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Sep 25, 2008

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Phil,

I think you’ll will see an across the board up-tick, with one exception. The nature of the outsourcing will likely be smaller scale – ie. things that can be more quickly implemented with little up-front investment and quick payback. The exception is Finance & Accounting, where I think you’ll see a Sarbox-like slowdown since issues of control are such a hot topic; not sure the natural reaction will be to outsource things for fear of the control risk.

Mark

Allow us to ad to the already bulging intelligence on this post. Permit us to look into newer aspects of the short-term effects for the Outsourcing industry in general:

1) M&A will most definitely throw up opportunities for LPOs and F&A. Call Centers (specially customer support - voice) may see some decline in business in the next 2-3 quarters but it will stabilize.

2) After the financial slaughtering in global markets, the post-merger entities will most definitely look at consolidating their IT & BPO outsourcing costs.

3) While the outsourcers consolidate costs the IT & BPO industry will most certainly have to increase their share of bundled offerings - SAAS in the new way to go.

4) While offering SAAS there would be an initial surge in business then a marginal dip, and the graph will pick up significantly in the later stages of its evolution. This would also help India (and other maturing Outsourcing markets) in rationalizing rising costs to a large extent, in many ways.

5) India, as specially observed by many, will have to look at its rising costs. One way is to quicken the pace of adding value (read higher skills) to its workforce.

6) One would see that the next big wave of outsourcing would see a surge in KPO (and/ or higher value, more critical processes) from the global markets, specially BFSI which will feel the aftermath of the current crisis only in subsequent years. While the BFSI segment stabilizes, that will be the time for smart BPO/ KPO companies to come up with more offerings and take high-value processes.

7) The industry has also started looking at domestic business almost in all places like India, China, Vietnam, Pakistan etc, to name a few. Domestic business will be the leveler for them - at least in the short-to-mid-term.

There is no doubt that the industry shall grow as a whole but there will be many quick changes. The trick is to foresee the changes and act now to be ahead rather than to wait for things and react.

Chief
(BPO Union 2.0)
bpounion.wordpress.com

Many of the firms involved in the recent M&A activity possess a large offshore capability within their firm. These Offshore Shared Services will be looked at very closely as an option to a 3rd party relationship, particularly as the new larger entities may provide the scale to further justify the in-house offshore capability. In the short-term, firms will be reticent to begin the time-consuming and costly project to outsource to a 3rd party provider in the current economic environment.

David Quirk

Can we outsource the people who voted the bill down, in the House? Get some people from India, or China instead?

Overall, I expect an increase in volumes in the second half of 2009, but a decrease in the top line growth of vendors due to a rate-squeeze.

Reasoning?

Well, from now till Christmas will be shootout time in the global financial markets.

The ones who are left standing will be busy planning their future course of action in early 2009. Outsourcing will be the least of their concerns. Global finance will be the focus.

By 2H 2009, cost cutting measures will start getting implemented, one of which will be increased software & process outsourcing to low-cost locations.

Assuming they have learnt their lessons and sort of "start flying coach", there will be one hard squeeze on billing rates!

One scenario that has been hinted at in the comments here but is worth discussing in full: politicians will now control significant assets on behalf of the taxpayers.

If they wake up populist one day (which becomes more likely during a crisis/recession) they may decide to write laws that restrict offshore activity in order to "generate US jobs"

Personally I disagree with that logic, but it has been used before and who knows, the public may be more ready to buy it after having to bail out riksy gamblers.

I look at this a bit differently, based upon which part of the marketplace - globalization vs staff augmentation - is being discussed. "Socialization" of equity sources will put an added political dimension that will likely retard globalization during the 18-24 months it will take the financial services industry to refactor its capital and rebuld business models. Nothing happens in 6 months, and only a few things can happen in 12 months.

The cycle will be longer because the underlying issues are fundemental. Staff augmentation will continue and will remain tactical, and will be focused on skills acquisition to fill demonstrable gaps in the local resource base (primarily). BPO opportunities for globalization will require greater risk assumption (e.g., cost per transaction pricing) to warrant the effort, with the exception of captive BPO operations.

The glut of highly skilled resources in the financial sector will create opportunities for remaining players to backfill their bench of knowledge workers. This will cause management to re-evaluate the time and expense of continuity of globalization programs (unless the returns are profound and very short term).

Let's not kid ourselves about the scope of this disruption. It will hit everyone hard, and will take some time to recover to "business as usual".

I guess there is cool realism in Amit's respone - a linear logic that is difficult to actually refute.

However, in view, the opportunities are not linear at all. The opportunities into the future, especially in thie newly disrupted marketplace, will be out of the box. For one, we are going to have to rething onsite/offshore ratios - a lot more will be done offshore (not just from India, but nearshore, in other locations such eastern europe, etc.). There will also be innovation in terms of the services offered. BPO not withstanding, most offshore IT services have been input based. What we will start seeing is customer demanding more output based. the question remains if the provider community can respond & deliver.

Ashutosh Mankar

Phil,

I actually think that it will be the opposite. BFSI has been on the forefront of outsourcing & almost all players have a heavy outsourcing / offshoring component. Outsourcing is now of very little incremental value to them vis-a-vis the competition. Consolidation will only lead to them considering rationalisation of their outsourced IT staff. I do think that there will be an immediate spike as operations inevitably need to be consolidated, but beyond that I expect the number of outsourced staff with the merged entity to be lesser than the sum of the outsourced IT staff had the entities still been seperate. Sadly enough for IT services organisations, the volume of IT work & the size of the client organisation is not as linear as they had like, as most systems are built for scalability. Hypothetically speaking, if Nomura took over Lehman's systems, it is more likely that the they would be able to accomodate the additional scale (from an IT perspective) without too much grief.

Regards,
Amit

Phil

I tend to agree roughly with your timescales but expect effects to be more protracted.

As I write the markets aren't exactly embracing the bailout plan. I believe the dichotomy of providing a genuinely attractive bailout program to the banks such that the take up of money is timely whilst ensuring the American tax payer is not taken for a complete ride will slow the process. Large banks - the ones with the cash will sit it out until the govt purchase price for distressed assets increases and only once they have taken the bailouts will money start to flow again.

Until the point where money flow returns to normality the majority of banks will focus on the crisis in front of them. I doubt any banks will consider increased outsourcing as a short term strategy and by short term I mean in the next 0 - 12 mths. Incumbents will most likely pick up the recent M&A activity that has taken place and not until some measure of sanity has returned to the financial world (at least 6-9 mths) will any measure of increased activity be seen.

Giles

Hi Phil,

Regarding the accelerators, i do think there are some reasonable suggestions you make out here (although taking the BofA-ML example in context, some could argue otherwise as well?); Not clear yet of the overall end results due to these recent changes in Wall Street/BFSI segments for the outsourcing industry in the forceeable future, will this help it grow or will it struggle to hold growth?

I would look at the inhibitors more closely including how the business is changing, try and analyze what are the lessons from the past, for example, changes that impacted the capital markets in the aftermath of the last downturn 5-6 years ago, although of course this time it is very different and deeper change,

1. Last time around (2003-?) there was some restructuring on a smaller scale (tighter regulation, research delinked from trading, RegN MS, SOX, shrinking fees etc.), clearly all that accelerated growth of outsourcing and especially offshore IT intiatives at the top bulge bracket banks/even across BFSI segments. Since then IT outsourcing and BPO is well established at most of the large banks and fairly significant. M&As may not grow the whole piece now really as there would be parallel opportunities to rationalize plus where is the business headed,

2. The change & restructuring this time is clearly a lot more deeper and painful. This will reduce the size of the industry, it may also therefore impact the size of the overall IT business volume this represents. A lot of discreetionary spends and longer term projects will be deferred,

The credit and commodities fuelled boom and in general the risk appetite of investors is ending, and so the asset classes - ABS/ MBS/ derivatives/ structed products? demand is definetly shrinking,

3. The bailout is going to expect Wall Street to put the house in order (takes longer and so the outlook will have to be muted for the medium term?) and also will have an expectation of a pay back of this over time? So the impact is continuing and work in progress,

It may all not really grow/accelerate much in the short-medium term,
Regards,

Based on the activities of the financial markets, I think this is a positive indicator for the Outsourcing Sector. I see short and long term gains from the Wall Street debacle.

Marc Kauffmann
[email protected]

I completely agree with the thought that the recent financial & economical crisis will be having a largely positive impact on Outsourcing Inudstry. Not only Financial Outsourcing but also IT Outsourcing Industry will get the benefits. As the recent crisis will force the companies to reduce their budget and cost of production they will actively start looking at cost effective options who can provide same or better quality then what they are getting back home.

But at the same time situation will take some time to become stable, and we need to wait and see how economy immerge from this. Also US election and new budget policy will play important role in the whole process.

Being an IT Offshore Service Provider I would surely belive this will help companies like us in long run. But at the same time we need to take care of increasing cost of resources in our own markets.

Divyang Pandya

I tend to agree with this points but i think in long term it's positive. We can expect still increased activity once Wall St. settle down again.Long term impact its very good for outsourcing issues.

I would not hold my breath waiting for an increase in projects coming from the financial services industry anytime soon. I agree that tough times tend to benefit companies that provide outsourcing services, but I would not be looking until at least Q1 or maybe even early Q2, when new budgets are in place, the new administration is in place and everyone has a better handle on the long term prospects. I think the holidays are going to be hard on the retail industry further shrinking IT projects. If those budgets are not already spent, the most likely scenario is they will be slashed and all but the most mission critical projects postponed until 2009. Time for services companies to trim the sails and brace for a few tough months before things get better, IMHO...

Mario

Short-term it's very negative, but long-term it's positive. I'm still very optimistic that outsourcing white-collar jobs is at the beginning of the cycle.

It is obvious that the Wall Street turmoil has had a direct impact on the expected revenue & profit margins of outsourcing vendors. However, thinking in the long run, the demand for IT services and products for major financial institutions will be fairly strong. This is because investment in technology is so crucial to keep going in today’s competitive scenario & to keep sensitive data secure. Moreover, consolidation among large financial services players due to current turmoil will provide huge integration opportunities for outsourcing vendors. The Legal Process Outsourcing (LPO) sector will also experience a positive effect of the U.S. financial crisis as bankruptcy filing incidents make many corporate houses and investment banks shift their credit crisis-related work to lawyers in India as it is a more feasible and cost-effective option.

Swapnil Bidve

I tend to agree with Siddharta on the fundamental argument: the size of the mess dwarfs even large savings on back office stuff, so it won't be a priorty.

It's a little like selling back office efficiency/outsouricng to E&P guys in oil. The bets are so big that fluctuations of 200% in back office costs are but a rounding error in the bottom line.

That said, I would still expect some increased activity once things settle down, as Wall Street rebuilds with a more diversified, global, risk-managed workforce across all functions.

I was at a Asset and Wealth Management Summit this week - and a clear message from both Asset Managers and Custodians/Fund Administrators was that there is 'only that much you can squeeze out of $30K p.a. jobs' in reference to operations jobs. So the savings through outsourcing are insignificant in context of the enormity of the current crisis (anything of the tune of $50 Million itself would require offshoring 3000 or more Ops jobs - even this big number is of no help in the context of either liquidity issues of 10s of billions or losses of 100s of millions). Only thing of significance could be captive sale which can fetch upwards of $500 M for some large ones.

So everyone realises that outsourcing is not a part of the solution here - not even in a small measure - it will come back on table when things become more 'business as usual' and untill then only those things which help address this crisis in some way are on table. Others who are not firefighting may continue with their initiatives already in place, though at a different pace.

I agree. Both the political and the macro economic climate point to slowing down of decision making in outsourcing deals which have more than 3-6 months deal cycle . For complex or large number of FTE's financial services may wait and watch.

Long term impact is likely going to very good, as it points to separating risk analysts from business, and risk analysts are available at a fraction of the cost in India.Cutting costs in merged companies is also a good medium term trend. But short term will be slower deals, and maybe even lower volume of work.

Ajay Ohri

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