Global Capability Centers in India Continue to Flourish

In their original iteration in the 1990s, GCCs (then known as “offshore captive centers”) primarily served as cost-saving centers to deliver routine IT and business process services to the company as an alternative to outsourcing. In recent years, GCCs have been moving up the value chain as a result of the global trend towards the adoption of advanced digital technologies, such as artificial intelligence (AI), data analytics, automation, cloud computing, social media and the Internet of Things (IoT). Indian GCCs are well positioned to take advantage of this trend with approximately 80,000 - 85,000 digitally skilled graduates each year and a 30 percent year-over-year growth rate in digital talent, as noted in the Deloitte/Nasscom report.

Business Case for Indian GCCs

The business case for Indian GCCs can be compelling:

Talent: As noted above, India has a very large pool of highly skilled IT resources with advanced digital capabilities. GCCs allow companies to recruit qualified individuals who are the right match for the company’s culture and business needs and align them to the standards of the company and its objectives. GCCs are attractive to top talent in India for several reasons, including the cache of working for global brands, the opportunity to develop deep industry and company-specific knowledge, and the ability to engage in challenging and innovative work.

Agility: Speed and agility are critical with digital technologies. A company’s digital operations are fast paced and require high levels of interactivity and collaboration. As an internal shared services organization within the company, GCCs provide the control, confidentiality and transparency required to quickly adapt to the priorities of the business and facilitate speed-to-market with digital technologies.

Business Alignment: GCCs offer an opportunity to build an internal team of highly talented and motivated employees who are intimately familiar with the company’s business and aligned with the company’s culture. In contrast, third-party service providers have competing interests because they focus on enhancing their own revenue and profits.

Risk Mitigation: Data analytics and other digital technologies that drive revenue growth and profitability for the company represent valuable intellectual property. As an internal shared services organization, value created by the GCC remains within the company. GCCs also reduce the risk of leakage of confidential data, trade secrets and know-how.

Indian Startup Ecosystem: There is a burgeoning ecosystem of innovative startups in India with which GCCs can collaborate. The Deloitte/Nasscom report noted that there are approximately 40,000 active startups in India, with about 12,500 in the technology sector and more than 2,100 in AI, IoT and other “deep tech” fields. The report also found that over 135 global organizations have investments in and collaborate with these start-ups. Accelerator programs and hackathons can provide opportunities for GCCs to tap into the Indian start-up community.

Cost Savings: The favorable cost arbitrage between labor rates in the United States and Europe and labor rates for similarly qualified employees in India can provide substantial multi-year cost savings. For large companies, savings can be in the hundreds of millions of dollars.

Establishing a GCC in India

With a 30+ year track record and the growth of a robust ecosystem, establishing a GCC is no longer viewed as a high-risk business strategy. It is much easier to set up GCCs than in the past because the infrastructure, including first-class office parks, supply chains and communication lines, has matured. There are established service providers in India with substantial experience in setting up GCCs that can help companies navigate the local market for real estate and talent and provide a wide range of services supporting the operation of a GCC.

Some companies set up and manage GCC operations themselves under a “do-it-yourself” (DIY) model and only retain local experts in India for discrete tasks (e.g., legal, tax, accounting, leasing, talent acquisition and human resources). However, that approach carries the risk of failing to identify and encountering unanticipated local issues due to a lack of relevant experience in, and understanding of, the regulatory regime and culture in India.

To mitigate that risk, many companies engage an experienced service partner to set up, manage and operate their GCC under a Build-Operate-Transfer (BOT) model or a variation thereof. Under a BOT model, a service partner is engaged to perform these services for an agreed-upon term of years. Operations and (where applicable) ownership rights are transferred at the end of the term after the company has hired sufficient local resources and gained the requisite local expertise to operate the GCC on its own.

BOTs offer several potential advantages, including accelerated timeframes for establishing the GCC, experienced management of the GCC, ability to leverage local knowledge and relationships of the service partner, access to talent in India, and the service partner’s knowledge of the regulatory environment and local practices. However, these advantages come at a cost. In addition to being compensated on a fee-for-service basis for ongoing services, the service partner will likely negotiate a substantial pay-out at the end of the term based on GCC cost savings and performance metrics. This back-end pay-out is beneficial in aligning the interests of both parties in the success of the GCC, but it can have a material impact on overall cost savings.

Under either a DIY or a BOT model, setting up a GCC requires careful planning and execution. There are many interrelated corporate, tax, regulatory, commercial, operational and contractual issues that need to be addressed, including the following:

GCC Legal Entity: GCCs are commonly organized in India as either a Private Limited Company (PLC) or an Indian Limited Liability Partnership (LLP). A PLC offers the advantages of (1) a well-developed body of corporate law, (2) established ways to bring in additional investment through External Commercial Borrowing (ECB), and (3) tested ways to deal with operational matters. An LLP provides certain tax advantages, such as avoidance of Indian dividends distribution taxes and easier repatriation of profits, but it is a relatively new type of legal entity without a well-established body of case law in India or tested ways to deal with operational matters. The relative importance of tax and corporate considerations should be weighed in selecting the most suitable legal entity for the GCC.

Tax Considerations: Setting up a GCC requires careful tax planning that takes into account both domestic and international tax laws and foreign exchange requirements. In addition to the tax implications associated with the choice of legal entity for the GCC:

• Companies need to determine the appropriate entities within their corporate family from a tax standpoint to contribute capital to, hold ownership interests in, and receive repatriation of profits earned by, the GCC.
• Charges for the services provided by the GCC to the company and its affiliates need to comply with transfer pricing requirements under OECD Transfer Pricing Guidelines, as well as domestic and Indian tax laws. Among other things, consideration should be given to potential excess accumulations of profits within the GCC as a result of transfer pricing markups.
• Special Economic Zones (SEZ) in India provide substantial tax and economic benefits, including zero ratings and exemptions from various taxes and duties. Companies will need to carefully manage the approval process and ongoing compliance obligations to realize the benefits of SEZ status.

Human Resources: The caliber of personnel hired by the GCC will play a critical role in the value the GCC brings to the company. Accordingly, companies would be well advised to engage a talent acquisition firm in India that has a strong track record of recruiting top-tier talent in India for their clients. In offering employment to and hiring candidates, companies should be aware that employment laws and practices are very different in India than in the U.S. or Europe. For example, there is no concept of an “at will” employee in India, and employment contracts are the norm. In addition, it is important to avoid exposing the company to claims from disgruntled GCC employees.

Facilities: Some companies have experienced challenges in securing desirable office space to accommodate growth in their GCCs. Companies leasing space should therefore consider obtaining expansion options into contiguous space, as well as long-term extension options on favorable terms. Companies would be well advised to seek market information on rent rates, security deposits, escalations, operating expenses, local taxes and other charges and lease conditions from local experts. In some BOT models, the services provided by the service partner may include the provision of office space that scales up and down with GCC headcount. This approach avoids the need to enter into a long-term lease for a fixed amount of space that may not be needed during the early stages of operations.

International Trade Regulations: Services provided by the GCC to the company and its affiliates will likely involve the export of technology to and from India. A compliance program should be in place to review all software and other technology prior to export (or deemed export) to identify any necessary export licenses or other actions required to be taken. In addition, consideration should be given to implementing a compliance program for the Foreign Corrupt Practices Act and securing contractual commitments from counterparties to comply with all applicable regulatory requirements.

BOT Issues: For companies setting up a GCC under a Build-Operate-Transfer model, there are a host of contractual issues to address with their service partner. Among other things:

• Companies should make sure that the relevant agreements give them control over decisions impacting the GCC, including GCC hiring decisions and the type and volume of work to be performed by the GCC. Companies should also consider their future needs and retain the contractual flexibility to materially alter the business plan and objectives of the GCC, if necessary.
• Service partners often use special purpose vehicles (SPVs) in connection with GCC joint ventures. SPVs typically have no assets other than the service partner’s equity interest in the GCC. As a result, it is important to secure appropriate guaranties of SPV obligations from parent companies or principals to satisfy the obligations and liabilities of the SPV.
• The terms, process and triggers for transferring operations and, as applicable, ownership interests in the GCC from the BOT service partner to the company should be spelled out with clarity and in detail in the applicable contract documents. Failure to do so could lead to disputes, including claims by the service provider for additional compensation.

Conclusion

As reflected in the robust growth numbers, there is a strong business case for Indian GCCs that is being heard loud and clear by business executives across a broad spectrum of industries and geographies. While setting up a GCC is easier than at any time in the past, there are numerous legal, regulatory, tax and other considerations that need to be addressed in doing so. Companies considering the possibility of establishing GCCs would be well advised to seek guidance from experienced advisors.