Is the sub-prime lending crisis placing outsourcing engagements on the backburner, or providing an impetus to proceed faster?

SubprimeUBS has shelved their planned HRO engagement with ACS and IBM as a result of its issues with the sub-prime lending crisis, the economy and their internal business uncertainty.  Like the recent Starbucks cancellation of their HRO engagement, plans have been waylaid to progress into a major HRO implementation due to changes in the business, as opposed to any operational issues.

What concerns me is the level of short-term-ism that some companies are currently adopting, with their looking only at the next quarter, as opposed to the longer-term picture.  I do believe this crisis will provide the outsourcing industry with a mixed-bag of opportunities, with some firms viewing the bigger picture and moving more aggressively into outsourcing initiatives, and others, like UBS, deferring decisions over long-term initiatives such as HRO, as they monitor the current economic situation and figure out their survival tactics.  Surely this is a perfect time to embrace changes to your business that will drive lower operating costs and new ways of doing things?  I’d be interested in your views….

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12 Comments

  1. Posted April 11, 2008 at 4:35 pm | Permalink

    This is a great question, one that most of us in the business of sourcing are musing [Re My note: Slowdown, SOA and Sourcing: http://infosysblogs.com/managing-offshore-it/2008/04/connecting_the_dots_slowdown_s.html Ram Charan, the management guru, in his recent Fortune magazine writeup advices “Don't expect the good times to roll for quite some time... But smart executives can use the downturn to make their companies better, stronger, and faster” [Managing your business in a downturn: http://money.cnn.com/magazines/fortune/fortune_archive/2008/02/18/103372936">]

    The Billion$ question is whether executives in Corporate America can think beyond a quarter at a time, especially during a slowdown?!

  2. Posted April 11, 2008 at 5:51 pm | Permalink

    Phil, I am a consultant at one of the largest Cpital Markets KPO outfit in India, providing Middle, Back and Front office services to Investment mgmt, Asset mgmt, Brokerage, Retail and Commercial Banking. The current Credit Crisis situation has created a heightened status of alertness in markets; and they are at least showing an openness (even the conservative ones), not seen before. Hence I feel the Credit Crisis will help the Outsourcing Industry by making companies aware of their capabilities and the gains possible through outsourcing. Of course there will be some outfts which will not want to outsource, preferring instead to initiate internal improvements,cost cutting exercises etc, but I beleive they are a group ever decreasing in numbers.

    Tathagat Dey

  3. Posted April 11, 2008 at 6:09 pm | Permalink

    Phil,

    There is no compelling reason to maintain a fast pace of outsourcing if you a) have less work that needs to be done, b) the dollar is sinking and increases the offshore cost, and c) employee turnover at offshore providers hurts customer quality.

    In fact, some companies are bringing parts of their customer service back onshore and even inhouse, because it is a key part of the customer experience.

    Brian

  4. Posted April 12, 2008 at 8:37 am | Permalink

    Specific to UBS; given Temasek’s management team having interests in other operations the business will most likely go elsewhere.

  5. Posted April 12, 2008 at 10:11 am | Permalink

    Phil

    Intersting thoughts.

    Make or buy strategies have been critical strategy since the onset of industrial revolution. The decisions on budget outlays for spending on Core and non core activities have continued to be hot debates in every strategy meeting since organized business decisions have been in existance.

    The two examples that you have enumerated are significant ones that are a direct result of the current economic crisis in the US. There are others as we all know.

    Outsourcing IT and business process management requirements to third party vendors has now become an irreversible phenomenon with many organizations globally opting to extend this practice to offshore vendors from cost competitive geographies.

    Short term strategies are but to tide over immediate crisis situations which could ultimately result in educated long term strategies. Outsourcing & Offshore outsoursing as you know are critical business strategies that makes log term views mandatory to ensure considerable and consistent results. It takes efforts and costs before these engagements are truly profitable (Return On Outsourcing / Offshoring – ROO)

    When Money supply (Read M3) being rather uncertain in these times, business tend to defer some of their long term strategic initiatives that would eventually bring them better cost minimization. Like UBS abd Starbucks there will be more organizations that will defer but not cancel their “Services Buy “ initiatives.

    While there definitely is a short supply in funds, resultant socio-economic pressures, tough market conditions and a need to be “cautious” on not-so-important-business spend, I do not think that the current economic turmoil in the US will stop Outsourcing or offshoring. The depreciation of the dollar will definitely have an impact on the bottom lines of all vendors that focus primarily on the US markets but then is this not the market that was willing to experiment with innovative business strategies more readily than other countries in the world?

    I do not think that there will be an increase in outsourcing. Well at least for a few months more. There will likely be a reduction in the size of the outsourcing / offshoring deals. Dependent services engagements will continue as is with demands for higher productivity from the third party vendors (More for less). Most organizations would defer outsourcing / offshoring engagements for all those initiatives that will provide them an advantage over longer but measurable time frame, to a later date.

    The US economy has always bounced back even if not in a “V” curve fashion it has always bounced back! It is something to do with the adventurous nature and “can do” spirit of the US businesses.

    Among the vendors, only those that are spontaneous in their adaptation to this “forced negative” market conditions and implement innovative business strategies and tactics to counter will emerge with minimal bruises.

    Cheers
    Ravi Ramanathan

  6. Posted April 12, 2008 at 10:13 am | Permalink

    I run Optwize with centers in Philippines and Mexico and we are definitely getting more interest as companies tighten their belts.

    Jim Jacoban

  7. Sanjay Negi
    Posted April 13, 2008 at 11:31 am | Permalink

    The Software industry related outsourcing is a little different in that the projects entail large capital outlays and these get directly hit during any economic contraction.

    Therefore the BPO industry will probably be less affected than the software services providers for the present.

  8. Posted April 13, 2008 at 4:32 pm | Permalink

    World is getting flatter at all ends… As long as you’re agile you’re doing fine. What I mean is that the distinction/advantages between onshoring and offshoring from a quality and commercial angles would keep blurring as we move forward.

    So either due to weakening dollar, quality concern, stronger Asian economy or whatever other factor it would make more sense for busienss processes to be best-shored; not merely onshored, near-shored or offshored.

    Credit crisis, economic slow-down and many other factors which make the business environment more and more competitive only make the case for best-shoring stronger for companies around the world. Its all about remaining agile to meet and beat the economic pressures and business challenges.

    Company sitting in China wants key functions to be performed in the US and vice versa. Similarly, a UK company with its IT team in Eastern Europe might want its sales team in US, its manufacturing team in China and its strategic team in UK.

    Slowly but surely labor arbitrage would no longer remain an offshoring driver. The only staffing/sourcing strategy that would work is the one which makes the company glocally (globally/locally) agile and effective to create and retain their value in both short and long terms. Also talking of agility, a trend of more and more ITO/BPO convergence is on the way to make this dream of agility really come true in an outsourced setting.

  9. Posted April 15, 2008 at 9:47 am | Permalink

    Phil. I agree with your comments. In times like these the strategic drivers for sourcing shift from competitive edge back to cost saving, but the reality is that there is a lag in this shift – projects planned for the former reasons are shelved before new ones are launched. Whilst that doesn’t fully explain the shelving of HR projects (which are commoditised and value-based anyway), this can be explained simply by a lack of confidence in the market. Ultimately, the credit crunch should (and I stress that) have a fairly neutral impact on the global sourcing market.

  10. Mohit Mankotia
    Posted April 15, 2008 at 10:34 am | Permalink

    Phil – Some background info first:

    “Consumer overspendings is one of the key reasons for sub-prime & the possible recession”. Consumer credit crunch is leading to declining sales thus Top – lines for most of the companies are dipping / stagnating. Financial institutions have lost money to the extent of not having money for OPEX / some big players now have to raise money for their operating expenditures.

    On the Off shoring side – Financial Institutions account for 20 – 30 % of revenues for most of the big off- shoring players. Predominantly most of the work done by these players is OPEX related (CAPEX related work e.g. application development etc is relatively less when compared).

    Now let’s see how crisis impacts the Indian IT / ITES sector in the short term to mid term:

    1.Financial Institution Clients: Financial institutions are in a cash crush situation. Lack of availability of operation expenditures may lead to downsizing at the existing offshore vendor location. Few instances are well known.
    2.New projects / projects requiring CAPEX definitely go on the backburner. UBS may be one of the examples.

    Financial Institutions account for 20 – 30 % of revenues for most of the big off- shoring players.

    3.Other Clients: Decline in consumer spending/sales is a concern here. Demand / Supply issues may lead to down sizing / re- deployment of resources at off shoring locations.

    4.New Projects / CAPEX related projects may be put on hold because of uncertainties on growth / recession/ etc.

    Short to medium (Q1, Q2& Q3) term growth looks like a challenge primarily because of uncertainties.

    But I believe the solution lies in the problem. With the stagnating/ dipping top – lines, the only way you make money is by increasing you bottom line which can be done by reducing costs. The proven way of reducing costs has been Off – Shoring. Margin pressures will definitely open doors to a lot of new opportunities.

    On the other side this is a good time for some M&A activities in the US. Valuations have been at all time low. To name a few – some Indian players who missed the 90’s IT bandwagon are seriously contemplating acquisitions for getting back into the game.

    Mohit

  11. jefferson faudan
    Posted April 15, 2008 at 12:01 pm | Permalink

    Working in an outsourcing company from the east. As far from what I noticed, most companies who have a glimpse on the outsourcing business truly haven’t realized the value of it. They haven’t realized how much it is they save on labor cost compared to what they pay for people to do it for them in their very own country. And sometimes it can be frustrating how they see outsourcing as a short-term goal that there are times take for granted and not pay the outsourcing agencies that have rendered them service on time despite contracts signed. Sometimes I find it radical that these people who says outsourcing is getting expensive. I mean practically, let’s make a call center agent based in the west which would cost them around $2000 a month while in the eastern side of the globe, that’s just a few months service rendered. And frankly I find it annoying how some of those who says $1000 is expensive for labor when they have to pay quite a lot more if they have their business outsourced in their very place… after all, if a middle class filipino can shed a $1000 on a piece of louis vuitton bag thinking that this is a third world country…what is it more on the other side of the globe when that $1000 can mean 4 pieces of Diesel or Calvin Klein jeans..? get my point?

  12. Posted April 19, 2008 at 5:02 am | Permalink

    Phil;

    Recently, these questions were posed at an IAOP meeting and here are some comments I made as a panelist;

    Dallas Chapter IAOP Meeting
    Chairman’s Summary
    April 14, 2008

    The Dallas IAOP Chapter used a panel format for its April 14 meeting. The discussion focused on what impact a recession or economic downturn would have on outsourcing activity and practice. Chapter co-chair Tom Tunstall facilitated a discussion with three panelists representing the customer, supplier and advisor perspectives to try to gain insight into this issue

    Gary Claytor – BDP Advisors (Advisor Representative)responded;

    1)How the government and innovative thinkers in industry react (or over-react) will determine how deep or how long the recession turns out to be.

    2)Recessions have in the past caused an increase in outsourcing activity. Companies use outsourcing both to save money and improve quality.

    3)The weakness of the U.S. dollar has a potential impact in the marketplace.

    4)People will respond creatively to an economic downturn and likely develop creative solutions to cope.

    5)A lot of outsourcing deals are coming up the 2nd time around, and there is less focus on cost savings and more emphasis on innovation.

    6)Outsourcing suppliers have been and will continue to consolidate through an economic downturn. There is also increasing interest from offshore organizations to purchase stable small-medium outsourcing companies in the U.S.

    7)Many mid-cap companies rely on outsourcers because suppliers can more easily keep up with advances in technology and provide capital for new technology.

    8)Outsourcing suppliers will continue to pursue work-at-home models for service delivery as a way to deal with wage constraints, higher commuting costs, as well as staff absenteeism

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