Outsourcing and the Financial Crisis

 A well-known international company here in Makati has required all their employees to take exams. If an employee fails that will give the firm reason to lay off that employee. Some clients of outsourcing companies have terminated or not renewed their contracts.

If companies are bankrupt or don’t have the budget , then for certain, even if the outsourced service is cheap, they will discontinue it.  If companies are cutting costs but still have the budget (and of course are not bankrupt), then they might have to consider outsourcing. 

Outsourcing is just one option of trimming the fat from the budget.  Laying-off is the cheapest and quicket way to cut costs.  Salary cuts are also a quick easy fix.  Having a one person do multiple tasks that had been done by several people before at even a lower salary  is another way to save money.  These  are propositions  accepted by US and European employees  due to the dearth of options.  For outsourcing to be a viable option, it  has to be significantly cheaper and has to produce, right away, with a fast and cost-effective transition. 

 The fraud perpetrated by Satyam, India’s 4th largest outsourcing company, when it inflated their earnings report,  will in near-term cause an operational and contractual mess that will affect other outsourcing companies but I believe, it will not affect the viability of the outsourcing business model.  The differences in foreign exchange rate and coutry cost of living coupled with the accelerating technology is an economic reality  companies cannot ignore.  Some good may come out of the  Satyam fiasco.  This incident  tells governments to exercise better controls and put more effort in the outsourcing industry. 

In this growing globalized landscape, with cost cutting foremost on the agenda because of the financial crisis, there are more, new, different opportunities for outsourcing companies. But in this increasingly competitive economy, outsourcing companies also have to be on the look -out for new markets and new services to offer.  Medical transcription, affliate marketing and knowledge-based outsourcing are just some new trends to emerge. Government support should be palpable.  Training for professionals in the industry should be intensive.  Information and communications technology should be continuously developed and improved.

There are a lot of “ifs”, “buts” and “to-dos” for the outsorucing industry especially in this financial crisis.  But I believe this is not something the industry cannot overcome.

How will the financial crisis affect the Philippines

The financial crisis seems so far away for many Filipinos. With reassuring headlines that say RP is “a sea of calm” in this turmoil, some might say that the Philippines wouldn’t be as affected as the other nations because we aren’t so exposed to those toxic securities that are dragging the big banks down. Unfortunately, the crisis has spread beyond those esoteric financial instruments and is posing a systemic risk for world economies.

Even if these big banks and institutions are oceans away from us, since they are so vital to the economy, they drag their clients, customers and investors down with them. These clients and investors may be your average Joe, you average small business, big businesses, titans of industries and even countries.

Because of this crisis, banks and businesses are hoarding cash ,and credit is hard to come by. What does this mean? Small businesses will not get the bank loan it needs to expand, big businesses may be forced to cut their spending, banks will not lend to other banks because they need cash to maintain their operations and pay their debt. This will mean lost confidence in the economy, dwindling pension funds, layoffs……..

Can the Philippines weather this storm?

This depends on how dependent we are on foreign injections of capital. This capital source may be from our OFW remittances and direct foreign investments. If a call center’s clients include foreign business hard hit by the credit crisis, that account may be in jeopardy. If an OFW’s contract will be terminated because his company has been laying off, then there will be no remittance. If another country is in recession, our exports to that country will decline.

The effect of this crisis will also depend on the strength of our domestic economy. Do we have enough goods and services produced and a big enough domestic market? For all our sakes, I hope our country’s balance sheet is strong enough to cushion us from this global economic blow.

Oh dear, a Wall St. regime change?

My boss has told us early this year that we are seeing a Street regime change stemming from the August 2007 debacle brought about by the subprime mess. 

And indeed we are.  Today, I cannot keep my eyes off the online Wall St. Journal.  Not 1, not 2 but 3 huge companies are either selling off assets, being taken over or is in the brink of bankruptcy. 

 It has been a week of seesawing sentiments.  After breathing a sigh of relief when Big Powerful Uncle Sam took over Fannie and Freddie, we are again waiting in bated breaths what Uncle Sam will do for another Wall St. giant –  Lehman Brothers.  Will it let it sink or will it save it yet again?  And yeah, the formerly called “ultimate NYC company” Merrill Lynch is bye-bye after being acquired by the Bank of America. Wow.  AIG, the biggest insurer is selling off its profitable assests just to keep afloat. 

With no Bear Stearns, Lehman and Merrill and the emergence of Bank of America, JP Morgan… Wall St. is changing its face.  Who is next? What is next?