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JC Penney to reduce outsourcing to India

LiveMint logoLiveMint 21-02-2017 Anirban Sen

Bengaluru: US-based retail giant JC Penney Co. Inc., which hands out millions of dollars worth software business every year to the likes of Tata Consultancy Services Ltd (TCS) and Infosys Ltd, plans to cut back on outsourcing to India, even as India’s top software services firms face their slowest period of growth in a decade as their core businesses face disruptions from technology shifts and from potential new visa regulations in their largest market, the US.

The Plano, Texas-based department store chain, which is in the midst of a turnaround in its fortunes as it battles for survival against new-age online rivals such as Amazon.com, also plans to hire at least 1,000 software professionals over the next two years for its new technology centre in Bengaluru as part of a broader “insourcing” drive to cut costs and tap local tech talent.

JC Penney launched its technology office in Bengaluru last year and currently employs a little over 100 engineers at the facility.

The India hiring plans for the company come at a time when there’s pressure on US firms from the Donald Trump administration to bring back jobs to the country.

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“Our India centre is vital for our go-forward staffing strategy for JC Penney— we’ll have almost 1,000 people here (in India). Our facility here will be an extension of our team in Plano. What we like about our facility here is the talent market that we have access to—we obviously have strong talent here...this is really a talent play for us, first and foremost. Obviously there are some cost advantages to it, but the talent is far more important to us in that journey,” JC Penney chief information officer Therace Risch said in an interview.

Risch clarified that the company would continue to hire in the US too.

“I’m actually hiring both in the US and here and that’s really about the shift to insourcing from outsourcing. The things that are going on in the US politically won’t affect us because we are looking to bring the jobs inside our company as opposed to those being owned by other companies. I’ll be hiring over 100 people in the Plano area for IT at the same time that I’m doing hiring here. Those are new jobs for folks in the US,” she added.

The shift towards insourcing is reflective of a broader change in the attitude of large enterprise buyers of technology who have over the years viewed India as a low-cost outsourcing destination.

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While earlier chief information officers (CIOs) of large Indian IT customers such as General Electric Co (GE) and Citigroup Inc, typically visited India to meet technology vendors such as Infosys and TCS and hand out more low-cost software projects to them, over the past few years large Fortune 500 companies have started to tap India’s rapidly growing start-up ecosystem.

Some large IT customers like US retailers Lowe’s Companies Inc. and JC Penney are also looking to India to set up their own technology outposts in order to insource work back from Indian information technology firms.

“Our partnerships with third-parties such as TCS and Infosys will always be important to us because we’ll always have peaks and valleys of work. But I believe strongly that we will get better quality products for our customers if our team does it because they just have more passion for the business. Much of our facility here is about bringing that work in-house,” said Risch, a former Target Corp. executive.

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“Our ratio (of insourcing vs outsourcing) shifts quite a bit depending on the projects we have—but it is going to shift tremendously towards in-house versus outsourced,” she added.

JC Penney, which generates roughly $12 billion in annual revenue, typically allocates about 2% of its total annual revenue to technology spending.

Accel India and Infosys-backed start-up ANSR Consulting, which helps large Fortune 500 companies like Limited Brands and Target set up their technology centres in India, are helping JC Penney set up its India centre, headed by former GE executive Snehil Gambhir.

Over the past decade, JC Penney has faced its own share of struggles and had a near-death experience a few years ago, before current chief executive Marvin Ellison took over and led a recovery.

Brick-and-mortar retailers like JC Penney also face an existential threat from rivals such as Amazon.com.

This is why they have been forced to invest in their own online shopping capabilities.

“For traditional brick-and-mortar retailers (like us), we really have to accelerate our technology advances and this centre is critical in that. It’s almost a little crazy how much retail is changing these days—technology is the backbone of nearly everything that’s being done,” Risch said.

“We’ve stabilized our financials; I think we’re through the point where the company was threatening to go out of business. We’re long past that point,” she added.

According to Tom Reuner, senior vice-president at outsourcing advisory firm HfS Research, discussions on the reduction of spend or even on in-sourcing are as old as the outsourcing industry itself.

“It all boils down to two issues: first, the unrelenting pressure to find cost savings, and second, the definition of what is the core business of an organization, which predicates any make or buy decision,” said Reuner. “As somebody like GE is re-inventing itself as a software company, invariably IT turns into a differentiating value creator. At the same time, the rise of automation is curtailing the opportunities to increase revenues from run operations. With that in mind, IT service providers have to adopt a fundamentally different mindset that allows them to survive in the As-a-Service Economy. And that is even before we start discussing the impact of the Trump Administration on the issues raised.”

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