The Hindu : Business : Has Indian BPO lost its lure for GE?

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Monday, Nov 22, 2004

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Has Indian BPO lost its lure for GE?

It is not realistic to say that the Indian honey has lost its lure for GE. Rather, the bee is changing its style to suck it.

FROM EARLY September this year, Indian financial dailies were abuzz with reports about General Electric selling its Indian BPO unit. It is official now. On November 8, GE announced the sale of 60 per cent of equity in GE Capital India Services (GECIS) to two U.S. private funds _ General Atlantic Partners and Oak Hill _ for $500million.

When the rumour mills started to grind, IT watchers were intrigued. The Financial Times would query, "Has India finally lost its allure for GE?" Some others wondered whether outsourcing from India was getting outmoded. What surprised them was that the news came at a time when the Indian IT sector was riding high and three of the major companies had reported stunning performance. Companies like IBM and HP were strengthening their India operations.

Change of strategy

Why then has GE decided to divest its equity? It had pioneered BPO operations in India and remains at the top of NASSCOM's list. If GE decides to shed, will others follow? There are grounds to believe that GE is not shedding but merely modifying its strategy to derive the maximum benefit from its operations .

Jack Welch's legacy

For two decades, GE was the most respected company in the world and Jack Welch, its CEO, was an icon portrayed in B-school textbooks. He turned GE from an ordinary engineering company into a conglomerate also deeply involved in financial services. Sadly, by 2000, the company was mired in financial scandals which included huge undisclosed retirement benefits to Mr. Welch. The much-touted management-by-stress model enforced by Mr.Welch came at a heavy price. "The case against GE" posted in a Multinational Monitor site in August 2001 was that while management by stress contributed significantly to the giant leap in GE's share value during Mr. Welch's reign, that jump came at a price which was "paid in considerable part by employees and communities that host or hosted GE facilities." Its outsourcing policies came under heavy attack.

By March 2004, the GE board had to consider a resolution proposed by a pension fund challenging its outsourcing business. The resolution was defeated. However, it sent a message to the GE management of consumer disaffection with its policies and how its globalisation programmes would be jeopardised.

The global outsourcing outfit _ GECIS _ is a 100 per cent ownership of GE. If GE's holding in it were reduced to below 50 per cent, it would cease to be a GE subsidiary. It will go out of its consolidated balance sheet. Legally or otherwise, GE may not then be held liable for any adverse outsourcing policies. GECIS was ripe for divestiture for other reasons as well.

Rationale for divesting

In the early years of GECIS when BPO outsourcing was untested, GE had reason to worry about the quality and safety of the BPO if provided by third parties. Since then, Indian BPO companies have blossomed and companies are able to offer sophisticated and dependable service in many areas. They are competing for business and even under cutting each other. Applying cost cutting norms, it makes sense that GE should palm off run-of-the mill services to others and retain "core" business within its ambit.

Moreover, as a big player with a monopsonistic hold on the market, GE is reported to have engaged in cutting billing rates with current contractors such as TCS, Satyam and Wipro. It is also known to appoint new companies like Mindtree and Polaris with the same objective view. The divested GECIS may be better placed to engage in this game. It will continue to have the advantage of multi-year contracts with 11 GE group companies. It is notable that GE was engaged in a similar exercise in the U.S. in offloading its shareholding in Genworth, its insurance arm. It sold a third of its holding in June to the U.S. public. In about two years, it aims to reduce its holding to less than 50 per cent. Perhaps, there is a parallelism between divestiture in Genworth and GECIS.

Another development is that after the departure of Mr. Welch, Jeff Immelt, the new CEO, had to redefine GE's priorities. Transportation, energy, healthcare and financial services are the core businesses he has identified. BPO seems to be out of his priorities. He may gain political advantage by formally shedding BPO, which is infested with outsourcing. The time saved on managing BPO may be used to monitor new programmes.

Tax angle

GE has been well advised by its tax advisers on the import of recent amendments to Indian tax laws.

Tax implications, as usual, are deep and inscrutable. Taxation of outsourcing companies has been a vexed issue. Of course, Indian outsourcing companies have been enjoying tax freedom for ten years. Tax incidence on foreign companies was not clear.

On September 28 this year, the Finance Ministry issued an important circular clarifying the legal position.

The net result of the circular which incorporates court decisions and provisions of double taxation avoidance agreements is that if an independent entity undertakes BPO services for foreign companies as also for others, it would not be treated as a permanent establishment in India. GECIS has thus far been undertaking `captive' business as a wholly owned subsidiary of GE.

The newly structured GECIS will be engaged in old or new business with other companies, Indian or foreign. Thus, it may be free from tax liability.

We get back to where we began. It is not realistic to say that the Indian honey has lost its lure for GE. Rather, the bee is changing its style to suck it.

K. Subramanian

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