Peter Redshaw here: Having just got back from a hectic time at NASSCOM in Mumbai, there were two questions that seemed top of mind for all the worried outsourcing providers there:
- How long and how deep is this recession going to be?
- Will there be a “flight to quality” in the wake of the Satyam scandal?
I don’t know the answer to the first question (and I don’t believe anyone else does either) but my opinion is that financial services was the first industry to get into trouble and will probably be the last one to recover. Only automotive manufacturers seem to be competing for that wooden spoon of being worst affected! Banks will have to survive a double whammy from the FS crisis (credit crunch, toxic debts, etc.) and from the ensuing general recession. So banks won’t see an upturn in their business until consumers are convinced the recession is really over and can spend again with confidence and there’ll be a further lag before IT budgets see any increases. I expect that the biggest cuts banks make will be around internal spending and that they will be retrenching a lot of their outsourcing and offshore operations – expanding what is known and familiar and delaying the new and the untried (see What’s Hot in BPO for Banking and Investment Services).
Despite all that gloom, I think the economic and business fundamentals for outsourcing and offshoring remain very positive in the long-run. Even when banks recover, there’ll be no return to “business as usual” as it existed before this crisis. The new world will be leaner and meaner and banks will have to be super-efficient to thrive on thin margins, heavy regulation, high volatility and low liquidity. So that favors outsourcers and India. The short-term problem will come from protectionist governments and especially for banks that have been semi (or wholly) nationalized that will be inhibited from “sending jobs abroad”.
Which leads to the second question and the impact of Satyam. This I see as more of a flight to financial viability and probity in the short-term. Banks will be pressured to be more risk-averse and that may translate into finding outsourcers with (a) deep pockets and (b) HQs, listings and ownership in G7 countries. The deep pockets are needed to simply survive the next 12 months and also to front-load deals where banks expect to see a very quick RoI. Small vendors without big cash reserves or a diverse customer base may get swallowed up by the tier ones and multi-national corporations. Indian vendors may also be forced in the short-term to look more closely at the domestic IT market – but that requires a very different value proposition to succeed.
So my summary would be one-step back before two steps forward – the long-term prospects are good but it’ll be a bumpy ride for some before we get there.