Not sure of what to outsource? No problem, just sign a contract and put a lot of faith in your FAO provider to do the right thing. That’s what Wachovia did in selecting Genpact as a partner in its FAO journey.

by Russ Banham

Most companies engage business process outsourcing (BPO) by first identifying the cost effectiveness and internal efficiencies of outsourcing a particular business process, sending out requests for proposals from service providers, selecting the vendor, and commencing the project—a nice, linear path toward fruition.

In the case of Wachovia Corporation’s recent decision to jointly establish an offshore, captive operation to support its BPO efforts, the company has a different strategy. Although it has decided on Genpact as a provider, Charlotte, NC-based Wachovia, the nation’s No. 4 bank in assets ($532 billion), hasn’t determined which processes will be outsourced or even how many. The bank also has no timetable in which to make this decision other than within seven years, the duration of its contract with Genpact. “If you’re asking if this is a standard BPO deal, then I would have to say it isn’t,” says Peter Sidebottom, Wachovia’s director of corporate development and strategic initiatives.

Rather, the Wachovia-Genpact agreement signed last November takes an innovative approach to accessing the benefits of outsourcing back-office functions. While its primary competitors in the U.S.—Bank of America, American Express, Citibank, and JPMorgan Chase—have established captive offshoring operations, Wachovia is tapping the expertise of a third-party, outsourcing service provider to manage its planned offshoring facility in India.

“Other people were going in this direction like Bank of America, Citibank, and others, and we realized we needed to find a way to do the same without building our own facilities and still remain competitive,” Sidebottom explains. “Leveraging the facilities and expertise of Genpact, which is already world class in this area, gives us the opportunity to drive process improvement at Wachovia. This is a partnership built on trust.”

Genpact, based in New Delhi, India, was launched as a back-office service provider in 1997 by General Electric as GE Capital International Services (GECIS). The GE subsidiary was one of the first offshoring operations established by a major U.S. company in India and is considered one of the best. As a GE subsidiary, GECIS improved business processes by leveraging its workforce trained in Six Sigma, the quality control program for business process improvement that former GE CEO and Chairman Jack Welch embraced in 1997. GE commercialized the GECIS subsidiary in 1997 and changed its name to Genpact last year, divesting 60 percent of the company into two private equity firms while retaining a majority stake.

Wachovia’s seven-year agreement with Genpact gives the bank access to the provider’s global operations for back-office processing, although the offshoring facility initially will be located in India. The terms of the agreement were not disclosed, but Sidebottom says the deal allows for a BPO infrastructure with dedicated resources such as IT connectivity and state-of-the-art security standards to be built at the India-based operation. “This gives us the opportunity to begin outsourcing when we feel it is appropriate,” he explains.

As for which processes are likely to be outsourced, Sidebottom says the company remains undecided. “We’re a very diverse company in a broad range of businesses, from banking to consumer credit to asset management, brokerage, and investment banking, to name a few,” he says. “Our entire company is performing an assessment of BPO functions to see which ones make sense for us to partner with Genpact to outsource. This is not limited to finance and accounting—every business unit is undertaking an assessment. Genpact will assist in the final decision. We like to think of this as a thoughtful and deliberate approach to our offshoring decisions and inevitable implementation.”

OFFSHORING AWAY
Wachovia is far from being the first U.S. financial services company to seek more efficient, cost-effective, and world-class business processes by shifting the work to service providers domestically and overseas, colloquially called “offshoring.” Offshoring presents lower workforce costs by tapping less expensive back-office labor in countries such as India, which has an intelligent, capable workforce largely lacking domestic opportunities for employment. A recent study published by consulting firm Deloitte Touche Tohmatsu indicates that 20 percent of the total cost base within financial services firms will migrate offshore by 2010.

Despite arguments over lost white-collar jobs in the U.S., many companies are pressured by competition to both reduce bottom-line costs and improve business functions. As New York Times writer Tom Friedman asserts in his best-selling book, “The World is Flat,” the global economy insists companies participate in the outsourcing revolution or reap the consequences. While Wachovia was late to the BPO party, the company had few alternatives. In April 2004, with profits at record highs, Wachovia Chairman Ken Thompson announced that the time was right to undertake an initiative to pare annual expenses by $1 billion during the following three years, which would involve outsourcing of processes domestically and overseas.

Although the cost-cutting effort was expected to eliminate close to 4,000 jobs, the capital would be directed toward the building of new branches and invested in other banking operations. “There is nothing I would rather do than turn back the clock and say ‘we will not offshore,’ ” Thompson said in a speech last October. “But we don’t have that luxury.”

Software development and maintenance were the first processes shifted to India, followed by an agreement with Hewitt to outsource HR functions domestically. Wachovia’s recent agreement with Genpact is the next iteration. Because the company is still analyzing which business processes to shift overseas, it has not said how many jobs will be eliminated by the offshoring endeavor. Sidebottom says any of the bank’s 96,000 employees nationwide who loses his or her job will be given the opportunity to apply for other positions within the company. “Our U.S.-based jobs increasingly are in the area of customer interactions,” he explains.

To manage the offshoring effort, Wachovia is in the process of assembling a joint management team with its counterparts at Genpact. “This team will make decisions as to when the offshoring facilities will be built, based on when the demand merits it,” Sidebottom says. Afterwards, the team will handle day-to-day operations. The companies also have formed a joint board that includes senior executives from each organization to oversee the project’s strategic development over the long term. The joint management team reports to the joint board.

To assess the range of different processes that could benefit from outsourcing, Wachovia has formed five separate, internal teams within five different revenue-producing business areas. The teams’ mandate is to analyze and measure current processes. “I can’t tell you which business areas we’re focusing on because we have made a commitment internally not to talk about them until we communicate it to employees,” Sidebottom confides. “What I can say is that these business areas do not in any way have anything to do with customer contact or interactions.”

The five teams ultimately will make their recommendations on whether a process should be moved offshore to the joint management team, although the latter does not have the authority to make this decision. “At the end of the day, the determination to outsource will be made by our line managers,” Sidebottom comments. “Although the joint management team will provide input, the decision to go or not go will be made by management in the internal line of business reporting structure. For example, if something happens with finance and accounting, the decision to outsource a process or not will be made by our CFO.”

GAINING A FOOTHOLD
The novel agreement positions Genpact to get into the banking world with a core client considered to be one of the top 10 banks in the world. Genpact already is a leader in providing outsourcing and offshoring services to Global 500 companies such as GE, with operations in several countries including India, China, Mexico, Hungary, Romania, and the U.S. Its workforce of Six Sigma “black belts” is trained to drive year-over-year cost, quality, and productivity improvements in banking and finance processes. “Our mandate is to continue to drive excellence for GE and find ways to grow by replicating what we do for other strategic global clients,” says VN “Tiger” Tyagarajan, Genpact executive vice president.

Tyagarajan is credited by GE as one of the pioneers who transformed GECIS into a high-end business services and technology-solutions company. “A bunch of us were in GE Capital’s business in India back in 1997 when GECIS was set up as a subsidiary to provide back-office services to GE,” he recalls. “I used to run the consumer finance business there and had consumer finance credit cards and automobile financing in the local market under my oversight. We realized as we set up operating centers for the domestic financial services business of GE Capital that we could provide those services to GE businesses in the U.S. At the time, these businesses were experiencing a boom in volume, and we said we could do simple work for you such as credit card and mortgage insurance application entry and simple purchase orders and invoices. That got the ball rolling.”

The idea was revolutionary at the time. “Our objective was to begin performing the functions on behalf of GE’s U.S.-based businesses and then figure out a way to go up the value chain,” Tyagarajan adds. “We were able to train people in performing these processes in India and put together a robust hiring plan, hiring 40 people a month initially, which soon moved to 100 a month, then 300, and is now on the order of 1,000 people a month. Today, we have 19,000 people on the payroll at Genpact.”

When Jack Welch introduced Six Sigma at GE, it started penetrating every global market of the company, including the growing workforce at GECIS. “We quickly found ways and means of driving incremental improvement and better performance through Six Sigma,” Tyagarajan recalls. “For example, invoices used to be processed within 15 days in the earlier environment. We were able to leverage Six Sigma to improve the process, removing non-value-added work and applying technology tools that ultimately reduced the time frame to five days. Jack (Welch) then visited us and got excited, and he asked us to show him what we were doing.”

With the excitement of Welch’s visit to India, the opportunity to linguistically serve Europe through Hungary and serve Japan via China was heightened, spurring GECIS to set up centers in Budapest and Dalian. GECIS already had two BPO sites in Mexico, to do document management and service Spanish-language customers. Last year GECIS opened in Bucharest as well. But India remains the core, with 11 BPO centers spread across five cities. “We’ve got 16,000 employees focused on GE business around the globe and the remainder focused on our 17 other global clients,” Tyagarajan says.

The 17th is Wachovia. “I feel we have created a really innovative deal that says the two of us will work together over the next several years, with us as the preferred outsourcing provider, to provide a broad range of back-office services that explicitly fit Wachovia’s needs,” Tyagarajan says. “As far as identifying which processes and work across their multiple lines of business will be offshored, that’s something the two teams on the ground are in the process of identifying. There’s a lot of heavy lifting going on now, but at the end of that we will have identified the first round of processes to migrate. We believe it makes complete sense for us to be involved in their strategic determination of which processes to offshore, given our expertise in this area.”

The overriding objective of both partners is to drive improvements in Wachovia’s business processes to liberate the bank to focus on outstanding customer service. “That will give Wachovia a competitive advantage,” Tyagarajan projects.

Sidebottom concurs: “This is all about enhancing our processes. What made Genpact attractive from the beginning was its reputation as a Six Sigma company. They will help us meet the evolving needs of our business, without us having to build it ourselves and focus our energies on a captive operation. Our focus is customers and that is where we will put our resources—not on back-office business processes.”

As to when he expects the first processes to make their way toward India, Sidebottom says some work will likely transition over by the middle of the year.

If nothing else, Wachovia’s FAO deal shows that making a leap of faith, in the absence of a definitive plan, is not so crazy after all. With all the elements needed in any successful outsourcing venture—the guidance of a trusted partner, a constant dialogue among the parties, and a vision of the ultimate corporate goals—the partnership may prove every bit successful as the conventional deal. And that, Sidebottom says, is something you can take to the bank.