By Snehil Gambhir & Anuj Mandal
Capability and innovation hubs (CIH), often referred to as global capability centres or GCCs, have been integral to enterprise growth. As they continue to expand their service portfolio to include customer-facing operations and advanced technological capabilities, their significance is expected to increase substantially. Currently, the global in-sourced spending on capability hubs is estimated between $265 billion and $290 billion. By 2027, this is expected to rise to anywhere between $390 billion and $420 billion, expanding at a compound annual growth rate (CAGR) of 10%. India, in particular, is a significant capability hub hotspot with an expected 16% CAGR and spend of $117 billion by 2027.
However, despite the general growth trajectory of CIHs, many find it challenging to deliver substantial value to their enterprises. Certain key elements are required to be in place to help these hubs move up the value chain and transition from a transactional partner to a customer experience- and tech-focused centre. To unlock their full potential, four key elements must be addressed:
(a) Creating a forward-looking vision and mission: Articulating a compelling vision statement that highlights their contribution to organisational strategic goals is essential. Creating and disseminating a clear vision and mission can energise and motivate employees, guide decision-making, and provide a long-term outlook for the organisation. Despite its clear importance, a recent analysis of 10 capability hubs showed that only four had a well-defined vision statement, and five had a clearly articulated mission statement. The starting step in any CIH journey should be to establish a vision and mission that resonates with stakeholders and addresses three key aspects: Linkage to value creation, promotion of innovation, and drive towards transformation.
(b) Obtaining sponsorship from HQ: Leadership commitment and sponsorship are crucial to the success of a CIH. They help mitigate resistance to change and fosters a culture that embraces new processes and strategies, thus preventing marginalisation of the hub as a ‘stepchild’. Leadership buy-in from the top prompts an execution bias among the next level of leaders to follow the set road map beyond mere discussions. It also guarantees resource allocation and prioritisation, while consistent endorsement reassures and motivates executives that challenges will be addressed through a ‘one organisation’ approach. According to our recent study “Capability and Innovation Hubs – The Emerging Frontier”, only 48% of CIHs have attained greater autonomy in making strategic decisions and policies that significantly influence business outcomes, facilitated by headquarters’ sponsorship.
(c) Create and evolve an appropriate operating model: Establishing a CIH often impacts existing reporting lines, team structures, roles and responsibilities. This may cause concerns at the HQ about losing control and, subsequently, about maintaining quality. Generally, organisations choose between two operating models: a federated structure, where hub functions report to their respective business units, or an integrated structure, where all function heads report to the local hub head, who then reports to a global CXO, CXO-1 etc. In either choice, the model can be matrixed with dotted line reporting as well. The choice between these models requires careful consideration and is deeply tied to the culture of the organisation and who is the primary sponsor of the initiative. Models can also have the hub leader “double hat”. These Op models, also called landlord-tenant vs CoE model, or hosted vs embedded, are an important element, and the solution may be a mix of both.
(d) Ensuring the right employer value proposition (EVP) to attract and retain talent: Our analysis of Fortune 500 companies shows that approximately 45% have adopted capability hubs across various sectors, highlighting a significant potential for growth. As these organisations establish and expand their hubs, retaining and attracting the right talent through a robust EVP becomes crucial. Developing an effective EVP can be complex, requiring analysis of over 40 factors across six dimensions: principles and values, leadership and responsibility opportunities, work-life balance, training and development, job security, compensation, and work appreciation. Tailoring these EVP factors to meet local talent preferences is also vital. For example, professionals in India value leadership opportunities and recognition more, but prioritise paid time off less, compared to their global peers. Despite the apparent benefits, our recent report indicates only two-thirds have adopted a holistic EVP strategy. Although attrition rates have almost halved to 10% from the near peak, maintaining a consistent focus on EVP is essential.
As organisations start or accelerate their CIH journey, their strategic priorities can differ widely basis starting point and shoring maturity. Those with no capability hub presence can set up to build advanced capabilities and accelerate their digital agenda, centralise, standardise and drive revenue acceleration with the right level of efficiencies. ROI on a scaled centre can be as quick as 15-18 months with multiple options to enter the market. A refreshed location strategy along with partnerships, ecosystems and outsourcing can accelerate the transformation by reducing fragmentation, and such existing hubs can scale and leapfrog to a platform model with microservices, providing unprecedented agility, efficiencies and more importantly strategic leverage.
Snehil Gambhir & Anuj Mandal, Respectively, partner and director, and Platinion senior IT consultant, BCG. Views are personal