Why these are good times for the outsourcing industry

Beautiful-cloudsDespite the uncertainly and current gloom that is consuming us, these really are opportunistic times for the outsourcing industry.

Outsourcing thrives on mergers. disruption, corporate restructuring, cost-containment needs and business change (remember the post 9/11 outsourcing bounce). 

The financial services industry is finally ready for that change, and early survey results show this.  In addition, the majority of service providers are polarizing their sales efforts on the beleaguered sector to increase their market presence and defend existing business. Moreover, my optimistic side tells me that this bail-out package will be ratified by Congress, and it will drive a new culture of long-term change into the sector that will favor long-term ITO and BPO contracts that reduce costs and add core focus to re-emerged enterprises. 

Traditionally, this sector has been very reticent


to adopt much outsourcing outside of IT areas, but this meltdown will surely drive a new era of change, and an embracing of long-term cost-containment strategies.  Executives will need to be seen to be implementing radical change, and outsourcing fits the bill.  And while many firms will initially move into smaller-scope engagements, the major difference is that we will see firms adopting an outsourcing culture that they would never have previously contemplated.

Here are some key early indicators the industry is telling us:

Over 55% of financial intuitions expect to increasetheir expenditure on ITO and BPO services within the next six months.   The key areas where new investment will occur are currently (in order): 

(1) Applications outsourcing,

(2) Finance & Accounting BPO,

(3) IT Infrastructure Outsourcing,

(4) Banking BPO services,

(5) IT Staff augmentation projects,

(6) HR Outsourcing projects.

Let's cut to the chase:  the financial services sector has held back from many outsourcing opportunities in recent years through a stubborn resistance to change and a fear of losing control over non-core business processes.  However, with this nurtured recovery, executives have little choice but to embrace global opportunities that afford long-term cost-savings, access to process acumen and new technologies.   I can't wait to reveal the results of this survey next week.

Exciting times… hang in there -;)

 

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7 Comments

  1. Manish Mehta
    Posted October 3, 2008 at 2:47 pm | Permalink

    Hi Phil,

    It seems like this this fits the past trends – Tough times do mean higher interest in outsourcing, although a lot of the recent comments have been otherwise.

    Curious to know – Is this the data observed from the poll responses -
    “Over 55% of financial intuitions expect to increasetheir expenditure on ITO and BPO services within the next six months.”

    Cheers,
    Manish

  2. Posted October 3, 2008 at 5:44 pm | Permalink

    Phil,

    I appreciate your optimism and hope you are right!

    Interested in your thoughts on one area that I think could see some shock: mortgage servicing. It has been one of the relative high-adoption functions for offshoring. As the Federal government acquires these mortgages, it occurs to me politicians might want to limit (or eliminate) the servicing that can be done offshore, which would be a huge hit to one of the more established portfolios of services. I would not be surprised if the forthcoming regulations to limit risk-taking also have some restrictions on offshoring (though I personally believe the opposite–there is less risk through a diversified portfolio of locations).

    Is this a rational fear? Or am I just looking for doom and gloom in all the wrong places?

  3. Posted October 4, 2008 at 8:47 am | Permalink

    Esteban: From what I am seeing so far from financial services firms, mortgage servicing isn’t high on the BPO agenda. In addition, many of the banks already have their own offshore captive operations, so I would expect some consolidation of these with all the M&A that’s happening. We should also expect to see some captive acquisition going on as a result, from some of the providers. One area I neglected to mention is KPO, where we are seeing more project-based work going to service providers such as WNS, EXL, Cognizant and Genpact in this space.

    You would expect the next US government to use the bailout opportunity to deliver many of these services for the financial sector onshore, but I have yet to hear about any specific policies from either candidate to encourage this. Ultimately, the cost of setting up onshore delivery for mortage services is likely to be too prohibitive, but with this new precendent of government intervention in the financial system, wouldn’t it be a good idea to set up an onshore shared-service facility to support the ailing banks, which would create jobs for the beleaguered sector?

    Manish: yes, this 55% number is from the current poll. This is an early indicator, and may change over the next few days.

  4. Phil Martie
    Posted October 8, 2008 at 4:17 pm | Permalink

    Mortgage Servicing BPO does have a niche that is going to heat up significantly, and that is the loan modification process. With the $700B going into the backing of troubled mortgage securities, the goal will be to modify the troubled mortgages to mitigate total loss.

    This is the whole concept behind buying the securities at 25 cents on the dollar (full loss) and re-selling them at 50 cents (modified loss). The challenge for the banks, and hence their motivation to outsource, is to analyze their subprime/ARM portfolios, solicit defaulting borrowers to agree to a modified rate & payment structure, and then recognize a partial loss as opposed a full write down. There is an application process that must be followed that includes means & expense review, however. The submitted app and supporting documentation must be complete before it can be considered, and between those borrowers who are asking for modification early and those who are agreeing to do so after solicitation, the banks are now flooded with inbound inputs to process.

    The modification process is now a core business in iteself – ie, modifying a $500k loan instead of losing it is considered revenue. The huge surge in volume means that the banks need help to get through all the applications in a timely and effective manner so that all possible loans are saved – a perfect BPO value proposition.

    A really advanced BPO could also guarantee cycle times and measure their success in terms money saved through modifications. So, this is really as good as it gets, because banks are much passionate about this than they would be about the labor cost savings benefit.

  5. James Reid
    Posted October 8, 2008 at 6:32 pm | Permalink

    Phil,

    Love the optimism. Thanks for cheering me up today -:)

    James

  6. Posted October 8, 2008 at 11:46 pm | Permalink

    Phil (Fersht): Thanks for the insight…though I think you underestimate how much mortgage servicing has gone offshore. Your idea for job creation might earn you as many votes as either candidate running! Too practical and it might actually work, though, so its unlikely to be featured in politics.

    Phil (Martie): Great point! I had overlooked this critical process. Which providers are world-class in loan modification?

  7. Posted October 14, 2008 at 2:01 pm | Permalink

    Phil:

    I’m optimistic that Business Process Outsourcing (BPO) will grow in the next 6-12 months. However, it’s important that our new president understands the value of BPO and makes it easier (i.e. – HB1 Visas) to do business globally.

    Marc

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