Outsourcing and GE Capital

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Outsourcing and GE Capital Powered By Docstoc
					Outsourcing and GE Capital
        Kuolung Yu
        Ezra Hurwitz
         Arun Burla

        July 28, 2004
                                  Table of Contents


I. What is Outsourcing?
        A. Business Processing Outsourcing
        B. Offshoring
II. Examples of Outsourcing
III. Outsourcing Trends
IV. Outsourcing Benefits & Pitfalls
V. GE Capital
        A. Who is GE Capital?
        B. GE Capital’s competitors
VI. Outsourcing and GE Capital
        A. History
        B. Outsourced Products
        C. Examples of Outsourcing
               1. GECIS
               2. CSC
        D. Policies
        E. Benefits
        F. Challenges
VII. Recommendations
What is Outsourcing?

          The word outsourcing has different meanings to different people. To many in the

United States, outsourcing is a bad thing that results in the loss of jobs sent overseas,

while others see it as being very beneficial to overall shareholder value. To those in other

countries, such as India and China, outsourcing provides much-needed, well-paid jobs

and an opportunity to work for a large and powerful multinational corporation. To those

in the business world, outsourcing is a way to cut costs and improve the balance sheet.

With all of these varying perceptions, it is worth taking a deeper look to see what exactly

outsourcing is.

          According to www.wordiq.com outsourcing is ―paying another company to

provide services which a company might have employed its own staff to perform.‖1

Outsourcing actually began in the 1960’s with Ross Perot’s Electronic Data Systems

(EDS). EDS would approach prospective clients offer to take over their in-house

information technology (IT) functions to allow the target company to focus on their core

business. The outsourcing trend has gained much favor and notoriety over the past 20

years, due to the need for companies to cut costs to meet the demands of an ever-

changing market.

          Outsourcing is actually a broad term used to describe a large variety of activities.

One such activity is Business Process Outsourcing (BPO). ―BPO is defined as delegating

an IT [information technology] enabled business process to a third party that owns,

administers, and runs the process according to a laid [out] set of metrics.‖2 Another way

to define BPO is as the migration of services to an external provider. Examples of BPO


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    http://www.wordiq.com/dictionary/Outsourcing
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    http://www.iconhorizons.com/business.htm
are the out-tasking of non-core functions such as call centers, finance and accounting

processes, human resources, and transaction processing.

           An additional broad topic, which is incorporated with outsourcing, is offshoring.

―Offshoring can be defined as relocation of business processes (including

production/manufacturing) to a lower cost location.‖ 3 Both India and China have

emerged as the dominant targets for offshoring. India has become the top location of IT

services offshoring, while China has become known as the top destination for the

production and manufacturing of goods. A large reason to offshore to another county is

to take advantage of lower labor costs. A large misconception about offshoring is that it

always involves outsourcing. This is not the case; in many instances, a company may set

up IT service operations in another country to cut labor costs while keeping the services

in-house. This allows the company to improve the balance sheet, while retaining full

control of sensitive corporate and customer information. The types of services that are

offshored are often similar to BPO services, i.e., information technology, back-office

services, as well as manufacturing. The advantages of offshoring are the ability to focus

on core services as well as the savings resulting from lower labor costs.

Examples of Outsourcing

           Almost every major corporation is realizing the advantages of outsourcing. For

example, Citigroup in 2001 outsourced operations to its 2,500 employees in India,

realizing an estimated $75 million in savings. Prudential Insurance UK outsourced its

call centers to ICICI OneSource in India and has realized savings of 30% to 40%

annually. American Express has stated savings of greater than 50% annually on its

Indian operations. More recently, both Mellon Financial and Bank of America have
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    http://www.wordiq.com/definition/Offshoring
opened offshore back-offices in India. While it is too soon to know just what the savings

are, one can be assured that they will be significant.

Outsourcing Trends

       While most large corporations are currently outsourcing, those that are offshoring

see the real cost benefits. The major offshoring frontiers are currently India and China.

India’s population is highly educated and affluent in English; this large labor pool is

proving to be very attractive to most prospective companies. China, due to its

population, provides manufacturers with a seemingly endless labor pool. This has

resulted in the enormous growth of foreign investment in China’s manufacturing sector.

In addition to India and China, Malaysia, Singapore, South Africa, and Australia are

quickly becoming popular locations for offshoring. This again proves that corporations

are looking for markets with lower labor costs and English fluent speaking residents.

       The growing interest in outsourcing can be seen throughout the economy. The

current trends towards outsourcing show that over 80% of the world’s largest financial

institutions are currently undertaking initiatives to outsource; since the summer of 2003

there has been a 38% increase in firms that are outsourcing. Currently, executives can be

expected to spend up to one third of their budgets on outsourcing projects. The global

outsourcing market is estimated to be $72 billion.

       By 2005 it is believed that the market will exceed $100 billion and the in-house

cost bases sent over seas will be upwards of $210 million per company. The average

savings per institution will be $700 million. India will continue to be the #1 destination

for outsourcing. According to Peter Lowes, US leader Deloitte Consulting’s outsourcing
practice, ―India is winning eight out of ten new deals.‖ This is in part due to the large

and educated labor market, as well as tax incentives offered by the Indian government.

Outsourcing Benefits & Pitfalls

       While many corporations are expecting to greatly affect their cost structures due

to the savings offered by outsourcing, the reality is that most outsourcing initiatives never

reach their full potential. The actual benefits, compared to the expected benefits, almost

always fall short. In addition to the reduced benefits there are several issues that

companies should be mindful of before pursuing outsourcing initiatives. A few of these

issues, as well as the actual benefits realized, can be seen below.
          With all of the advantages and disadvantages of outsourcing a closer look is

needed to gain a better understanding of how it can affect a company.

GE Capital

          GE Capital is one of the many subsidiary companies that make up General

Electric. In 2002 GE Capital was split into 4 separate subsidiary companies. This was

done to clearly delineate the various services provided by GE Capital to its consumers

and investors. Each one has its own cost and revenue structures and each report

individually to the parent company. The four companies are GE Commercial Finance,

GE Insurance, GE Consumer Finance, and GE Equipment Management. These

companies have a combined asset total of $500 billion. They create a global diversified

financial services company, providing consumer and specialized services in 47 countries.

Its parent, GE, wholly owns GE Capital

          Several competitors exist for GE Capital; in the Insurance industry it faces

competition from American International Group (AIG), Citigroup, and General Re. AIG

is the world’s leading international insurance and financial services organization, with

operations in more than 130 countries and jurisdictions.4 Citigroup is a financial services

holding company that conducts its activities through the Global Consumer, Global

Corporate and Investment Bank (GCIB), Private Client Services, Global Investment

Management (GIM) and proprietary investment activities segments.5 General Re




4
    http://www.aig.com/GW2001/home/
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Corporation, a subsidiary of Berkshire Hathaway Inc., is a holding company for global

reinsurance and related risk assessment, risk transfer and risk management operations6.

       In the commercial finance industry, GE Capital’s competitors are CIT, Citigroup,

and JP Morgan. Founded in 1908, CIT has nearly $50 billion in assets and possesses the

financial resources, industry expertise and product knowledge to serve the needs of its

customers in a broad range of industries.7 J.P. Morgan Chase & Co. is a financial

services firm. The company has four wholesale business segments: Investment Bank

(IB), Treasury & Securities Services (TSS), Investment Management & Private Banking

(IMPB) and JPMorgan Partners (JPMP).8

       In consumer finance industry, GE Capital faces competition from General Motors,

Household International, and MBNA. General Motors provides consumer vehicle

financing, automotive dealership and other commercial financing; residential and

commercial mortgage services, automobile service contracts, personal automobile

insurance coverage and selected commercial insurance coverage.9 Household

International, Inc. is principally a non-operating holding company engaged in three

reportable segments: consumer, credit card services and international.10 MBNA operates


6
 http://www.genre.com/page/0,1019,expandID%253D5%2526ref%253DAboutUs-
en%2526childID%253D6,00.html
7

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3D0%26restrict%3D%26getfields%3Ddescription&q=cit
8

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%3Fsite%3Dnyse%26output%3Dxml_no_dtd%26client%3Dnyse%26proxystylesheet%3Dnyse%26filter%
3D0%26restrict%3D%26getfields%3Ddescription&q=jp%20morgan
9

http://www.nyse.com/p1021232175378.html?displayPage=http%3A%2F%2Fgoogle.nyse.com%2Fsearch
%3Fsite%3Dnyse%26output%3Dxml_no_dtd%26client%3Dnyse%26proxystylesheet%3Dnyse%26filter%
3D0%26restrict%3D%26getfields%3Ddescription&q=gm
10

http://www.nyse.com/p1021232175378.html?displayPage=http%3A%2F%2Fgoogle.nyse.com%2Fsearch
as an independent credit card lender and issuer of endorsed credit cards, marketed

primarily to members of associations and customers of financial institutions and other

organizations.11

       Finally, in the equipment management industry its competitors are Electro Rent

Corporation, GATX, and Sea Containers. Electro Rent is one of the oldest—and the

largest—U.S. firms in the test and measurement rent/lease field.12 GATX is a specialized

finance and leasing company combining asset knowledge and services, structuring

expertise, partnering, and capital to provide business solutions to customers and partners

worldwide.13 Sea Containers is a market leader in its three main business areas:

passenger transport, leisure and marine container leasing.14

History of Outsourcing and GE Capital

       To examine outsourcing in GE Capital it is first necessary to look at its history.

GE Capital was a pioneer in the outsourcing industry. In the early 1990’s Jack Welch, the

former CEO of GE, introduced the 70:70:70 rule. This rule states that GE is to outsource

70% of its work. Of the 70% outsourced, 70% should be offshored. Of the 70%

offshored, 70% should go to India. The desired result is the outsourcing and offshoring

of approximately 30% of GE’s in-house work to India.

Products outsourced by GE Capital




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12
   http://www.electrorent.com/er/about.aspx
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   http://www.gatx.com/index.asp
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   http://www.seacontainers.com/
       To accomplish the 70:70:70 rule, GE has offshored several back-office functions.

For instance, the majority of its IT systems (consulting, software solutions, and remote

network monitoring) have been offshored to India. As well as offshoring work to India,

GE Capital has outsourced several functions locally within the US. A few examples of

GE’s efforts to outsource non-core functions can be seen in General Electric Capital

International Services (GECIS) and Computer Sciences Corporation (CSC).

Examples of Outsourcing and GE Capital

       GECIS was established in 1996. It was created with the intent of performing

supporting, back office work for GE business units in the US, Europe, Japan, and

Australia. GECIS has set up operations in several Indian cities, such as Gurgaon,

Hyderabad, Bangalore, and Jaipur. GECIS is a world-class remote processing operation

that services its clients from around the world through its IT enabled services. Currently

GECIS employs 12,000 people and delivers over 450 processes to over 30 different

businesses throughout the world. The company was established to perform processes that

do not require face-to-face contact with the customer. India was chosen in order to take

advantage of the English speaking, highly educated, intellectual population. Additional

benefits of India are its geographical location, highly motivated workforce, and lower

wages resulting in lower operational expenses. India’s location is extremely beneficial to

GE Capital because it allows for 24x7 operations due to the time zone differences in the

two countries. The highly motivated work force contrasts that of the US, where call

center employees tend to have low morale and very high turnover, 40%-70%, compared

to the Indian turnover rate of 5%.
       As recently as 1999, GECIS expanded to include GECIS – IT Services. GECIS –

IT began as a help desk company providing technical support to GE Capital’s customers;

it has evolved into a company that employs over 900 highly technically qualified

professionals. Additionally, the company has moved up the value chain going beyond

simple IT help desk tasks to specializing in server, network, application, and security

services. The subsidiary company has an enormous customer base of over 38 GE

businesses in North America and Europe. GECIS-IT supports over 150,000 end users,

ideally positioning it to become a true global world-class infrastructure management

service provider.

       Another example of outsourcing for GE Capital can be seen in the contract it

recently signed with CSC. CSC is based in El Segundo, California; the company

employs 54,000 people in 700 offices worldwide. CSC helps its clients utilize

information technology to attain strategic and operational objectives. Recently CSC

signed a 10 year, multimillion-dollar, letter of intent with GE Capital. CSC will be

providing data outsourcing functions for GE Capital. For instance, CSC will manage GE

Capital’s (as well as GE’s) mainframe and midrange data processing operations in

Europe. Additionally, CSC administers certain data processing functions in Australia. In

order to provide the needed services to GE Capital, CSC will supply management and

operation of GE’s European data centers, midrange platforms, and help desk and disaster

recovery services. From this agreement GE Capital hopes to improve the quality of

services to their customers, reduce costs, and increase focus on their core functions.
GE Capital’s Policies Towards Outsourcing

       Beyond the current outsourcing practices that GE Capital is undertaking they are

continuing to push the envelope in the outsourcing market. For instance, according to

Steve Morrison, GE’s Director for Global Delivery Centers, ―[GE Capital] can get 80%

to 85% of [their] outsourced work offshores.‖ If GE Capital is successful in doing this,

they will have a leg up on their competitors who have yet to offshore such a large portion

of their in-house functions. GE Capital is beginning to examine the possibilities of

offshoring to China. As the labor costs continue to rise in India, currently they are rising

at about 15% a year, the cost benefit of offshoring to India will begin to diminish. As a

result, companies, including GE Capital, will need to look elsewhere in order to take

advantage of disparities in labor costs. GE Capital is currently doing this by beginning to

invest in China. These investments are being done with the assistance of their Indian

partners who already are aware of GE Capital’s needs and can thus properly train and

implement the labor tools GE Capital will need in China.

GE Capital’s Benefits From Outsourcing

       The benefits to outsourcing and offshoring are numerous for GE Capital. By

outsourcing non-core functions GE Capital is able to gain access to vendors with

expertise in various back-office processes, thus providing their customers with top of the

line information and customer service. Additionally, the quality of the back-office work

will improve because professionals who specialize in these types of operations will be in

charge. By not having to worry about these non-key functions, GE Capital will be able to

better focus on it’s core competencies. This will lead to a reduction in costs, as resources

will not have to be wasted on things that are not vital to GE Capital. The reduction in
costs will improve the balance sheet, which will make the company more attractive to

investors. Finally, the timesavings will make the company more efficient and able to

meet the demands of an ever-changing market.

GE Capital’s Challenges from Outsourcing

       While the benefits are many for GE Capital, it is necessary to mention a few of

the challenges they may face. For starters, by outsourcing so much work, GE Capital

may lack a strong control over costs, meaning that it will be hard to know the number of

resources being used by vendors. Additionally, they may face excessive standardization

due to the fact that several companies are now outsourcing work. This simply means that

vendors may choose to do things in the most cost effective way for them. However, this

may result in a decline in the quality of work that is accomplished. Furthermore, vendors

may be slow to react to the specific issues faced in a changing business environment; this

could result in GE Capital being trapped in contracts that are not beneficial. An

excessive amount of resources may be expanded due to ineffective communication

channels resulting in poor migration of information.

       Another challenge that may be faced is a decline in performance, resulting from

ineffective comprehension of cultural differences. In work outsourced here in the US, the

high turnover rate of employees will result in rising training costs, as well as a decline in

performance. Local perceptions may also become skewed against GE Capital if local

employees are losing their jobs to international markets, then US citizens may be hesitant

to purchase goods and services offered by GE Capital. Finally, the rising costs of labor

overseas as a result of the offshoring trend will result in increased labor costs.
Recommendations for GE Capital

       With these benefits and challenges in mind we would recommend that GE Capital

continue to outsource and offshore work, however there are a few things to keep in mind.

For starters, GE Capital should become more diverse in its outsourcing practices; it

should not solely focus all of its interests on India. Additionally, GE Capital should

increase the training of it’s overseas employees and vendors to make them more aware of

events and cultural norms in the US and Europe. From a contractual standpoint the

hourly wages offered to vendors should be reexamined. A lower hourly rate should be

offered; to accomplish this GE Capital should increase the competition for contracts. To

increase the competition for contracts it is necessary to increase the number of accredited

vendors that the subsidiaries are allowed to use. These two things will increase

competition, thus enabling lower employment and labor costs. To address the concern of

declining performance GE Capital should strive to increase in-house offshoring. This

will accomplish two functions; one it will increase competition among vendors and two,

it will allow GE Capital to keep sensitive and customer information in-house.

       Regarding the growing negative perception of outsourcing and offshoring, GE

Capital should implement a former employee-retraining program. They should provide

scholarships to all employees who lose their jobs as a result of outsourcing. This will

allow the company to give back to the community and maintain its strong namesake in

the US market. Through these recommendations we believe that GE Capital will be able

to continue to be a driving force in the outsourcing market. Additionally, these steps will

improve the overall performance of the company and the services provided to customers.
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