FRAMINGHAM, 26 SEPTEMBER 2008 - The collapse of Wall Street may prompt financial services firms to increase their use of offshore outsourcing and cut more jobs in the U.S. on top of the layoffs they have already announced.
And that job cutting will happen even with a taxpayer-backed US$700 billion bailout. These firms will be under too much pressure to cut costs, and offshore outsourcing will be one way to do it, according to outsourcing consultants.
The financial services industry, including banking and insurance, is already the most aggressive industry in the U.S. when it comes to offshore outsourcing. It is the biggest single source of revenue for Indian offshore companies.
For instance, Infosys Technologies Ltd., which finished its most recent fiscal year in March with US$4.18 billion in revenue, reported that nearly 36 per cent of that revenue came from banking, financial services and insurance. For the same period, Wipro Ltd., reported that financial services contributed 25 per cent to its annual revenue of nearly $5 billion. Satyam Computer Services Ltd. reported $2.13 billion in revenue for that same period and recently told investors that financial services would contribute 24 per cent to 26 per cent in revenue in this fiscal year.
In the short run, Peter Bendor-Samuel, founder and CEO of Everest Group in Dallas, a consulting firm, said the need by financial services firms to cut costs "will probably result in an acceleration of financial services jobs going offshore."
Bendor-Samuel said more regulation and oversight may create some headwinds to offshore outsourcing, but the factors he believes will have greatest impact on offshoring work will be the appreciation of the rupee and rising wages in India.
If Congress decides to link the Wall Street bailout to offshore outsourcing, and there are no signs that it will, the flashpoint may be the H-1B visa, which is heavily used Indian offshore outsourcing companies.
Indeed, the three companies cited earlier were also the three largest users of the H-1B visa in 2007, according to the U.S. Bureau of Citizenship and Immigration Services, which issues the temporary work visa. Infosys received approval for 4,559 H-1B visas last year, Wipro, 2,567, and Satyam, 1,396.
The H-1B visa has some tough critics in Congress but, including U.S. Sen. Chuck Grassley (R-Iowa), who said last year that the visa "is so popular that it's now replacing the U.S. labor force." The U.S. is issuing 85,000 of these visas annually.
Congress has generally supported the H-1B visa and that includes Sens. John McCain and Barack Obama. Microsoft co-founder Bill Gates has been very vocal on the issue. Whether increasing unemployment and the Wall Street bailout changes this support is a question.
But what will happen on Wall Street, at least, seems certain to consultants such as Stan Lepeak, managing director of research at outsourcing advisory firm EquaTerra Inc. in Houston. Lepeak said he expects more outsourcing by financial services to cut costs.
If Congress tries to curb offshore outsourcing, Lepeak said it will be difficult. "To what degree can the government control the business practices of private entities?"
But some of the shift overseas is due to the growing markets in those countries as well, Lepeak said. For financial services firms that deal in wealth management, overseas customers are increasingly important. "If you look at where the new millionaires are coming from, a lot of them are overseas," he said.
Eugene Kublanov, the CEO of Neo IT, an outsourcing management consulting group, in San Ramon, Calif., said that for now, uncertainty will restrain the financial services from taking on new offshore initiatives. But once these firms hit bottom and know where they stand, they will likely start new offshore ventures. It's a pattern, he said, that he has seen in previous downturns.
Kublanov also sees the federal government exerting some leverage on outsourcing, particularly if a Democrat is elected and that may bring incentives to keep jobs onshore and penalties if that isn't the case. The impact could be direct or indirect, through changes in tax incentives and possible restrictions on visas.
Ron Hira, an assistant professor of public policy at the Rochester Institute of Technology and author of Outsourcing America , said Wall Street firms have had a major impact on U.S. economic policy.
Most analysts believe that we are going to have a pretty severe recession, Hira said. "That provides more fertile ground for those advocating positions to level the playing field for American workers. It isn't clear that there is a critical mass of politicians from both parties to overcome the elitist stranglehold in Congress."
"Will the recession be severe enough for the American people to question the current flavor of globalization and economic policy? Probably. Will it be severe enough for elites to question it? That remains to be seen," Hira said.
