Global inhouse centers (GICs) are service delivery operations that are typically located in low-cost geographies, and they are owned and operated by the same company that receives the services. In other words, GICs are not outsourcing to a third party.
However, the GIC landscape is enduring a massive transformational journey. GICs are no longer the low-cost centers catering to transactional and mundane repetitive tasks for the parent company to leverage cost arbitrage.
The digitization of the world has allowed global inhouse centers to grow and expand their services from business process delivery to strategic IT and R&D/engineering services.
The key reason this change was able to take place is because of the skilled talent pool and supportive ecosystem that encourages growth – making it the perfect environment for GICs to thrive.
They are maturing into Innovation Centers, Centers of Excellence, and Program Management Offices that anchor strategic initiatives and numerous value-added services for the parent organization – as they vie for a bigger share in India’s digitization growth story.
GICs play a vital role in an organization’s value chain and are thus a worthwhile investment for companies looking to expand their operations rapidly.
A GIC, or global inhouse center, is a type of offshore service that has seen a 25 percent growth in popularity (and revenue, amounting to US$38–42 billion) in recent years.
By investing in a GIC, businesses can strategically position themselves in regions that offer the most potential for expansion.
GICs were initially set up to access new talent pools, but over the years, GICs have brought in other ecosystems and value-added benefits.
Here’s a short guide on creating and building an efficient global inhouse center, considering future growth expectations from such bodies.
Key Considerations in Building Global Inhouse Centers
The six key priorities that GICs must focus on over the next three to five years in order to become future-oriented are as follows:
- business accountability,
- becoming a world-class talent hub,
- placing digital IT at the center of the organization while ensuring traditional IT is ready for digital,
- becoming a data and analytics center of excellence,
- driving sustained cost excellence and adopting agile ways of working.
When setting up a GIC, it’s important to plan and execute carefully. There are many different issues that need to be addressed, including corporate, tax, regulatory, commercial, operational, and contractual ones.
All of these issues are interrelated, so it’s important to make sure that all of them are considered when making decisions about your global inhouse center.
Experienced local counsel who are familiar with India’s legal requirements and practices are essential to navigating the country’s business landscape. India has a variety of laws and regulations that can influence businesses, for example real estate and zoning laws, employment rules, corporate and partnership laws, intellectual property and data privacy laws, licensing requirements, and good citizenship rules.
Local counsel can be very helpful in guiding companies through the regulatory approval process in India and avoiding costly mistakes.
In order to ensure that India-specific issues are aligned with the broader commercial, legal and contractual framework for the global inhouse center and the enterprise, company counsel in the U.S./Europe should work closely with local counsel in India. This close working relationship will help to ensure that all issues are considered and addressed in a timely and effective manner.
Setting up a global inhouse center can be a complex task that requires careful tax planning and consideration of domestic and international tax laws as well as foreign exchange requirements.
From a tax standpoint, companies need to determine the appropriate entities within their corporate family to contribute capital to, hold ownership interests in, and receive repatriation of profits earned by the global inhouse center.
Charges for the services provided by the GIC to the company and its affiliates must comply with transfer pricing requirements under OECD Transfer Pricing Guidelines and domestic and Indian tax laws. Among other things, consideration should be given to potential excess accumulations of profits within the GIC due to transfer pricing markups.
The quality of the employees hired by the GIC will be instrumental in the value that the GIC brings to the enterprise company. Therefore, it would be in the company’s best interest to consult with a talent acquisition firm in India that has a strong history of recruiting first-rate talent in India for other clients. When extending job offers and hiring candidates, companies should be cognizant of the fact that employment laws and procedures vary greatly in India as compared to the United States or European countries.
For example, in India, there is no concept of an “at will” employee, and employment contracts are the norm. Companies should also take appropriate steps to mitigate the risk of dual employment claims made against both the GIC and its deeper pocket parent companies.
Many companies have had trouble securing good office space to house their growing GIC businesses. If your company leases space, make sure to get options for expanding into contiguous space, and get favorable terms for long-term extensions.
It’s important for companies to understand that the commercial terms of leases in Asia are not the same as they are in the U.S. or Europe.
To avoid misunderstandings or problems down the road, it’s crucial to seek out market information on rental rates, escalations, operating expenses, local taxes, and other charges and lease conditions from local experts who are familiar with the area.
International Trade Regulations
Services provided by the GIC to the company and its affiliates will likely involve exporting technology to and from India. A compliance program should be in place to review all software and other technology before export (or deemed export) to identify any necessary export licenses or actions required.
In addition, consideration should be given to other applicable laws, regulations, and compliance requirements, such as the Foreign Corrupt Practices Act, and securing contractual commitments from counterparties to comply with them.
With digital technologies becoming more disruptive and complex, it’s important for businesses to rethink their strategies. Next-generation GICs offer a great opportunity for companies to stay ahead of the curve and be successful.
While the talent pool in low-cost India is certainly attractive to companies, success is not guaranteed. GICs require careful planning and execution, including the commitment of resources and an understanding of the unique requirements in India, in order to realize their potential.