To those who know their IT outsourcing history, GE and offshoring are practically synonymous.
The colossal conglomerate—which Forbes named the third largest company in the world—first began offshoring IT and business processes to its own center in India in 1996. Even after spinning off its shared services division, renamed Genpact, in 2005, the offshoring pioneer has continued to aggressively pursue the costs benefits of outsourcing to third parties overseas. (GE maintains a minority stake in Genpact.)
But recently GE CEO Jeffrey Immelt has been touting the company's plans to hire 1,100 technologists and researchers—not in Mumbai or Manilla—but in Van Buren Township, Michigan. In a recent interview with Bloomberg News, Charlene Begley, president and CEO of GE Home and Business Solutions and senior vice president and CIO, indicated that the offshore outsourcing model may have lost some of its luster for the $150 billion company.
"About 50 percent of the IT work was being done by non-GE employees," Begley told Bloomberg News. "That strategy may have had its time, but there was a lot of downside. We lost a lot of the technical capabilities that we have to own."
So is this trailblazer of the offshore outsourcing model reversing course? Not exactly, say outsourcing industry experts.
Hiring 1,100 technology workers is a large undertaking; if the company were outsourcing that many jobs to one provider, it would be considered a big deal. But GE employs 9,600 IT professionals in 40 countries around the world, according to Deia
Campanelli, global communications leader for GE-IT. The company also has 3,000 to 4,000 IT roles outsourced to India, according to Ben Trowbridge, CEO of outsourcing consultancy Alsbridge.
GE would not confirm how many of its IT positions are filled by third parties offshore, but Campanelli did say that the professionals it's hiring to work at its Advanced Manufacturing and Software Technology Center will be filling new roles, not replacing the company's offshore workforce.
"In a prior decade, GE's strategic sourcing intent was to outsource 75 percent of their IT jobs and locate 75 percent of those jobs in India," says Trowbridge. "Hiring 1,100 IT professionals to work outside Detroit represents an effort to balance the percentage of staff that is outsourced and offshored."
David Rutchik, partner with outsourcing consultancy Pace Harmon, believes GE's decision to recruit local IT workers points to its desire to bring architecture, product and program management, and other strategic roles in-house to drive differentiation in products and services.
GE, like many heavy users of offshore outsourcing, may have begun to suffer the limitations of the offshore model. "Speed to market, flexibility, leveraging of resources across the enterprise—without all the statements of work and red tape [that accompanies outsourcing]—is something that is hard to quantify until you've lost it," says Adam Strichman, founder of outsourcing consultancy Sanda Partners. "The reality is that for IT to become a real differentiator in business, the personnel must be stakeholders of some kind."
GE's Economic and Political Motivations
GE's stateside hiring is a sign of the economic times, says Phil Fersht, founder of outsourcing analyst firm HfS Research. "GE has always been willing to be innovative with their global operations," Fersht says. "This move shows that their global operations management strategy is changing as wages in the US continue to fall, bringing something closer to parity with low-cost locations such as India. As arbitrage disappears, companies have to compete on quality and competency."
In addition, notes Fersht, Michigan has been aggressive in offering incentives for employers to set up shop there.
The information technologists outside Detroit will help GE develop new manufacturing software and processes, says GE spokesperson Campanelli, from industry-specific diagnostic tools to new data architecture and IT security systems. Also working at GE's Advanced Manufacturing and Software Technology Center will be scientists and engineers from GE's global research group. They will be designing new technologies for everything from aircraft engines to renewable energy. The center marks "a significant investment in IT and in regaining some of the technical [intellectual property] we had outsourced in the past," says Campanelli. "It also marked a commitment to bring 1,100 jobs to hard-hit Michigan."
So far, the center has 660 employees, and GE says it's averaging two new hires a day.
It's certainly good PR for the company and its CEO, who happens to be the head of President Barack Obama's Jobs and Competitiveness Council and has taken heat for occupying that seat even as his company outsources thousands of jobs offshore. But no Fortune 500 CEO today can afford to simply play politics when making job location decisions.
"All business is guided by some sort of direct or indirect political pressure. This is certainly impacted by the current high unemployment numbers," says Fersht. "[But] GE will have to do what is best for the clients and be careful to create the right numbers of jobs in the US to accomplish their mission."
More Companies Will Look to Create IT Jobs in the U.S.
The move could inspire other big users of offshore talent to rethink their sourcing strategy, says Trowbridge. "It is no longer a simple decision driven by massively cheaper India labor costs," he says. "CIOs today need to take into account the location, configuration and the scope of work they need to be able to provide for their clients."
Many CIOs are "fed up" with their own overreliance on offshore support, says Fersht. "I think you can expect to see more companies finding ways to create IT jobs in the US&and some activity moving work to locations such as Mexico, Argentina and Brazil, but it's still on a small scale."
Low-cost, rural locations are also growing more attractive to American CIOs due to high unemployment rates and an increased interest in supporting U.S. job creation, says Rutchik.
It's unlikely, however, that GE or any other early adopter of offshoring, will bring the entire IT function back in-house or even onshore. "While this is a bold move from GE, I think you will see GE continue to be a heavy offshorer," says Fersht. "GE has made a lot of money over the years since it pioneered the outsourcing concept, and I don't think it wants to see operating margins decrease."
Meanwhile, notes Rutchik, CIOs in industries that are newer to offshoring—such as healthcare and retail—are increasing their investment in overseas deals. Should the U.S. fall into another recession, adds Fersht, many companies may maintain or increase their offshore presence in order to cut costs.
Above all else, GE's move may be a milestone in the maturation of the offshore model. "Clients have gotten a lot smarter about outsourcing over the last 15 years, and GE is probably smarter than most," says Strichman. "The reality is that a more targeted approach to offshoring makes sense. It is about optimizing for strategic imperatives, not just optimizing around lowest cost."