Financial crisis and International Outsourcing

Dear all,

The world is facing both a financial crisis, an economic, a social and values crisis.

Nobody is able to foresee the end of the crisis. What is quite sure is that years 2009 and 2010 will be worse and that it will take years for a full recovery.

Before the crisis the world community had a positive perception of international outsourcing. The developing countries such as China or India took important measures to urge western companies to outsource a larger part of their activities and create jobs for a skilled local manpower. It was and it is, until now, a "win-win" agreement.

The most interesting and surprising example is R§D. The report on Global Innovation 1000 underlines that the 1000 companies with the most important R§D budget spend 55% of this budget in foreign countries. 80 American firms spend 80 billion dollars overseas. China is the receipt leader with 25 billion dollars in 2007, followed by India (13 billion dollars.). The companies that out-source aggressively their R§D have the best financial results. Multinational companies create research laboratories in China and India and export their innovation to the western markets. It is quite sure that within the five next years the major technologies for the automotive area will be developed in China and India.

Western governments, except for companies working in strategic areas such as defense and for the United States the spatial industry, put no restriction, respecting the liberal approach of the market. Some western trade unions were reluctant but so much that the unemployment level was socially and politically acceptable this disagreement had no consequences.

What could be the consequences of the financial crisis on international outsourcing?

On October 28 M. Wang Chao Minister of Commerce assistant minister said the world financial crisis has brought China’s service out-sourcing industry new opportunities. More and more multinational companies were keen to out-source non-core business to other companies to reduce costs and enhance competence amid a world finance crisis. He suggested domestic enterprises adopt a more active attitude to seek new business opportunities with priority on out-sourcing, while stabilizing existed business.

Let me develop two points:

1. Banking system and out-sourcing,

2. Impact of the crisis on out-sourcing companies.

1. Governments and taxpayers agreed to help ailing financial firms offload their toxic loans and resolve their liquid worries. These firms have helped drive the huge growth of the out-sourcing companies in the past few years. And now?

From an optimistic view point we can say that banking survivors that already use outside contractors, will give them more to do as they cut costs. Banks that have hitherto shunned out-sourcing will have to embrace it to protect their margins.

From a pessimistic or realistic viewpoint many banks have put discussions about out-sourcing contracts on hold and cancelled projects. What is sure is that the banking survivors will be less numerous and the competition for the remaining contracts will be stiffer.

2. The out-sourcing industry will suffer in the short term of the financial and economic crisis. In the first nine months of 2007 financial-services firms signed 132 deals over 25 millions of US dollars, worth a total of 17.9 billion. In the first nine months of 2008 there were only 101, worth a total of 10.8 billion.

Out-sourcing companies that have enough cash have opportunities to buy other companies and offshore activities of bankers in order to boost future revenues. (For example in September HCL Technologies, a big Indian company took the control of Axon, a British firm that provides outsourced computer services for 813 US million dollars.)

My personal viewpoint is that big Chinese companies have very good opportunities to out-source activities to United States and Europe and recruit a lot of skilled and high level specialists who are now unemployed because of the crisis and will accept lower wages. It is also a smooth way to have access to these two important markets.