The deregulation of the US financial markets during the Greenspan era allowed for the unprecedented growth and expansion of its economy. For the first time since the FDR brokered New Deal, Americans were able to enjoy a golden age of lower unemployment, higher gross domestic product and willingly expressed their joy through unbridled spending. Led by Alan Greenspan, Regan was instrumental in removing the Keynesian hurdles that acted as the crucial check mechanism to minimize government intervention in business. The governments that followed the Regan administration carried on with the policies and expanded their scope to deregulate the financial markets. As a direct consequence of the deregulation of the financial markets, the US was able to shake away the effects of negative growth that had been bought about as a result of the attacks of 2001. Though the Greenspan years turned out to be the most economically prosperous years in American history post the Second World War, the effects of the deregulation that he oversaw created a powder keg with a short fuse. During that period, American financial giants explored options which allowed them to target a new segment of customers. These customers enabled the growth of both the financial sector as well as the housing sector by virtue of their sheer strength in numbers. Banks lent money to customers who would previously be rejected by the stringent standards that they were required to maintain by the Federal Reserve. These sub-prime customers would prove to be the undoing of both the US economy and later the global economy. Banks, funds houses and brokerages started trading exotic financial instruments which found their basis in the creation, management and maintenance of sub-prime debt. However, rising customer delinquencies and foreclosures created a financial crisis which ensured a credit freeze which hit Wall Street and its doyens hard. One by one, venerable names who were key players on the global financial scene became mere footnotes in history books. Those that survived did so merely on the promise of a US$ 700 billion dollar bailout package that divided both the House of Representatives and the Senate before being passed into law in the form of the Emergency Economic Stabilization Act of 2008. A new age of financial regulation was dawning upon the world with a pace that was accentuated by the severity of the crisis.
The impact of the Global Financial Crisis
As a direct consequence of the financial crisis, companies began tightening their purse strings to ensure that money was spent only towards essential purposes. This caused corporations worldwide to undertake an exercise which attempted to ascertain where costs could be rationalized to effectively improve their financial statements. Pink slips and rightsizing became the norm not just on Wall Street but also on Main Street. Corporations that had been previously free with dispensing employee perks were now exercising austerity measures to manage both cash flows and worried shareholders. Unemployment rates that had remained at a steady 4.6% for most of 2006 and 2007 in the United States began rising at an alarming rate to reach 16-year lows peaking at 7.2% by December 2008 (Source: BLS1). Companies released earnings warning statements to cushion their share prices. Stock markets globally took a severe beating and wiped out trillions of dollars worth of shareholder value.
As a means to contain the extent and impact of the crisis, heads of state met with frequent regularity to discuss steps and measures that could be undertaken with immediacy to alleviate their nation’s economies and stimulate growth. The most prominent of these measures saw governments across the globe stepping in to guarantee troubled assets of banks that operated in their countries. With these guarantees came conditions that attempted to curtail spending towards maximizing return on investment. Though these guarantees protected many banking and financial services corporations from floundering or worse yet declaring bankruptcy, economic conditions and a new found risk averseness ensured credit stagnancy.
Seeing little improvement in the status quo, central banks across the world moved to substantially reduce interest rates in the hope that banks would release capital into the system to reinvigorate the engines of industry, thereby improving GDP growth and managing the problem of unemployment. But companies and economists worldwide felt that the exercise of interest rate reduction would not alone act as a stimulant to growth. It was widely perceived that in addition to interest rate cuts, governments would have to provide better tax exemptions, investment incentives and a controlled labor policy regime.
Though a lot is being done by world governments; Policy makers, economists and analysts globally believe that the effects of the crisis will last into 20102 or 2011 or even longer3. The quick fix measures that governments have implemented in the wake of the financial crisis could lead to a deterioration of the global economic climate in the medium to long term brought about by a potent mix of inflation due to frequent stimulus injections and near zero interest rates. In other words, measures that might yield dividends in the short term could have counterproductive results in the medium to long term and the only visible road to recovery lies in taking to the principles propounded by Keynes.
The Outsourcing Perspective
Gartner at an IT Conference in October 2008 announced that the first casualty of spending at corporations globally would be with respect to their IT budgets. In a reversal of its earlier projection of 5.8% with respect to IT spending, Gartner said that companies would reduce their IT spending by a minimum of 2.5% leading to an expected increase of 2.3% going down to 0% in the worst case scenario. In fact, It is expected that developed economy countries like the United States and Japan would see flat growth while countries in Europe were likely to experience negative growth4.
This is going to result in companies across the board looking at the commoditization of products and services that are integral to the management of the IT function. As part of increasing the efficiency of the function, 2009 will see a slew of outsourcing arrangements to manage not only traditional area but also moving towards the core of the IT function including security and disaster recovery. Companies are going to look at renegotiating their contracts with current vendors and look at obtaining upfront savings either in the form of cash or contract discounts. Additionally, for ease of management, companies are going to look at vendor consolidation so that contracts are being managed by 2-5 large vendors as opposed to the current system of having multiple vendors. Another important area which is going to see growth not only during the slowdown but also in the medium to long term is in the area of asset virtualization.
Banking and financial companies are going to be among the first adopters of new and innovative cost management practices. In addition to IT specific outsourcing, there will be an increase in the number of non-customer facing functions that would be outsourced starting from 2009 onwards. These would include contracts relating to various elements in the finance and accounting function, the human resource function, the direct and indirect procurement function, the legal function, etc. In addition to companies in the banking and financial services sector, there will be a slew of new buyers for outsourcing services across sectors from the automobile, healthcare, retail and other sectors of the economy.
A new important buyer will emerge for outsourcing services: government. With national governments attempting to resuscitate their economies, they will try to ensure that they are able to do more with less. This will lead to government agencies and departments to adopt outsourcing as a measure to drive efficiency and enable end user satisfaction.
Finally, as a result of the global impact of the financial crisis, opportunities will open in as yet unexplored countries including Japan, France, Germany, Russia, China, etc. which have been largely been left untouched on account of specific on-the-ground geography and demography related factors.
In all, outsourcing across the board is set to receive a boost as a consequence of the global financial crisis.
Advantage India?
Ever since McKinsey and AT Kearney introduced India as a value based destination for services, global corporations have invested in setting up their back offices and home grown companies have risen to service these requirements. The Indian Big 3 of outsourcing (TCS, Infosys and Wipro) have been rated as being equal to or direct competitors of the Global Big 3 (IBM, HP and Accenture). TCS’ takeover of Citibank’s BPO eServe and Wipro’s takeover of Citigroup’s IT arm CITOS is a harbinger of things to come. However, in recent times, the sheen of the outsourcing industry has come under a cloud as a result of the Satyam scandal. But the financial crisis being a reality, momentary caution in the wake of the scandal will give way to business pragmatism.
For Indian companies to seize the opportunity that is being offered on a silver platter, they have to look beyond mere offshoring or nearshoring. The key will be to create a reasonable presence in the buyer’s market which will not only enable them to capitalize on proximity to the client but will also allow them to create local employment, earn incentives from the national, state and local governments, market their services for government contracts and most of all, shed the ‘India only’ tag to become true global services players.
Indian companies need to expand their areas of expertise either through organic or inorganic means after identifying underlying synergies to drive their business strategies. Most importantly, they have to explore possibilities for strategic arrangements with local players who have strong niches. Indian companies need to adopt a consulting oriented client acquisition approach so that they will be able to adequately manage expectation gaps in during the contract lifecycle.
Indian companies will have to identify new trends in the outsourcing space and become pioneers as opposed to becoming adopters of patented processes and technologies. This will have to be driven by the company’s long term strategy and will have to focus on value co-creation with their clients through the management of their business processes as an approach to building process and technology IP.
Finally, Indian companies need adopt new technologies and practice an innovation based delivery process which enables their clients to realize substantial savings while at the same time retaining a competitive advantage in their respective market.
Conclusion
Though at the current time, the focus of the world is on the developments in the Satyam saga; its impact in the medium to long run will be minimal. Indian outsourcing companies have a definite opportunity before them to become leaders in the segment. To achieve this, companies are going to have to identify new markets and service areas which will enable them to scale up both their geographical presence as well as revenues. The key to achieving preferred vendor status is going to rest upon their ability to create technology and process IPs through collaboration and co-creation with their clients. Finally, to fully enable themselves to compete with companies like IBM and Accenture, Indian companies will have to manage an image makeover which will enable them to transition into global companies headquartered in India. If they are able to achieve these objectives within the next 3-5 years by taking advantage of the current economic conditions, an Indian IT company(s) might become the inheritor to the mantle that is currently being alternated between IBM and HP.
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