Paradox Of GBS / GIC Marketplace Due To COVID-19 Crisis

American politician Rahm Emanuel advised, “You never want a serious crisis to go to waste.” As companies begin to exit the COVID-19 crisis, they look at the business world through new eyes. In a recession, they need to reduce costs. Further, most employees now work from home. Together, these factors, forced by the pandemic, cause boards of directors and CXOs to ask, “How can we operate as a leaner, more competitive company structurally?” But they look at more than how to operate more cost effectively. They look at how they can add more strategic value in their operations.

One way to achieve those objectives is to build out and create more value (beyond cost reduction) in their Global Business Service (GBS) units and Global In-house Centers (GICs), the offshore component of a GBS.

Over the years, GBS units and GICs proved their ability to perform simple labor arbitrage-based tasks. To create new value, they need to take over end-to-end processes and functions. They were on this trajectory for a while; but change management challenges and issues of changes within their parent organizations restricted their ability to move beyond a slow, incremental trajectory.

Balance Sheet Clean-up Actions

I expect paradoxical activities will happen in the GBS / GIC marketplace over the next six months. I blogged before about the COVID-19 crisis causing companies to undertake contradictory actions. Everything is on the table, all at the same time. We will see companies building more units and divesting some.

As we exit the COVID-19 crisis, I expect the number of GICs and GBS carve-outs to increase by perhaps as much as fivefold.

Why so many carve-outs? As companies reassess their operations in the recession environment, they want to clean up their balance sheets. Additionally, some GICs and GBS units struggled with the crisis work-from-home model. Consequently, they lost credibility with their parent organizations and are now vulnerable to carve-out opportunities. I believe some companies will chose to divest some or all of their units.

I also believe some companies will use the crisis to consolidate their footprints. Over the past few years as GBS units and GICs evolved, they sprawled to locations in India, the Philippines, Eastern Europe, Central America, and China. The crisis now gives them an opportunity to double down on the Philippines and India and divest their positions in sub-scale areas.

It is important to realize that valuations for these organizations will be substantially lower than the sky-high valuations prior to the crisis. However, given the liquidity in the market, it is unlikely the fall in valuations will be as low as in the 2008-2009 economic crisis.

There are plenty of potential buyers, especially if the GBS center or GIC has a commitment for ongoing work, and the valuation is reasonable. The Indian firms, which have strong balance sheets and plenty of capacity to go after these acquisitions, will especially look for units that offer market share and new markets as well as help position themselves to gain digital market share.

Hence, GBS units and GICs that have intellectual property or digital platforms will be of interest, even though the price for these acquisitions likely will be higher. Private equity will vigorously compete for these assets too.

GBS / GIC Build Outs

At the same time as companies engage in carve-outs or divestitures over the next few months, I believe we will see companies create more GICs and larger GICs.

The barrier to doing this earlier was that they were too expensive and difficult to establish. The risk was too significant. Large, sophisticated companies set up their own GICs, but most companies had to turn to third-party service providers with a scale of thousands of employees. This drove Indian service providers to emerge as the champions of this new model.

But the world changed, and GICs matured. The cost to set up a site in India and the Philippines dropped dramatically. The cost now makes sense; even if a company builds one for just 50-100 seats, it creates $2-$4 million EBIT benefit to the bottom line. It is compelling at that size. And it takes only 12-18 months to set up a GIC offshore. It costs $1-$2 million to create, and the return is very quick.

Companies can set up their own GICs now because the risk dropped as well as the cost. Management teams and attorneys are available. Governments are amenable. Tax laws are well understood. Facilities are easily rented and very available. Techniques for managing a GIC tested successfully.

The processes and techniques to establish a GIC are widely understood. The risk dropped and cost dropped. They are compelling.  

The Great News

As I pointed out at the beginning of this blog, the good news is companies have an opportunity to build on the COVID-19 crisis and use GBS units and GICs to help them operate more cost effectively and add more strategic value in their operations. The great news is the crisis will enable them to accelerate what would otherwise be a five- to seven-year journey in just six to nine months.