COVID-19: Transforming Offshore Captives/Global Innovation Centers

The Peepal GIC Report for 2018 counted approximately 1,100 GICs in India employing more than 800,000 individuals and generating approximately $23 billion in revenue. According to Jochelle Mendonca in The Economic Times on April 14, 2020, “over 75 global companies set up new centers or expanded their offices in India [in 2019] as they tapped local talent with skills in newer areas such as digital and analytics.” GICs have been growing at a faster pace than the broader outsourcing industry for many years, but COVID-19 is forcing organizations to re-evaluate their sourcing strategies.

We reached out to Sachin Kulkarni¹ and Vinayak Sastri² at IBM to seek their insights into the near and long-term implications of the global pandemic on GICs. IBM provides a wide range of service offerings and engagement models for clients with GICs and is working with them to meet the challenges of COVID-19.³ As reflected in their responses below, Sachin and Vinayak view the global pandemic as a “Black Swan event” that will have a major impact on GICs.

1.  What steps have GICs been taking to manage the impact of the pandemic?

Sachin and Vinayak have seen the following steps taken to ensure business continuity, data security and employee safety:

Infrastructure

• Ensuring the availability of the underlying infrastructure and upgrading it to boost capacity, speed and reliability
• Providing reliable laptops, desktops, mobile devices and Wi-Fi access points for remote connectivity

Security

• Implementing security measures and protocols (including for VPNs and dedicated VDI secure networks) to prevent unauthorized access, transmission or loss of sensitive data
• Cybersecurity upgrades and updated anti-virus software for all devices connected to the network

People

• Greater support for employees working remotely to improve effectiveness and collaboration
• Regular communications with employees to improve morale and provide timely information
• Regular communications with customers, clients and partners to instill confidence in business operations and safety

2.  How will GICs reopen facilities as lockdown restrictions are lifted?

Sachin and Vinayak have identified the following:

• A phased return to the workplace: Phase 1 – “essential core” personnel; Phase 2 – “essential auxiliary” personnel; and Phase 3 – “the rest”
• Prioritization of hygiene and cleanliness, including the use of sanitizers, masks and other PPE, onsite medical screening before entry
• Adoption of temporary measures, including visitor screening, temperature checks, hands-free access, food delivery to individuals (in lieu of cafeterias) and staggered entries and exits
• Facilities will be used and configured differently, including the use of space for collaboration or engagement activities and the conversion of space to permit social distancing
• Implementation of local health and safety regulations, which will evolve globally over the next 12-to-18 months—compliance measures will take into account cost, corporate values and culture
• Retention of existing seats where large investments have been made; creative use of office space for brainstorming, product design or team engagement activities; giving up nonessential seats to create the space for social distancing

3.  How will GICs will change over time and will organizations prefer certain locations?

Sachin and Vinayak anticipate the following areas of focus:

• A re-evaluation of employee productivity at the office and at home, including a reconsideration of assumptions about a remote workforce (and the amount of office space needed)
• A sharper focus on key roles within the GIC (rather than broad functions) to support and create deeper areas of critical expertise
• A measured response to government pressure to preserve local employment and avoid lay-offs (e.g., in the USA, the UK and Australia)
• A preference for established locations with talent and infrastructure in place, including India, the Philippines, Eastern Europe and Mexico, over emerging locations which will be considered riskier
• A preference for established service providers and partners with a strong balance sheet; there will be a “flight to quality”
• Geographic diversity to ensure business continuity and disaster recovery

4.  Will the pandemic change perceptions about the desirability of GICs vs. outsourcing?

Sachin and Vinayak place organizations into one of three categories and anticipate that each will be revisiting its insourcing, co-sourcing and outsourcing strategy:

• Organizations in deeply impacted industries, such as retail, hospitality and aviation, will be focused on survival and the need to immediately reduce expenses and total cost of ownership—they may consider selling their GICs or entering into vendor partnerships for managed services (possibly with an option to take back control of the GIC in the future)
• Organizations in more moderately impacted industries, such as banking, consumer durables and electronics, will also want to preserve and optimize cash—they may explore a range of options, including joint ventures to receive an equity injection or develop co-sourced service offerings to transform the GIC or generate new revenue streams
• Organizations in less impacted industries, such as food, pharmaceuticals, collaborative IT and cloud, will look to grow their GICs in established locations through an OpEx model—they may consider entering into vendor partnerships that transform the GIC to bring greater agility and resilience to the organization

For each category of organization, final decisions will involve an evaluation of sourcing options to balance cost, risk, business continuity, security, agility and access to global talent and capabilities; established GICs may be evaluated differently than relatively new GICs.

5.  How will the pandemic affect the ability of GICs to retain and attract top talent?

Sachin and Vinayak make the following observations:

• Organizations in less impacted industries will have the advantage of being more likely to retain and attract top talent.
• Talent will be paying more attention to the financial condition of the organization, its perceived brand image, its industry (and the impact of the pandemic) and future career opportunities.
• In the short to medium term, increased unemployment and under-employment could mean that top talent is more available to GICs at lower compensation.

6.  What long-term impacts do you think the pandemic will have on GICs?

Sachin and Vinayak predict different impacts on different types of organizations:

First movers—organizations with a culture of working remotely and investing in collaboration tools and the Cloud, including seamless connectivity and 24 x 7 availability and help desk support, which have communicated proactively with their employees and customers

• First movers will look to upgrade their infrastructure and move deeper into transformation with their GICs, either by themselves or with vendor partners.

Middle-of-the-packers—organizations with an on-premises working culture (but with some experience with remote employees) and limited investments in collaboration tools and the cloud, which took longer to communicate with their employees and customers and required more help from partners

• Middle-of-the-packers will look to partner with vendors (and their infrastructure), optimize costs and build economies of scale and scope.

Late Adopters—organizations with little (if any) experience with remote employees and negligible investments in collaboration tools and the cloud, which took much longer to address challenges and now depend heavily on vendors (and their infrastructure and capabilities)

• Late adopters will look to lower their OpEx or secure an upfront payment to solve cashflow issues by divesting their GICs.

Overall, organizations will re-evaluate sourcing options to balance risk, access to global capability, cost, continuity of business, security, and business agility.

According to Sachin and Vinayak, when the dust settles, agile and resilient GICs could be the transformation engine for the organization in digital, analytics and other critical areas.

Pillsbury Observations:

The setting up of GICs involves thoughtful execution and planning to address many legal and compliance considerations, including international trade, corporate, tax, commercial, HR, real estate and operational matters under the laws applicable to both the organization and the GIC.

These considerations will also be critical when GICs are divested or transformed through vendor partnerships as a result of the pandemic. Experienced in-house, international and local counsel will need to work closely together to avoid costly missteps and to implement a legal strategy that achieves the business objectives of the organization.

For more information, please reach out to your regular Pillsbury contact or the authors of this Client Alert.

Pillsbury’s experienced multidisciplinary COVID-19 Task Force is closely monitoring the global threat of COVID-19 and providing real-time advice across industry sectors, drawing on the firm’s capabilities in crisis management, employment law, insurance recovery, real estate, supply chain management, cybersecurity, corporate and contracts law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 (Coronavirus) Resource Center.

^{1 Sachin is a Managing Partner and Global Transformation Centers (Captives) Leader at IBM.}

^{2 Vinayak is an Associate Partner and Shared Services Transformation Leader at IBM.}

^{3 IBM’s Global Transformation Center offerings include the following engagement models: Design-Build-Operate-Transfer and Virtual Captive (to accelerate clients’ time-to-value to build new GICs); and Evolve and Reinvent (to transform existing in-house centers into effective GICs). Please note that the responses from Sachin and Vinayak represent their individual views only.}