Online Extra: Wachovia's Change of Heart

While many other large corporations were rushing headlong into offshoring, Charlotte (N.C.)-based Wachovia (WB) was content to sit on the sidelines -- until now. By the middle of this year, Wachovia will have outsourced 500 to 1,000 jobs, with plans to move an additional 3,000 or so by the end of 2007.

Most, but not all, of those jobs are going to India. An undisclosed number of human resource slots are being outsourced to Hewitt Associates, which will perform some HR functions for Wachovia right down the street from its Charlotte headquarters.

SOUL-SEARCHING.Why the change of heart? Peter Sidebottom, director of corporate development and strategic initiatives for Wachovia, says that with a couple of major bank acquisitions on its hands at the timethe bank has pulled off two large-scale mergers with other regional banks so far this decadeWachovia had a lot on its plate, and knew it could extract plenty of cost savings just from those two mergers. "We felt we had a lot of opportunities to save money without going offshore," says Sidebottom.

But at the same time, it's clear that senior management at Wachovia spent the past several years doing a bit of soul-searching about outsourcing. Wachovia CEO Ken Thompson made several trips to China, India, and other countries to see those economies up close and to meet in person with business leaders there.

And after watching his competitors lower their cost structures through offshore outsourcing, Thompson finally concluded that Wachovia had no choice but to follow suit. In an Oct. 17 speech at Wake Forest University, Thompson told the students: "There is nothing I would rather do than turn back the clock and say, `We will not offshore,' but we don't have that luxury," according to an account in the Charlotte Observer.

THE RIGHT THING.Thompson elaborated further a few weeks later in a forum at Charlotte's Queens College when former Bank of America CEO Hugh McColl put him on the spot, asking about the controversial practice of moving American jobs offshore. Reflecting on his travels to India, Thompson allowed that he "came back more convinced than ever that free trade, open borders is the right thing for the country. And it's the right thing for the Third World as well."

Thompson admitted that buying goods and services from Third World nations creates job loss in the U.S., "but to try to staunch that in my view would be like putting your thumb in a dike to hold back the Atlantic Ocean. It's not going to happen. The laws of economics aren't going to allow it to happen."

But even after it decided to go offshore, Wachovia proceeded slowly -- and took pains to study the early experiences of other companies. First thing it did was consult not just with the experts at the likes of Deloitte Consulting and McKinsey but also with other banks that had offshored, including its crosstown rival, Bank of America (BAC).

SHORT-LIVED.What did Wachovia hear? "Not to view [offshoring] just as a cost ploy," says Sidebottom. "Don't view this just as a labor arbitrage. If you don't plan from the beginning as to how to also transform the way you do business, it will take longer." Sidebottom said he discovered that some banks that had viewed offshoring as nothing more than a quick way to cut costs found that the savings were short-lived. "They all ran out of runway after 18 months," says Sidebottom.

After listening to other companies, Wachovia decided early on that it didn't want to create its own "captive" company -- in effect, an offshore operation that it alone managed, as opposed to contracting with an Indian company to perform the service -- as some other companies had. Reason? It got the sense that things hadn't gone well for companies that tried to manage a new division half a world away from headquarters.

"They [other companies] found it was very expensive and time-consuming," says Sidebottom. Also, Wachovia concluded that some of the companies that set up captives had a hard time recruiting the best talent because many U.S. companies have no name recognition among Indian workers. They'd rather work for, say, Tata Consultancy Services or Genpact than a relatively unknown U.S. company such as Wachovia. "Genpact is one of the top employers in India for graduates of business schools," he notes.

BIG GAINS.In the end, Wachovia decided to partner with Genpact, Infosys Technologies (INFY), and Cognizant Technology Solutions to perform different tasks, including computer programming. But while the bank did shift some computer programming and analytical work to India, Wachovia made a decision not to outsource any call center work.

While Sidebottom was measured in his explanation, it seems apparent that Wachovia was well aware of the experiences of some U.S. companies that have outsourced call center tasks to foreign workers who aren't always attuned to U.S. culture and geography. "We view our customer relationship as our most valued asset. We see no reason to put that at risk," says Sidebottom. "We've seen the impact on customer relationships for a wide variety of companies."

Still, Wachovia expects offshore outsourcing to produce big gains for the bank. Wachovia believes that offshoring will be a key component of its goal to take out $600 million to $1 billion in costs over a three-year period. And it expects to turn around and reinvest up to 40% of those cost savings back into its core businesses, through additional branch openings, more ATMs, and more personnel for such services as wealth management. Despite its late start, Wachovia has clearly caught the outsourcing religion. By Dean Foust in Atlanta

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