PERSPECTIVES
AI dictating a radical shift
in the IT outsourcing industry
AI will disrupt the traditional model based on labor arbitrage and large offshore workforces. In this article, Geert Hendrickx from S-Square looks at the impact of AI on the service providers and the way ahead for the CIO.
The era of IT outsourcing and offshoring
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The IT outsourcing industry has evolved over the past four decades, with offshore outsourcing becoming a significant trend as of the 1990s. Labor arbitrage and globalization were the drivers. Access to talent has also been a key driver, particularly for regions like Europe, where attracting skilled IT professionals has become increasingly difficult.
The Global Delivery Network (GDN) has offered numerous advantages including flexibility to scale resources, 24*7 coverage, ability to deploy and support global solutions, and all of this at an optimized cost. Outsourcing and offshoring have become the norm. Today most of the global IT service providers have over half of their global workforce in India!
While many clients have benefitted from this model, others have raised concerns about the productivity from offshore teams. In recent years, cloud technologies have tested the limits of the traditional offshore model. Success in cloud transformation is driven more by talent and experience than by sheer quantity of people. While some IT service providers have succeeded in helping clients navigate the complexities of the cloud journey, others have failed to meet client expectations due to a lack of experience with cloud technologies.
The traditional model of adding more capacity will not hold. Instead success will depend on “reversed pyramids” – focusing on brains rather than bodies, and reorienting to an AI enabled workforce.
AI - The ultimate test for the IT outsourcing industry​
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AI will fundamentally transform the IT outsourcing industry in the coming decade: labor will become less relevant as AI can perform many tasks more efficiently, without the need for as much human labor. The global IT service providers will be in the eye of
the storm.
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IT Managed Services will see a massive productivity improvement from AI. Software development will be rapidly automated. According to our recent AI survey (see next article), the areas with the biggest impact on IT service delivery include virtual assistants & chatbots, and code generation & debugging. Five year IT services contracts could see productivity of 40% or more.
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But it all depends on the adoption of AI by each individual in these giant firms in their day to day job. That is a tremendous change management task: workforce training, enabling people with the right tools, enforcing and measuring AI adoption, and executive sponsorship across the firm. To help clients achieve results from AI, top-talent needs to be developed in roles such as architects, data scientists, LLM trainers, and prompt engineers.
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These changes can significantly disrupt the current landscape of IT service providers. The traditional model of adding more capacity (headcount) will not hold. Instead, success will depend on “reversed pyramids” – focusing on brains rather than bodies, and reorienting to an AI enabled workforce. This will also require investment in AI assets and deep partnerships with the technology firms. The winners of today might not be the winners of tomorrow.
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The task ahead for the CIO
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Some words for the CIOs in navigating this very interesting period:
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Just like the global IT service providers need to undergo a massive change and capability upgrade with AI, also you as a CIO will need change management within your IT workforce and your business community: reskilling, enabling them with carefully chosen tools, and enforce and measure the adoption.
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Within the rapidly changing landscape of technology companies, solutions and global and local IT service providers, be sure to make the right choices and form successful partnerships
That will set you up right to fully AI-enable your IT services towards the business, plus help the business transform themselves with AI.
The transformative role of AI
in IT Service Delivery (Survey)
The Survey: Impact of AI on productivity in IT delivery​
GenAI will transform the way IT services are delivered. With its ability to generate code, answer user queries, and perform human-like tasks GenAI is unlocking transformative productivity. Productivity commitments from service providers linked to automation and continuous improvements typically were in the range of ~25-30% over a five-year period. As part of our Partnership Benchmark survey, we set out to examine the potential impact of AI on IT managed services delivery.
Methodology:
In Q4 2024 we asked IT service providers participating in our Partnership Benchmark to assess the impact of AI on IT productivity across different functions including Service Desk, Workplace, Cloud & infrastructure, Applications Development and Support, and Security. The following questions were asked:
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What % productivity gains did you typically factor into your IT services proposals over a 5-year contract due to automation, continuous improvement and other levers, before the application of AI/GenAI?
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What % productivity gains do you now factor into your IT services proposals now over a 5-year period, with AI/GenAI infused IT service delivery?
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What are the activities (IT tasks) where you believe AI/GenAI will have the biggest impact on productivity? Please rank them.
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Over the next five years, what impact do you anticipate AI-enriched IT service delivery will have on the "business and user experience with IT"?
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11 of the leading global and European IT service providers have completed the survey.
Overall Results: Impact on Productivity in IT service delivery
The below graph shows the difference between committed 5-year productivity with and without AI/Gen AI by different IT functions. There is a marked increase of close to 20% additional productivity due to AI/GenAI.
Figure 1: AI Impact on IT productivity
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The largest impact due to AI/Gen AI seems to be in the areas of Service desk and Digital Workplace where the productivity figures are being doubled. In terms of overall productivity, the leading areas are Applications Development (43%), Application Maintenance (42%) and Service Desk (42%).
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Next, we delve into the aspects that drive this productivity per domain.
Application Services
Below are the top ranked areas based on expected magnitude of impact due to GenAI.
Figure 2: Top ranked activities in application services
AI has democratized coding; it is now possible to describe functionality in natural language and get the translated code. AI powered development platforms allow creation of applications through drag and drop interfaces. AI assistance can be leveraged across application lifecycle including user story generation, coding, debugging and testing. The ability to migrate legacy code to cloud-native architecture using AI will unlock new revenue streams in the coming years. Additionally, transitioning older applications without documentation will not be as challenging as it once was.
Service Desk
Below are the top-ranked areas based on expected magnitude of impact due to GenAI.
Figure 3: Top-ranked activities in Service desk
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Service Desk is one of the most significantly impacted domains by GenAI. We expect ssignificant productivity gains and notable improvement in user experience. Two distinct themes emerge: Autonomous AI (e.g. users finding solutions through virtual agents) and Assisted AI (agents leveraging AI for faster issue resolution). As AI agents mature to handle more complex requests "shift-left" is accelerated. However, adoption will be driven not only by technology but also human resistance (the lack of).
Workplace Services
Below are the top ranked areas based on expected magnitude of impact due to GenAI.
Figure 4: Top ranked activities in Workplace​
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AI will transform workplace services - enhancing user experience, boosting productivity, and fostering seamless collaboration. AI-driven updates ensure compliance and improve system reliability. User experience is further enhanced through AI-powered digital experience monitoring tools that provide real-time actionable insights into device usage. With Copilot integration into Office 365, AI is now embedded in everyday apps, making tasks like preparing meeting notes, drafting emails, and finding content in OneDrive effortless and more efficient.
Cloud and Infrastructure
Below are the top ranked areas based on expected magnitude of impact due to GenAI.
Figure 5: Top ranked activities in Cloud & Infra​
AIOps is leading automation of cloud operations including monitoring, provisioning, migration, optimization and security. AIOps when infused with managed service data such as logs can be useful to recognize patterns and formulate responses. Common cloud monitoring services such as AWS cloud watch or Azure monitor are already powered by AI. AI enables users to search log data using a few prompts without knowledge of queries or scripts.
Cybersecurity
Below are the top ranked areas based on expected magnitude of impact due to GenAI.
Figure 6: Top ranked activities in Cybersecurity
AI is revolutionizing the cybersecurity landscape. AI-solutions are being deployed in many areas including automated threat detection and mitigation, prevention of phishing and malware, improving response times, and analyzing large volumes of data to identify risks and vulnerabilities. Identification of unusual activity in logs and traffic is a classic use case for AI, since it is good at pattern recognition. Similarly, AI is used in code scanning to identify code vulnerabilities. Security surveillance demands 24/7 alertness, AI agents can perform these tasks without any fatigue securing mission critical systems round the clock.
The way forward
Enterprise software companies such as Salesforce, SAP and ServiceNow are infusing AI into their core offerings. At the same time, IT service providers are also developing AI platforms that provide tools, frameworks and infrastructure for implementation of AI use cases. Every CIO will need to define his/her own AI strategy and roadmap including the selection/orchestration of AI platforms and definition of business use cases.
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Human adoption rather than technical limitations will be the determining factor for the success of any AI program. Leadership commitment, change management and training are prerequisites to speed up the deployment of AI uses cases in IT operations (e.g. some companies have enforced rules – you can’t talk to human agents before trying out virtual agent).
Background – the rapid evolution of AI technology
Since the introduction of GPT-3 a large language model (LLM) by OpenAI in 2020, Generative AI has advanced at accelerated pace, consistently breaching the boundaries of cognitive capabilities. Each year new breakthroughs have been made that redefine what AI can achieve. For instance, the latest GPT-4 model processes token sizes 8X larger than its predecessor, enabling enhanced language processing capabilities, superior analytical and forecasting abilities, more nuanced content generation and improved accuracy,
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As advancements in GPA, NLP and computer vision continue AI models are becoming more and more capable. Claude 3, an advanced language model developed by Anthropic, demonstrated its precision by excelling in the 'needle in a haystack' test—a challenge designed to evaluate how well AI can isolate specific information in dense text. Alongside text to image generators have enabled designers to rapidly generate AI images.
In 2024, AI capabilities took center stage, fueling creativity like never before. Consumers have been using AI tools to create images and video based on a few text prompts. Synthesize content and real-time text to speech translation are other prominent usecases.
In business AI use cases are being deployed gradually, example leading e-commerce platforms use AI to auto generate product catalogs, law firms are learning to use GenAI to research, draft and review contracts. But it is early days, as the AI adoption increase we are likely to see transformative productivity gains in the coming years.
Rise of Global Capability Centers (GCCs)
In 2024, there was a noticeable increase in the establishment and expansion of Global Capability Centers (GCCs), with India emerging as one of the key hubs for these operations. Many European companies like Sanofi, H&M and NXP semiconductors have had their GCCs in India for years. Banks like BNP Paribas, KBC and ING have long operated GCCs at both nearshore and offshore.
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While the trend around GCCs is very cyclical, this year we heard many new names taking this route. Proximus, one of the first companies in Belgium to adopt structural offshoring and one of the largest outsourcing clients in Belgium also announced that they were looking to setup a GCC. Such was the buzz around GCCs, that CEOs of leading IT firms were forced to clarify their position and response towards analysts.
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In this article, Sunil Basavaiah of S-Square looks at the GCC evolution in India, the different GCC models, and the advantages and challenges when going this route.
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GCC evolution in India
The journey of GCCs in India can be traced back to the 90s. The first wave of captives was driven mostly by technology companies. Texas Instruments established its R&D center in Bangalore that focussed on semiconductor design and engineering. Later companies such as GE, Intel, Motorola and Cisco setup their respective technology centers.
The decade of 2000s saw growth of GCCs mainly propelled by availability of vast talent pool and cost arbitrage. Many companies’ setup captive centers which focussed mostly on IT support and business operations. During this period many of units acted as back-office processors covering functions such as finance, HR and procurement.
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Moving ahead, the decade of 2010s saw maturing of these offshore units, they started to perform complex functions and have established themselves as engines of innovation. GCCs strengthened capabilities in full-stack development, cloud transformation, data analytics driving high value work.
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2020 onwards GCCs have started to function as extended arm of their onsite units. GCC units have moved up the value chain. Today, they have assumed end-to-end ownership in key areas including research & development, product development and digital transformation. Successful GCCs have managed to promote GCC talent to global roles.
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The number of GCCs have been steadily increasing over the last 5 years. As per Nasscom-Zinnov India GCC landscape report, there are 1700 GCCs in India. From 2019 to 2024 number of GCCs in India have grown at a pace of 32% (similar trend for European companies). The overall GCC headcount is estimated to be 1.9mn. Q2 of 2024 saw GCC recruiting surpass that from IT service companies. GCC revenue in India stood at USD 65bn in 2024. Such is their scale, that they represent 30% of all leased space in the country.
Key considerations to establish GCCs
One might wonder why companies take the effort of setting up an offshore GCC unit when similar outcomes can be achieved by outsourcing work to a global IT provider? Below are some key considerations to take into account.
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Control
Cost
Talent
Competence
Expertise
Set-up time / Scalability
Risk
Global Capability Center
High degree of control. Fully owned and governed
High initial investment, long-term ROI
Retain talent by offering long term career
Work is of strategic importance e.g. Intellectual Property
Processes and tooling aligned to parent company
Longer (1-2 years), gradual scalability
High risk and impact in case of failure
Outsourced IT Providers
Moderate control, governed by SLAs and contracts.
Low upfront costs, operational expense
Long term talent retention less critical
Non-core or non-differentiating work
Global standards and best practices, cross-industry expertise
Quick (3-6 months), rapid scalability
Low risk and higher flexibility
There are 3 distinct models to establish and operate GCCs
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Captive Centers: Fully owned and operated by the parent company. The parent grows the GCC unit independently. This model enables the parent company to retain total control over the GCC operations.
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Joint Venture: A partnership is stitched between the parent company and local partner. In this model risks and investments are shared between both partners. The partner brings local expertise and accelerates speed to market.
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Build-operate-transfer: A local party sets up, operates and later transfers the ownership to the parent company. This model is used to minimise risk by relying on a local partner with know-how to setup operations and later transition complete ownership.
Advantages and Challenges
GCCs offer a lot of benefits around developing niche competence, protecting core IP, knowledge retention, maintaining a strong company culture, internal acceptability, and ability to orchestrate end to end solutions across business functions (e.g. finance, HR).
However, sustaining and maturing the GCC is not without its challenges.
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Lack of flexibility: A GCC is a long-term strategic commitment. GCCs cannot be easily scaled up or down to reflect business fluctuations, as you can do with external contracts.
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Talent Acquisition: GCCs are faced with lower brand recognition compared to local IT service companies. It is challenging to attract and retain top talent - GCCs need to pay salary premiums and higher annual hikes.
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Career progression: The Indian IT service industry is characterized by frequent promotions and role changes, which are needed to retain top talent. This is more challenging in a GCC environment with smaller scale and different role expectations.
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Cross functional: To be really effective, a GCC must offer an integrated and harmonized shared service capability not just in IT, but across multiple domains such as finance and HR.
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Way forward
While GCCs offers great value to global companies not just in terms of cost or scale but also in driving innovation, there are challenges to be overcome in setting and scaling up the units. Nevertheless, they will be a vital part of the overall equation. Here are some emerging trends that we notice:
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Hybrid mode: Global companies operating GCCs in tandem with a local partner (e.g. IT providers). Work is distributed between both parties based on their core capabilities. As an example, GCCs can be handling upstream work such as architecture and design while the IT providers deliver downstream work such as development.
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Alternate destinations: Poland, Vietnam and Mexico are emerging as alternatives to India and Philippines. Poland and other central-eastern European destinations like Romania offer better cultural fit and nearshore advantage.
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Global roles: With growing maturing of GCCs and advancements in technology we will also see global roles emerging out of GCCs. Ownership of global platforms such as SAP is led by GCC units.
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Collaboration: Leading GCCs are pursuing innovation by collaborating with offshore start-ups. Jointly they are driving innovation and research.