The current financial crisis is driving many of the leading financial institutions to sell their Indian captive operation to third-party service providers, typified by Citigroup today offloading its Indian banking services operations to Tata Consultancy Services for $505 million. Most of these offshore captives were established in recent years to cater for growth in the financial services sector, and with the current climate, many of them have little choice but to sell them off.
I was having an interesting discussion just yesterday regarding Securities/Capital Market BPO (back office operations of Investment Banks, Asset Managers etc.).
Most of the outsourcing in this sector here is to captives, for example, JP Morgan, Lehman, DB, UBS, Goldman Sachs and Morgan Stanley each have between 1500 – 7000 employees in Indian captive operations. The trading volumes in some instruments are practically negligible in this economic climate. Take OTC Derivatives Confirmations and Settlement processes – these teams were significantly ramped-up towards the end of 2005 to meet regulatory requirements, in view of very high-volume spikes in demand. Now, in some cases, 60-70% of team members are literally twiddling their thumbs. Attrition has reduced significantly as there are not many jobs on the market offering higher salaries. Moreover, the back-office-cost-per-trade ratio continues to rise as this economic situation fleshes out.
Hence some of these captives are in a quandary; large scale lay-offs are not an easy option in India as they significantly impact the brand. Redundancies in India have generally been of two types – small 100-150 employee operations closing shop or industry giants letting-go less than couple of percentage points of their workforce under ‘under-peformance’ or some other pretext.
The theoretical argument in favor of third-party outsourcing is that it provides flexibility to scale-up and down and keep the cost-per-trade at a minimum. This segment of the industry went mostly captive over-looking this argument in a high-growth period, with control and regulation being the over-riding factor. One large operation is already on sale, and there are some of the largest third-party outsourcing deals in discussion – is this the beginning of restructuring of this segment, and is the day of the offshore financial services captive in terminal decline?
This argument is strongly supported by today’s largest-ever buy-out of an Indian captive operation. It was a widely known fact in the industry that Citigroup had been contemplating selling its Indian banking operations to a third-party for over a year now.The fact that is has finally made that decision so quickly after the recent financial meltdown is telling of the changing attitude towards outsourcing, and the fact that these captive support models do not work well in a volatile economy.
We've been talking a lot about consolidation in the outsourcing industry and when/how/if it will happen. We can debate for hours the strategic benefits of service providers of adding niche competences, industry specialization, process acumen and global scale, and whether they should merge, acquire captives, or grow organically through client acquisition to achieve this. However, the financial crisis is creating a compelling event to accelerate M&A between service providers.
The amount of consolidation we're seeing in the financial sector, which is likely to have knock-on effects into other industries, will drive new client needs for global sourcing models. Many clients are worried about making large initial capital investments in outsourcing engagements – especially ones which have complex transition and transformational needs, hence those service providers which can help streamline these costs over the course of a contract will be successful. Complexity, disruption and increased globalization drive change, and outsourcing is one vehicle that can help many companies reach a global support infrastructure quickly. Hence, those service providers with the global scale, competency and financial resources to deliver this quickly will be the winners in this market.
While this industry has ramped-up beyond the wildest expectations over the last 5 years,
the healthy demand for outsourced services has held back a lot of M&A between larger providers, for the simple fact that there has been enough business to go round to enable many service providers to remain independent. The recent haggling over Axon Global by both HCL and Infosys is a signal of the increased stakes for dominance and scale in this market, as the top tier look for larger acquisitions to scale-up even quicker, and valuations drop to more realistic levels.
Despite 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.
With the whole of Wall St being restructured and substantial investment being primed to re-vitalize the financial services sector, what will be the short-medium term impact on the outsourcing industry?please complete this 2 minute poll here.
I've been trying to get my head around the looming crisis on Wall St. the past few days, and the situation is far more severe than when we discussed the sub-prime crisisa few months ago.
Normally, I'm quick to pounce with my thoughts and opinions (as if you didn't know that already), but I've been truly perplexed by the goings on - and the potential magnitude - of the potential outcome to global markets. I cling to the hope that the bail-out package will quickly steady the economy and spark a mini-revival, despite the long-term ramifications of paying back this debt – and our children footing the bill too. So what does this mean to the outsourcing industry?
Historically, tough economies have proved to be lucrative markets for increased outsourcing: remember the 2001 recession and subsequent deal activity. However, this situation will have a two-pronged impact on the outsourcing industry:
1. Outsourcing drivers: Merger activity is going to provide new outsourcing opportunities, for example the Bank of America, with its acquisition of Merril Lynch, will surely look to move Merrill's support functions onto third-party resources, as BoA has a strong and effective outsourcing culture. And the newly-merged entity may have to look at additional or new providers to support the broader global presence of the new firm – especially when you take into account Merrill's international operations. We can also expect to see a host of other M&A events taking place in the coming weeks (i.e. JP Morgan taking over Washington Mutual's assets, and CitiGroup taking over Wachovia and its global BPO operations). In addition to M&A activity,
there will be some financial institutions looking to reduce SG&A costs quickly, which will opt for outsourced solutions that quickly impact the bottom-line – i.e. F&A BPO and some ITO and possibly some HRO deals, where there is quick remediation of staff.
2. Outsourcing inhibitors: Short-termism is rife. My real concern is that most of the financial services firms are currently looking at mere survival on a month-to-month basis, and will not be looking to move into any complex long-term initiatives. And this includes staff-augmentation projects, a lot of discretionary spend, ERP upgrades, BPO and ITO engagements.
All-in-all, I see this crisis as having a largely positive impact on outsourcing adoption, provided the situation does not spiral even further out of control, the government's bail-out package has the desired effect, and the majority of financial services firms can maintain a long-term strategy.
However, I do not anticipate an immediate spike in demand for outsourcing services – either IT or BPO – as financial services firms iron out their immediate futures, but I do expect to see increased adoption of services from Q2 next year and beyond, when the sector emerges from this restructuring phase.
The recent article on Polandcertainly stoked up some creative discussion about sourcing BPO locations. And none more so than from Ratnesh Mathur, a BPO guru from India, based in Central Europe. Ratnesh has worked in the "outsourcing temples" of Citibank and Infosys, in both India and Europe, for over 17 years. These days, he spends his time traveling to lesser known places in India and Europe, and, when not traveling or working on his upcoming book on Indoeuropean linguistic/cultural links, you can seek his blessings on outsourcing advisory work in India & Europe, through social networks like Linked-in. Anyway, I thought Ratnesh's recent contributions warranted a full-posting:
When selecting a BPO location inside the European Union and in India, its useful to first segregate the City-level metrics from the Country(EU)/State(India)-level metrics and then quantify relative-importance of each metric vis-a-vis others, specific to your unique need:
Country(EU)/State(India) Metrics– BPO/SSC Set-Up time; Visa/ Work Permit Requirements; Subsidies/Government Incentives; Labour Laws; Tax & Accounting Laws; Political stability
City Metrics– People (Labor Pool size / Education – Graduate skills/ Location attractiveness for Senior Foreign Hires/ Understanding of US & Western European cultures/Languages) ; Infrastructure (Real Estate, Telecom, Light/Heat/Water etc) ; BPO/SSC Competition; Travel links with key Client sites
You will discover, from a BPO perspective, that there is little difference between CEE countries. Poland, Czech Rep, Romania, Bulgaria etc. – all present EU stability, consistent ex-communist educational systems, progressive labor/tax/accounting norms more aligned to Brussels roadmaps than Old EU countries, Spirited govt. investment cells etc
Eventually, the one-on-one negotiated government subsidy/incentives (through PaIiz in Poland, CzechInvest in czech rep, SARIO in Solvakia etc) for job creation, is the salient country-level metric for new BPO locations.
Other-wise, its best to focus on City-Metrics to develop a meaningful point of view on a BPO location inside the EU. For example, if you seek to set-up a 500 seats+ BPO venture in the location you select, it's best to validate break-even point for the handful of cities with 300K+ population.
In my experience within the EU (just as in India), its most useful to conduct a location-selection focused on city-metrics and a comparison between 3 Economic (Comparable cost-of-living) Groups of Cities. For example:
a) Prague, Warsaw, Krakow, Budapest, Bucharest, Bratislava
b) Lodz, Wroclaw, Brno, Ostrava, Cluj etc
c) Various Sub-150,000 population towns
Poland and most other CEE countries present several interesting BPO locations. Just as in other industries, the BPO industry too will eventually progress towards a "stateless multinational mindset". See this article from the Economist entitled "In praise of the stateless multinational".
One should mostly trust the NUMBERS of one's business model during BPO location selection within the EU. Inputs to the model are mostly at a city-level.
Comments on a Nation as a BPO location in Europe, still invite a lot of nationalistic demagoguery. As philosopher AC Grayling reminds us – " Nationalism is an evil. It causes unnecessary wars, its roots lie in xenophobia and racism, it is a recent phenomenon – an invention of the last few centuries. The word – "nation" – is meaningless: all nations are mongrel, a mixture of so many immigrations and mixings of people over time that the idea of ethnicity is largely comical. "
Its fairly common these days to find nations presenting themselves aggressively through their investment bodies such as Paiiz, czechinvest, Sario etc. at BPO conferences in the CEE region. A new and meaningless war of words has been underway for the past 5 years. We need to rise to a stateless multinational mindset.
Jason Averbrook on HR and technology: the core theme is about how HR needs to reach outside of the organization to drive performance inside. And technology and social networking tools arethe enabler to make this happen. Here are some of the sound-bites:
"What we thought we were getting from technology is not what we have. We outsourced benefits and payroll, so what are we left with – an address book, and IT tells us it'll cost a million dollars to upgrade!"
So why are people are unhappy with technology?
Because people bought technology without a strategy and LinkedIn knows more about your employees than you do. What people are building outside of work are communities – and who manages all of this stuff? We do – we are all contributing to this everyday. So what's driving technology? We are
People are communicating with other each day using LinkedIn, Facebook, Twitter etc, and employers ask – how do we block this? How can we govern this?
What drives employee engagement? The once-a-year holiday party? Are we providing employees with ways of connecting with each other? So what are these tools and technologies doing? What they are doing..is making us perfectly visible.
Instead, HR should be asking "how can we embrace this to drive collaboration and innovation"
People now average 10 jobs before the age of 38… they are communicating each other in so many ways. The Gen-Ys are growing up with technology – ask a 4 year-old what a mouse is… "it's a thing for the computer". It's a major culture shock to look outside to go inside
It's all about Social Capital – it's the collective value from a group of individuals or employees. HR systems am been built for HR, but what we really need is to have them built for employees.
Been listening to some excellent discussions at Mercer's client event, where the central theme is all about globalization. Mercer's Jeff Miller and Julia Velixon discussed the results of their new study, conducted with the Harvard Business School, based on interviews with senior HR leaders from 60 global corporations. Some key points of note:
Workforces are becoming more globally-dispersed. More than 50% of respondents' workforces reside outside of their corporate home country – the pressure to standardize policies and processes, manage increased workforce mobility and manage compliance needs is greater than ever;
Many senior HR executives are stepping up into global roles, but are finding the transition challenging. 45% of the executives have moved into global roles over the last two-to-three years – many of these transitioned in the last year alone. However, while roles are being structured globally, most of the executives have been struggling to get away from dealing with local and regional issues.
Lack of standardization. The lack of a consistent approach to governance and compliance, especially in Europe and Asia – where employment and tax laws vary widely in different jurisdictions – creates further challenges for HR leaders. There is also a lack of standardization around the approach to global mobility, which hinder's HR's ability to apply consistent procedures to the compensation and benefits of a workforce that has been growing rapidly. It is becoming increasingly important for companies to properly manage the logistics of moving there employees from country to country.
Vinnie Mirchandani picks up on a great posting from Christian Today on ten cyberspace commandments to give bloggers a "moral edge in a virtual age":
