BolBhai

In India's outsourcing boom, GE played a starring role
Jay Solomon and Kathryn Kranhold
Wall Street Journal
Mar. 23, 2005 10:58 AM

NEW DELHI - In September 1989, Jack Welch, then General Electric Co.'s
chairman, flew to India for a sales call. He hoped to sell products
like airplane engines and plastics to the Indian government.

But during a breakfast meeting with top government advisers, it was Mr.
Welch who got pitched. "We want to sell you software," Sam Pitroda,
chief technology adviser to the late Indian Premier Rajiv Gandhi, told a
surprised Mr. Welch. Mr. Pitroda explained that India needed business
for its emerging high-tech sector.

"If I kiss your cheek, what do I get in return?" the GE chairman
replied, according to two men who were present.
Fifteen years later, the answer is clear: the global outsourcing
revolution.
India today earns more than $17 billion from corporations worldwide
seeking low-cost overseas talent to do everything from writing software to
collecting debts to designing semiconductors. GE in large measure
stoked the phenomenon, playing an unheralded role as the Johnny Appleseed of
India Inc. and reaping billions in savings for itself along the way,
referring to the legendary folk figure who roamed the American
countryside planting apple seeds.

GE's technology partnership with India came amid the country's economic
opening, which began in 1991 when New Delhi began systematically
dismantling tariff and export controls. Indian executives say early
investments by GE in India gave their technology and business service sectors
crucial credibility and cash when other companies still viewed the
country as a risky backwater. Moreover, exposure to Welch's culture of
cost-cutting and efficiency taught them business skills they are now using to
compete globally, often against U.S. firms.

"What we learned out of (the relationship with GE) is phenomenal," says
S. Ramadorai, chief executive of India's largest software company, Tata
Consultancy Services Ltd. Business from GE helped TCS boost its annual
revenue to nearly $1.6 billion in the year ended March 2004 from around
$37 million in the early 1990s, says Ramadorai. Today, GE still
accounts for 15 percent of TCS's overseas revenue and the Bombay company has
used the GE relationship to spread into new markets such as China and
Eastern Europe.

Publicly, GE has been reluctant to take credit for its singular role.
Shipping white-collar jobs overseas has proven controversial in the U.S.
Demoralized American workers have had to train their foreign
replacements. During the 2004 presidential campaign, Democrats threatened to
impose tax penalties on companies that move jobs overseas.

But the strategy has been pivotal for GE. In 2000, it inaugurated a
Jack F. Welch Technology Center in Bangalore that employs thousands of
researchers working on everything from new refrigerators to jet engines.
This year, the conglomerate plans to spend about $600 million on
computer-software development from Indian companies, according to a recent
company report. The company estimates that similar products would cost it
as much as $1.2 billion in the U.S.

GE also recently unleashed a big new player in Indian outsourcing. In
November, it sold a controlling interest in GE Capital International
Services, or Gecis, a company with about 17,000 employees that GE started
in 1997 to answer mail from its credit-card customers. With the $500
million sale of the Indian unit to private investors, Gecis will go after
business from other corporations looking to save money.

Helped by the outsourcing boom, India's economy is on track to grow 7
percent for the year ending this month. Services now make up roughly
half of India's total economic growth, and revenue from India's technology
sector is expected to exceed $28 billion during the current fiscal
year, according to Nasscom, a trade organization representing India's
high-tech sector.

Indian businessmen and politicians widely credit Welch and GE for
seeding their country's economic boom. "The breakfast meeting was the
turning point" for India's information-technology industry, says Jairam
Ramesh, a senior economic adviser to India's ruling Congress party who was
present at the 1989 meeting.

The first teams of GE executives Welch dispatched to India set foot in
a country where cows meandered freely in the streets and where searing
heat often drove temperatures to around 40 degrees Celsius. "I was
tasked to make sure nobody got sick," says Sunand Sharma, a former
executive with GE's India operations who helped coordinate the conglomerate's
initial software partnerships.

GE Medical System's former Asia chief, Chuck Pieper, was among the
first to arrive in 1989, seeking an Indian partner to help develop a
low-cost ultrasound machine. Because India was still a closed economy
protected by steep tariffs and red tape, GE needed a domestic partner to sell
its instruments there.

Among Pieper's first contacts were with Wipro Ltd., a Bangalore
software-services company which until the late 1970s largely profited from
selling vegetable oil. He says he quickly became enthralled with Wipro's
chief executive, Azim Premji - today India's richest man - who picked
him up at the Bangalore airport in a hulking Ambassador sedan, a 1950s
design famed for its rugged endurance but lack of air conditioning or
power steering.

Mr. Pieper felt confident that he could get a "good night's sleep" with
Premji as GE's partner. Within a year, the two companies had formed a
joint venture to manufacture an ultrasound machine for GE's medical
division.

GE's industrial-equipment sales into India didn't take off as
anticipated. But executives realized they had found an inexpensive source of
talented programmers and engineers. GE's Mr. Pieper quickly set aside $5
million annually to hire Wipro to write more software code for GE
ultrasound machines and computer tomography, or CT, scanners.

GE's taste for cost-cutting came as a shock to Wipro executives such as
48-year-old Ramesh Emani, who helped manage the software partnership.
He says GE soon began playing one Indian software firm against another
to drive down costs, demanding constant productivity gains. "GE was very
brutal," says Mr. Emani, who now heads a Wipro unit developing software
for cars and cellphones.

By the mid-1990s, top GE managers began encouraging other units to
follow the medical division's lead in India. In some cases, Welch gave the
order directly, says Mr. Pieper, now vice chairman of Credit Suisse
First Boston's alternative capital division in New York. "For the same
amount of engineering dollars, we were getting 50 percent more people
thinking about stuff world-wide," he says.

A software programmer in India with two to four years experience makes
about $10,000 a year, compared with $62,000 in the U.S., according to
Hewitt Associates LLC, a Lincolnshire, Illinois-based consulting firm.

GE contracts helped underwrite the growth of India's technology sector,
Indian executives say. GE accounted for about 50 percent of revenue
from Wipro's software unit, Wipro Systems Ltd., at its peak during the
1990s. At TCS and another leading technology company, Infosys Technologies
Ltd., the figures were between 20 percent and 30 percent, the companies
say. Combined, these three firms now account for a third of India's
total software exports.

For the year ended March 31, 2004, Wipro's information-technology
businesses generated more than $1 billion in revenue, up from just $15
million in 1989. Its headquarters in Bangalore is an oasis of blue fountains
and manicured lawns amid dirt roads and parched fields. In a December
interview there, Wipro's chief executive, Mr. Premji, said GE "helped us
understand global companies."

By the late 1990s, GE began turning its attention from simply buying
software from India to using the country as a base for data entry,
processing credit-card applications and other clerical tasks.

Other companies such as American Express Co. and British Airways PLC
had already moved some back-office operations to India. But with Welch's
enthusiastic support, GE eventually went much further, shifting
thousands of jobs and untold dollars in operational expenses to India. Savings
on backroom operations alone amount to about $300 million a year.

Nigel Andrews, a former top GE Capital executive who oversaw India,
says the "light went on" for GE in 1997 as the financial unit was about to
create an Indian office to process credit applications for a
credit-card joint venture with a local bank.

Andrews says he realized that India's 100 million English speakers
offered an almost limitless pool of inexpensive, educated labor for such
tasks. "We started to think, we can do this for the rest of the world,"
says Pramod Bhasin, a former GE Capital executive who today serves as
Gecis's president.

Their first move was to hire away the Indian executive then managing
American Express's Indian outsourcing unit, Raman Roy. The new Gecis
operation quickly took on a number of assignments for GE's U.S. businesses,
such as pulling together mortgage applications. By late 1998, Roy began
patching together a prototype for the company's first international
call center in New Delhi.

That effort met with skepticism from U.S. executives, who thought
India's telephone and electricity infrastructure was too unreliable. Roy's
team worked with Indian regulators to install reliable phone lines and
bought generators to guard against frequent power cuts. They strung bed
sheets between cubicles to meet U.S. requirements for privacy of
financial data.

"The phone company initially told me there wouldn't be outages for much
longer than six minutes," Roy says. "I told them I couldn't survive an
outage of even six seconds."

The venture offered clear economic advantages. An Indian call-center
worker earns around $3,000 annually, compared with more than $27,000 in
the U.S., according to Hewitt, which says its comparison is based on
secondary sources. Mr. Bhasin says 8,500 people responded to a newspaper
ad for the first 20 positions.

After the call-center's first trial in early 1999, GE allocated more
than $10 million more to expand the operation, as well as other
processes. Roy says former GE Capital Chief Executive Gary Wendt told him: "You
don't know the revolution you just created." Mr. Wendt didn't return
calls seeking comment.

In the U.S., GE's outsourcing push continued to meet resistance.
Executives worried about replacing American workers with overseas labor.
Andrews says managers at GE Capital's credit-card operations feared U.S.
clients might take offense at being called by foreigners.

As the cost savings, efficiencies and quality became apparent, GE
increasingly came to view outsourcing as a weapon to drive its profits.
Welch challenged his top managers to meet with Indian staff. At GE's annual
gathering of top management in Boca Raton, Florida, he gave the stage
to Messrs. Andrews and Bhasin, who pitched their operation. "You weren't
a fully fledged player if you weren't doing something in India," says
Andrews, who today serves on several corporate boards and as a governor
of the London Business School.

GE's Gecis unit eventually employed 12,000 people at two expansive
office buildings outside Delhi and a glittering new tower in Bangalore, and
several thousand more in other countries. It also started proving more
sophisticated services like accounting and analyzing new markets for GE
businesses. In 2004, Gecis estimates it did about $400 million of work
for its parent company.

In November, GE sold 60 percent of Gecis to U.S.-based investment firms
General Atlantic Partners LLC and Oak Hill Capital Partners LLC. The
sale has allowed Gecis to begin working for companies other than GE,
including Japan's Nissan Motor Co. which recently signed on as a customer.

GE leaders have discovered limits to overseas operations. India's
nuclear standoff with neighboring Pakistan in 2002 caused executives to
worry the company had become too "concentrated" in the subcontinent and led
to a pause in investment, says Scott Bayman, head of GE's India
subsidiaries.

Some other GE units have also withdrawn business from India. Last year,
GE's health-care business stopped using India to handle
customer-service calls, after a GE health-care survey showed that hospitals and
physicians "prefer to work with local, U.S.-based customer services." The
calls are now being routed to call centers in Wisconsin and Florida. GE's
health-care unit still does some work with Gecis.

Alumni of GE's India operations say they aren't worried about a
backlash against outsourcing. Indian entrepreneurs are churning out dozens of
new technology and outsourcing companies, many based on business models
learned from the American conglomerate.

Roy, the former Gecis executive, founded Wipro's call-center operation,
Wipro Spectramind Services Ltd. With 15,000 workers under him, Roy says
he is looking forward to competing with his former employers.
"Technology companies and outsourcing firms in India need to recognize that if
it wasn't for GE, they wouldn't be here today," he says.