When Penske Truck Leasing adds to its fleet of trucks, office staffers in Hyderabad, India, log on to Penske's computer system and begin to arrange for titles and registrations available through U.S. state government Web sites. From that point on, Indian and Mexican workers, employed by business-process outsourcing company Genpact, will be remotely involved in practically everything regarding that vehicle.
Genpact essentially acts as a virtual subsidiary of Reading (Pa.)-based Penske. When a truck is leased for an interstate trip, Genpact's Indian staff check the customer's credit status and arrange for all of the necessary permits. If the truck gets stuck at a weigh station because it lacks a required fuel permit, the driver calls an 800 number, and Indian workers have the necessary document transmitted to the weigh station to get the vehicle back on the road within a half-hour. When a ride is finished, the entire driver's log is shipped to a Genpact facility in Juarez, Mexico, where mileage, tax, toll, and fuel data are punched into Penske computers and then processed in India. When Penske sells the truck, staff in Mexico record the transaction.
The relationship between $3.7 billion Penske and Genpact, which spans more than 30 different business processes, illustrates the length to which some companies are now leveraging offshore skilled labor. It's the outgrowth of a four-year-old strategy by Penske, which owns 216,000 trucks in 750 locations. Genpact also is starting to help Penske manage its logistical services, such as arranging just-in-time delivery of components to U.S. factories and shipping finished goods to retailers and home consumers. The top objective is not to cut costs, explains Penske Chief Financial Officer Frank Cocuzza. "The prime driver was to improve efficiency and customer service."
A NATURAL PARTNER. When Penske first decided to outsource such tasks, it was in the process of absorbing a $768 million acquisition of rival Rollins Truck Leasing, just as the U.S. economy was heading into recession. At the same time, Penske realized it needed to better organize its back-office and customer-care operations, which were spread among four different U.S. cities. "It was difficult to justify the cost of four different centers and also offer a consistent level of service," explains Cocuzza. "I came to realize that our business needed a transformation."
To pull this off, Penske concluded it would be better to recruit an outside specialist with resources in a low-cost nation such as India to help redesign and then administer its back-office work, rather than attempt to reengineer by itself. "Sometimes that's difficult to do with existing operations," Cocuzza says. "I couldn't have centralized all of these functions as cost-efficiently in the U.S."
Genpact was a natural partner. Penske is 79%-owned by General Electric (GE). At the time, GE also owned Genpact, then known as GECIS, which handled an enormous amount of back-office work for most GE businesses, from handling global accounts receivable to loan risk analysis and financial reporting. GE spun off the 19,000-employee unit last year and still owns substantial shares.
"ELIMINATING THE DEFECTS." Penske started the collaboration small, in 1999, by sending documents for data processing to a 30-worker Genpact team in Mexico. It then began sending work to Hyderabad. Now, of the 1,000 staff working on business processes, half are in India and 10% are in Mexico. Cocuzza stresses that Penske managers are in ultimate control of each process, and offshore Genpact workers always work through Penske's own computer system. "Everything I have there supports something we are doing in the U.S.," he says.
But the contractors are taking on ever more demanding jobs. For example, Penske is building a team of 40 statistical analysts in India to help design its supply-chain management services in the U.S., Europe, Brazil, and China. Supply-chain contracts involve managing vast volumes of customer data. Thus, many of the analysts require master's and PhD degrees in statistics. "To get the necessary resources to do that in the U.S. would be difficult," Cocuzza says.
The results? Because it isn't publicly listed, Penske discloses little financial information. So it's hard to gauge whether it performs better than rivals like Ryder (R) or U-Haul (UHAL). And the some $15 million annually in direct cost savings aren't huge for a company that's expected to earn around $300 million this year, Cocuzza says. But, he adds, the real gains from outsourcing are much greater, because Penske's business has grown sharply in the past four years, while the size of its U.S. staff hasn't increased much.
REDESIGN IS KEY. The real payoff has been in much more efficient back-office processes and more responsive customer service. "Where I really see the value is in eliminating the defects in my organization," Cocuzza says.
Penske also has learned some valuable lessons in how to efficiently handle offshore outsourcing. The biggest, Cocuzza says, is that getting an entire transition right was absolutely crucial. "The cost of not getting a transformation done seamlessly is traumatic," he says. "It's hard for me to explain to a customer why they have a problem because we relocated work offshore."
The key is to redesign inefficient old practices before shifting work offshore en masse. Genpact and Penske staff spent considerable time meticulously mapping all of the company's work processes, then redesigning the processes benchmarked against Six Sigma performance standards. Prior to the transformation, Penske managers didn't know whether or not they were losing money because customers were paying bills late, for example, or because its own finance department was paying bills early. Due to Penske's decentralized structure, agents also made unneeded collections calls.
TIME WELL SPENT. Penske accounts-payable agents in every location used to be responsible for calling customers about invoices. Some customers would receive dozens of such calls -- even if they had good records of paying bills on time. Now, Penske associates place a single call to customers for invoices at least 38 days old. Penske says these process improvements helped sharply reduce delinquencies, while requiring 30% fewer staff.
Nor did Penske document the average time its vehicles sat idle while waiting for a repair truck or to arrange for required permits. As a rule of thumb, Penske figured it did well if the truck idling at a weigh station got back on the road within two hours. Now that it's working with Genpact, the downtime in the vast majority of cases is less than 30 minutes.
Cocuzza also learned that successful outsourcing requires much more investment and management time than most companies assume. "At first, it was a huge learning process of what it took to relocate a business process," he recalls. "It took a heck of a lot more involvement on the part of myself and my team. If you take a third-party provider that says they can do it all, you are fraught with all kinds of risk. I don't care how motivated or well-trained your partner is. You still are working with new people." The outsourced staff "may know some principles, but they don't know your business."
IMPROVING COMMUNICATION. As a result, "we now do transitions more slowly and gradually, with a lot more people involved," Cocuzza says. For instance, each Penske manager of a business process being outsourced is expected to travel to both India and Mexico at least twice a year. The U.S. company also must invest time and resources to make sure employees of its offshore partner thoroughly understand Penske's culture and businesses.
One interesting lesson Penske learned is that it pays to help train Indian staff in English-speaking skills -- not just so that call-center workers sound more natural to American clients, but also so that Penske's own managers can communicate better with Hyderabad. "We have focused in India very seriously on voice. In collections, we have a rigorous process of hiring people with great voice skills. If we don't get people in each process with good voice skills, our own people have a hard time understanding them."
With several years of experience under their belts, transferring additional business processes from Penske to Genpact is easier. "I now have people there who are like our people here" in Reading, Cocuzza says. "They have now been through four or five processes and are still with us. Now our receivables and accounting group all work together almost seamlessly." And Penske is hardly finished expanding its Genpact relationship. In 2006, Cocuzza says, "my growth in India could be greater than last year and the year before." By Pete Engardio in New York