Outsourcing and the subprime crisis

The obvious short term impact of the rising default among “subprime” borrowers on the outsourcing industry will be in the form of lost revenues and profits. And while subprime mortgages are perhaps the most visible manifestation of the “subprime” problem, the issue of unaceptable quality of risk (relative to the pricing of that risk) is just as prevalent in the credit card and consumer loan segments of the industry. Thus, the impact will be felt not just by outsourcing companies that work with mortgage customers, but also by those that derive a significant portion of revenues from the BFSI sector- which is arguably the largest spender on outsourcing (BPO + IT services- captive units included).

The flip side is that the crisis can be expected to drive industry consolidation- which in turn, opens up new opportunities to rationalize prcesses, systems and infrastructure. And clearly, outsourcing these tasks can save the client company anything from 25-40% in costs. Existing players will want to run more rigorous analytics on their lending portfolios to assess and manage credit risk. There will also be more resources allocated to enabling lending institutions to take a customer-centric, rather than a product-centric view of their relatonship with customers. The pressure on margins might force even more BFSI players to embrace outsourcing as a strategy to regain at least a part of their financial health.

Do not assume that the impact of the subprime crisis is limited to the BFSI industry. The overall credit squeeze in the US economy will have a direct effect on spending in the retail, leisure, travel, media & entertainment and healthcare sectors. And much of the logic above in support of an increasing trend towards outsourcing will play out in these other industries as well.

Thus, in the medium term, I think the outsourcing industry will actually emerge stronger.