The US bailout plan and impact on offshoring – A grim future ?
The weekends for Treasury secretary Paulson and his team continue to be busier than his weekdays. With Congress agreeing in principle to pass a bi-partisan bill to bail out the financial industry in the US , the fed-wall street alliance continues to increase. The debate over if this is the right solution is far from over. The ‘Main –Street’ the common man still feels cheated that it’s money is being used to bail out people who got them here in the first place. The money supposedly is being used to buy the ‘toxic assets’ which caused this to happen and the taxpayers are being dragged to foot the bill. It’s like you need to give medicine to the patient though you are not sure if the patient needs the medicine or if it is the right medicine.
Banks across the globe continue to be ‘rescued’ and will continue to do so with federal government money. With Washington Mutual folding under the crisis, Wachovia seem next in line to go the nationalized or shotgun wedding route.
The effect of this is not limited to Wall Street, and the Main Street is caught in this storm. Barring the technical definition of recession, it is here and seems like it is here to stay.
With the current turmoil in the market place, I see analyst, vendors companies struggling to get some directions on where the market is going. You hear some analyst expecting the outsourcing market to grow by 40 to 45 times over the next five years to someone talking about negligible affect to outsourcing because of the crisis. Some look at financial services crisis as a boon to offshoring. What is the real impact only time will tell but the story I see with being in the trenches with the firms going through this turmoil seems to tell a different story.
I think what people have to realize is that how the bailout is affecting globalization is one of the items way down on anyone’s priority list. The dealmakers, decision makers within financial services and other industries across the developed world which are looking to survive through this crisis.
Let’s look at the facts on what has transpired over the last few months in financial services:
1. Federal government is getting more involved in financial services industry and the industry is getting nationalized. Who is footing the bill – the US taxpayers who continue to see their net worth tumble and jobs disappear.
2. Bank mergers which have happened recently are by Weaker banks buying supposedly failed banks. These are shotgun wedding with the equity value wiped in the acquired bank for the shareholders. A number of them have been rescued by federal government providing backstops. M&A activities in this environment will result in job cuts for the acquired and the banks acquiring are not out of the woods and will continue to focus on massive cost cuts to reduce operating costs.
3. Investment banks – the wholesale banks are a thing of the history. These were traditionally the risk takers, market makers who are now history and have stronger regulation in place with limited tolerance for any kind of risk.
4. Only a handful of financial services firms will be left standing which are ‘super financial services’ organization and offer all services and products to all clients globally. Most of the other ones are going to be tightly regulated federal banks with tolerance for risk taking toned down.
5. Specialized mortgage banks are dead. Credit to consumers is still tight and will continue to remain so for a while. Auto industry received a handout from the federal government to survive and will continue to stagger for the near future.
It all paints a grim story of financial services and the indications are that the offshoring or globalization strategy will continue to take a back seat till the market woes are sorted out, the consumer confidence is back and the firms are willing to focus on cost reductions and operating efficiencies rather than survival.
What that does mean is that the offshoring firms are in the same state as the corporates they serve – a survival mode. The impact is delayed because of the time it takes for existing relationships to slow down.
Firms who have a strong globalization model will leverage it more but will demand better pricing and performance from their vendors. Bank of America is a good example which will create synergies with it’s operating platform. The issue though is that there are only a few such firms which have the size and scale to leverage their existing platform.
The effect of the financial services vertical will be felt on other sectors too as nothing is disconnected today.
The globalization is not dead but the taxpayers who are bailing the industry out will expect more local focus , job creation by the firms they rescue. We believe that the offshoring vendor landscape will change too, with a few larger vendors continue to survive and grow and a number of mid size firms either disappearing or going through a shotgun wedding.
The globalization phenomenon is too far along to reverse but that does mean that we do ‘atleast the connected world’ live as one big happy (unhappy) family. And these are unhappy times!
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