The Future of Outsourcing

An exclusive look inside GE's back-office machine.

Beyond Labor Arbitrage

Charging GE businesses at an arms’ length and at cost plus, Gecis made US$404 million in revenues last year. All told, says VN Tyagarajan, head of global business development, GE units saved 35 to 40 percent on cost alone. He estimates another 40 percent is saved when a client relationship reaches three years, because by then the benefits of Gecis’s drive for process improvement start to kick in. This is where Bhasin thinks the future of outsourcing companies lies, other than the level of work they could remotely process. “Too much of what is happening today is still what one of my customers calls, ‘My mess for less,’” he says. “They’re just moving the work, and you’re just executing the work. Not enough is being done around process expertise and domain knowledge.” Improving the process that’s outsourced, he argues, can deliver savings equivalent to the labor arbitrage benefits.

Gecis is doing this by enhancing its ability to use the strength of one COE to boost another, while embedding Six Sigma — the productivity-enhancement program that GE itself pioneered — into its internal processes. Take a case that was handled recently by collections and analytics. This center of excellence used to make up to 80,000 calls at the beginning of each month to customers of GE’s commercial finance business who had not paid on time. Using data crunched by the analytics team, Gecis found that 80 percent of those who normally overshot the due date pay on the tenth or eleventh day without being reminded; the rest wouldn’t pay without being called.

So collections focused on that 20 percent. “We’re left with a smaller pool to call, and we call the people who have a higher probability of defaulting on day one,” says Tyagarajan, who was the global head of Six Sigma for the commercial-finance arm of GE Capital in the United States before rejoining Gecis in February.

Replicating this model in other businesses is helping GE clean its balance sheet. In its 2004 annual report, the conglomerate reported that for commercial finance, delinquency rates dropped from 1.8 percent in 2002 to around 1.4 percent in 2003 and 2004. In consumer finance, the figure dropped from 5.6 percent in 2002 and 2003 to 4.9 percent last year. GE’s allowances for losses on financing receivables as a percentage of the total improved to 1.5 percent last year from 1.7 percent in 2003. In commercial finance, the figure improved to 2.7 percent from 4.2 percent.

To be sure, there is room for improvement. Bhasin reckons, for example, that an average company loses the equivalent of 0.5 percent of sales to incorrect billing. “GE supplies aircraft engines and parts all over the world,” he says. “Being able to correct those billings — from warranty to technicians’ time to what taxes to charge — is critical.” Gecis has traced the problem to pricing templates that aren’t standardized across the regions where a business operates. Building on Six Sigma, Gecis feels it could generate a lot of savings for GE if it brought the leakage down to 0.3 percent. “We have an understanding of what is a defect, what are the opportunities for defects,” says Mohit Bhatia, business leader for the finance and accounting COE. “We can convert it to Six Sigma scores that can allow us to benchmark how a particular process compares with other businesses.”

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