There is a buzz at the ground-floor cafeteria of Gecis, the back-office operation of General Electric just outside Delhi. About a dozen people are gathered round a corner, and more are forming a queue. “Have you got your free drink?” a woman in a green sari asks a colleague, lifting a can of Red Bull in her hand. The energy-drink maker is giving free samples of a new flavor. It’s nearly 4 p.m. in India, the beginning of the workday for many at Gecis, and they can use the energy boost. By the time their U.S. colleagues clock in, they will have done a fair amount of tasks for GE worldwide, from underwriting insurance and collecting delinquent accounts for its finance businesses, to performing cost analysis and tracking inventory for its industrial operations.
This is the world of offshore business-process outsourcing (BPO), where corporations farm out routine office functions to developing countries to take advantage of lower labor costs and higher productivity. It’s the little sister to the phenomenon of manufacturing and IT-services outsourcing — only 3 percent of overall BPO spending is currently spent offshore, according to research firm Gartner. But offshore BPO is catching up, be it in the form of companies setting up captive back-office units abroad or contracting out the work to third-party providers. Either way, the trend may rattle the global labor market yet again. In its World Investment Report 2004, the United Nations Commission on Trade and Development argued that offshoring of corporate service functions could become “the next global shift”.
Currently synonymous with call centers, offshore BPO is becoming commonplace, especially in India, by far the most favored BPO location. Gartner estimates the market there will soar from US$3.6 billion last year to US$24.3 billion in 2007. Based on 2004 revenues, Nasscom, the industry lobby group, says a third of all BPO work are in the area of customer care, followed by finance, administration, content development, payment services, and human resources. India already houses captive units set up by multinationals from American Express and HSBC to Dell and IBM, doing mostly standardized tasks such as general accounting, records management, and transaction processes such as accounts payable.
The tasks being remotely processed are now going up the value chain. You no longer have to imagine a company whose finance team in the United States is made up of only the controller, treasurer, and CFO, with their staff in India. This is already happening. What you need to still imagine is what happens when headquarters, unburdened by the rigors of running a factory and the tangles of accounts collection, is left only with the core tasks of selling products, developing new ones, and mapping growth strategies. This scenario may be way out on the horizon right now, but it is worth pondering how far it can go — and how it can change the way CFOs run finance.
The Way Forward
For a hint of where offshore BPO is headed, look no further than to its pioneer. Since 1997, Gecis (pronounced jekis) was the back-office captive of U.S. conglomerate General Electric (GE), the world’s second-largest company by market capitalization. With revenues of US$152 billion last year, GE’s extremely complex financial operation encompasses 11 global businesses from consumer finance, commercial finance, and insurance, to transportation, healthcare, and energy. Gecis is the back-office hub to 17,000 employees in India, China, Hungary, and Mexico.
Following GE’s sale last December of its 60 percent stake to U.S. private-equity firms Oak Hill and General Atlantic Partners, Gecis is extending its services to non-GE businesses. That, says Gartner research director Sujay Chohan, “could redraw the global outsourcing map.” The reason? Gecis is a vital, if little-known, factor behind GE’s reputation as one of the world’s most admired companies. “India has largely been seen as a destination for call centers and low-level transaction processing, and multinational companies in North America and Europe have been reluctant to outsource more complex tasks,” says Chohan. As Gecis reaches a wider market, this view will significantly change, he adds.
With characteristic aplomb, Gecis CEO Pramod Bhasin gets keyed up when he talks about what the BPO industry in India is capable of. “In the past, outsourcing was typically around finance and accounting,” he says. “But now there’s no reason why you can’t outsource part of the risk underwriting for a financial services company, claims processing for an insurance company, and a large part of the supply chain for a manufacturing company.” It was Bhasin, a chartered accountant, who gave birth to the idea that India could serve as a back-office hub for GE globally, a notion that came to him while he was scouting for a similar solution for GE Capital in India.
The 450 processes that Gecis has been doing for GE businesses go beyond just finance and accounting. These processes are undertaken by ten “centers of excellence” — COEs — which are categorized according to industry or function. For example, the insurance COE provides underwriting, claims processing, and actuarial services for units such as GE Insurance Solutions. Come October, says a smiling project manager working for GE’s property and casualty reinsurance business, his team of 23 people will take over the job of the U.S.-based claims handler, who decides the amount of insurance payouts. The claims handler will only review the amount calculated in India.
The finance and accounting COE does the full suite of financial processes — from accounts payable to financial analysis to statutory reporting at the consolidated level — for 26 financial and six industrial businesses at GE. Here, the financial planning and analysis team, comprising 250 employees with an average age of 27, crunch the requested data — inventory turns to usage of cash and working capital; or productivity, efficiency, and yield analyses; or operating margins at product level — within an hour after receiving an e-mail request from GE staff across the globe.
And then there’s the analytics COE, considered the jewel in Gecis’s crown. Led by Sanjay Goel, an engineer who used to head operations for GE’s lighting and industrial systems businesses, this team of 700 statisticians, MBAs, and PhDs serve as quasi-vice presidents of their clients. Most often, they’re commissioned to create models from which market-development strategies are made, from pricing schemes to competitor profiling to cross-sale opportunities. They also do due diligence for GE’s targeted acquisitions, and demand forecasting and optimization of warehouses, logistics, and inventories for the industrial businesses. Short of executing strategies, Gecis is “at very high-end levels,” says Bhasin.
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.”
Birth of a BPO Provider
GE’s road to Indian BPO started in late 1997, when Bhasin and Tyagarajan decided to set up a processing center for GE Capital India’s domestic operations. At that time, the U.S. capital business was also experiencing a refinancing boom, which led to more applications than the back office there could handle. Offering its services, the Indian back office — then called GE Capital International Services — was initially met with skepticism; it was given very simple processes such as requests for address changes. As it turned out, the Indian operations reduced the errors in the processes it took over by 90 percent, says Tyagarajan, while doing the job for 50 percent less cost. “They loved the cost benefit, but they loved the results benefit even more,” he says. Encouraged, Gecis started offering, and getting, more complex work such as credit scoring and credit-card approvals.
Gecis’s first industrial customer, from GE’s healthcare business, came later in 2000. Starting with simple data entry, Gecis migrated to more complex processes such as handling services, from taking service calls to fix MR or ultrasound equipment, to shipping the parts that needed to be replaced. Around the same time, Gecis, then still part of GE Capital, took over the treasury function of GE’s entire European operations. “At that time, and probably even today, it was the single most complex piece we transitioned,” says Vivek Gour, CFO of Gecis, who led the move of the European treasury to India lock, stock, and barrel over eight months in 2000. Gecis took over the Asian treasury operations as well in 2001. Now, all of GE’s treasury operations are managed in two centers — in the Stamford, Connecticut headquarters, and in Delhi.
The project involved migrating the foreign exchange, hedging, cash management, and bank-relationship management desks to India — all treasury functions save funding, which is centralized in the headquarters. Gecis currently employs around 80 people, including currency traders, for this GE function. On any given day, the team would execute hedging and foreign-exchange transactions from US$400 million to US$1 billion, and cash movements from US$7 billion to US$8 billion, estimates Gour. Following the sale of 60 percent of Gecis to two private-equity funds last December — which also changed the name from the acronym GECIS to the word Gecis — this operation had to be carved out and plugged into GE Capital India for tax reasons.
All this time, the finance and accounting COE proved to be Gecis’s core competence. It now encompasses accounts payable, receivables management, accounting, treasury, closing and reporting, and financial planning and analysis. Last year, for example, the team in Dalian, China worked with CFOs of Asia Pacific sales divisions to bring down unsettled inter-company receivables and payables, in U.S. dollars and euros, from US$60 million in the first quarter of 2003 to just US$1 million by last December. The job involved setting up an online tool that improved tracking of in-transit inventory movement on a daily basis, and increasing the frequency of Asia Pacific’s reconciliation with US and euro operations.
Since Gecis does accounting for most GE businesses worldwide, the next step was to move to reporting, down to the notes to financial statements. “These reports are created here, and sent to the businesses for vetting and validation before they get submitted to the SEC or the relevant authority,” says Anju Talwar, who heads Gecis’s nascent third-party business. In some cases, Gecis staff call attention to instructions by clients that do not properly meet standards.
“For example, in the case of FAS 52, on foreign currency translation, we are better equipped than many foreign affiliates because we get to see many more cases than an individual business,” says senior vice president Afzal Modak. “Often we get thanked for pointing out new insights.” Adds Bhatia: “We are an extension of the treasurer, of the controller, of the CFO. We wouldn’t say we’re here to advise you on how to structure the balance sheet, but because we operate as an extension of the teams, there is joint ownership.”
Gecis has scrupulously met Article 404 of the Sarbanes Oxley Act that requires certification of every financial process by an external auditor, from documenting who has log-on access to certain tasks, to laying out change-management plans. Given the sensitivity of the F&A work, Gecis shies away from classifying processes between low-and high-end. “It’s almost blasphemous to say that this is low- or high-end because of the exposure the CFO is facing,” says Bhatia. A low-end process like accounts payable may not be low end in the world of Sarbanes-Oxley, where, Modak adds, if a supplier is based in one country and wants to be paid in another, it could be money laundering. “CFOs need to be satisfied that there is controllership,” he says.
For GE, the analytics team is regularly called upon by CFOs of relevant businesses on issues such as pricing support, or creating revenue scenarios according to discounts and promotional periods for certain products; capital allocation, or how much capital a business is required to reserve against losses, achieve a desired credit rating, and meet regulatory requirements; and credit research, or background analysis of GE counterparties and assessing business opportunities with them.
As Gecis looks toward third-party growth, it’s now trying to get deeper into the supply chain, a task that falls to Goel. Currently, Gecis does demand forecasting and optimization of warehouses, inventories, and logistics. In the aircraft engines business, which has warehouses in 20 locations globally, Gecis maps past transactions to see what parts to keep in each warehouse, and then makes “a recommendation on the optimum number of parts for that particular warehouse, with the aim of reducing inventory across the board for aircraft engines,” says Goel.
In logistics, Gecis analyzes, based on the number of vendors and location of their warehouses, how GE can supply to its own customers in the shortest possible time. “This needs complete modeling of what you have to have in your warehouses, where they are being sourced, and what destinations they have to reach,” says Goel, “so people can optimize the time cycle of bringing the part to the end-customer.”
Going forward, Gecis wants to add procurement analytics to its supply-chain services. That means seeing what is the global benchmark for pricing, what are the best places from which to source certain commodities, and what are the inflationary, freight, and other trends that are driving the cost of particular goods. “The goal,” says Goel, “is to give insights to our customers and clients on how they can optimize the cost and timing of their procurement and sourcing.”
Despite the amount of work that can be offshored, Gecis says neither captive units — which Gecis once was — nor outsourcing providers are likely to replace white-collar jobs in corporate headquarters. “It’s not replacement, it’s creating more capacity for growth,” says Goel. In one case, however, a GE asset-management business that handles a portfolio of investments has been able to slash down its finance staff to just three people — the controller, assistant controller, and CFO — having farmed out all back-office and research work to Gecis. “It’s an extreme case,” says Modak. “It’s very easy to get feeds on what those investment are, the value of the underlying securities, and preparing the balances that a controller needs to review.”
And despite the level of work that Gecis can do — which translates to the depth of information gathered on the business operation of their clients — CEO Bhasin dismisses growing Gecis in the mold of Accenture or IBM/PwC, which combine offshore BPO with strategic consulting. “Consulting has too many ups and downs,” he says. “I like the annuity business [of outsourcing]; you know where your revenue is coming from, it’s predictable, longer term, and on the ground.” Instead, Bhasin’s goal is to bring benchmarks in the offshore BPO industry.
“There aren’t benchmarks as to what is the best-in-class performance for, say, collections, accounting, or supply chain and how much it should cost you to get there,” says Bhasin. “If you can help define benchmarks, you can save a huge amount of money for companies well beyond anything we could do in cost arbitrage.” As the offshore BPO industry is just taking off, Bhasin may need a good dose of energy drinks to accomplish that.
Captive No More
Take any day this month and Vivek Gour is probably somewhere in Romania, China, Hungary, or Mexico looking after the expansion of Gecis, the India-based back-office operation of General Electric. Armed with US$35 million in free cash flow, the CFO is on a spending spree as Gecis hires 4,000 specialists this year to support its new business model. It’s an enviable task to manage such growth, but it only makes Gour more mindful of his assets, watching meticulously where the money goes “deal by deal, fixed cost by fixed cost,” and how every expense will affect his Ebit “this month, this quarter, this year”, he says.
Just four months ago, Gecis exclusively served General Electric’s businesses worldwide. The sale of 60 percent of Gecis to American private-equity firms Oak Hill and General Atlantic Partners late last year changes its outlook entirely, and with that, the nature of Gour’s job. “The intensity of focus on numbers has gone up dramatically,” he says. “The way you look at your numbers as a division of GE is very different from when you’re an independent company with shareholders who want a return on their investment in a defined time frame.”
Fair enough, but perhaps Gour is only being cautious. The company, which had a turnover of US$404 million last year, is brimming with optimism. Gour himself is eyeing a revenue increase of US$86 million and free cash flow of US$50 million this year. From a zero base, Gecis is also expecting revenues from third-party businesses to equal those from GE in the next three years. That would make Gecis a US$1.2 billion company in just a decade since it started operations in 1997, a feat in the BPO industry in India.
For VN Tyagarajan, leader of global sales and business development, the target is easily achievable. For one, within GE itself remain ample opportunities for growth. “Unlike what a lot of people think, it was never a mandate” for GE businesses to farm out their back-office operations to Gecis despite its being a back-office captive, says Tyagarajan. As such, it has varying levels of penetration among different processes, in different GE businesses. “In some cases, we may have 5 to 10 percent of finance and accounting activity; in other cases, it could be 70 to 80 percent,” says Afzal Modak, senior vice president at Gecis.
For another, GE is known for taking the acquisition route in its growth strategy, “and every time an acquisition happens, we always start with an opportunity at zero base,” says Tyagarajan. All told, he expects revenues from GE to hit at least 15 percent a year over the next five years. Anju Talwar, leader of third-party business, is equally confident. Even before the sale, she says, a number of companies had expressed interest in doing business with Gecis. Already, Gecis has won eight third-party contracts as of March, the first one being a multinational company shutting down its shared-service center, and the most recent one being a large European car manufacturer.
In most cases, the contracts encompass Gecis’s full suite of services. “We started with just finance and accounting, then moved on to financial planning and analysis and pricing support,” says Talwar of the terms of the contract with the carmaker. Discussions, however, quickly evolved into supply chain management, indirect procurement, sourcing activities, and customer-relationship management. Although Gecis itself only started serving GE’s industrial businesses in 2000, “manufacturing seems a very nice area opening up for us,” says Talwar.
Gour says just like with GE, most of the contracts with third-party business are negotiated at a fixed cost over a certain period of time, and the customers are billed monthly. Some of the contracts have a productivity sharing arrangement, where if Gecis delivers more units of work per dollar than initially estimated, it shares the extra savings with the customer. “It helps build a partnership flavor to the relationship,” says Gour.
Despite the rapid growth of the BPO industry in India, Gour plays down the competition. “We don’t have to cannibalize each other’s market share for growth,” he says. “It will be up to the big organizations to establish that doing this kind of work with low-cost countries is viable. If we have too many mom-and-pop shops with inadequate management depth, sooner or later it will start affecting the quality of work coming out of India, and start giving the industry a poor name.”