture of digital talent should lead to much more beneficial business relationships between multinationals. They will need each other to handle the coming crush of work in digitalizing products and processes.
However, that won’t be enough. If both sides want to hold onto their talent, they will need to develop better leaders to manage them. Highly effective leaders of digital engineering centers are in huge demand and short supply. The Tech Services firms have an advantage. Since digital engineering is their core offering, their digital talent can more easily advance to the top levels of the company. This isn’t as easy in pharmas, auto manufacturers and other companies that don’t sell software to customers. Career advancement may be more difficult in these firms.
As a result, Tech Services firms must now focus on creating great leaders to oversee their India operations. Over the last two decades, most Indian Tech Services firms relocated their top leaders to be close to their customers in the US and Europe. They kept their delivery operations managers in India. This won’t help them get more business from customers that have set up GCCs in India. With strong leaders in India, Tech Services firms can build deeper relationships with clients that have set up their own GCCs. That, in turn, should result in a deeper understanding of their needs and new services offering that meet them.
All in all, Indian Tech Services firms could view the specter of customers setting up their own digital engineering centers in India as a threat. Likewise, multinational companies with Indian GCCs may think they no longer need Tech Services firms. But the savvier Tech Services and multinational companies know it’s not a zero-sum game. The ones that work closely together over the rest of the decade will seize opportunities that are out of reach for those that look at each other as the enemy.
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