Q&A: Brian Fabbri, Chief US Economist for North America, BNP Paribas

Phil Searle

Phil Searle, Advisory Board member of Shared Services News, questions Brian Fabbri, Chief US Economist for North America, BNP Paribas, about the current markets and the potential for shared services operations.

(Brian Fabbri will be speaking at Shared Services Week 2009 in Orlando, Florida, March 22-26. For more information see the Shared Services Week website.)

Phil Searle: What is your view of the current state of the global economy given the recent financial crises worldwide, the dramatic rise and then more recent fall in oil and other commodity prices and the predictions of worldwide recession?

Brian Fabbri: We are just at the beginning of a global recession. This started with the financial crisis, which is not done yet and still has a way to go. The impact has since moved into the wider economy. We are just in the shallow part of recession in the US right now. There are far deeper waters ahead. The banks have had to write off billions of dollars of assets and have had serious capital issues. We are also just at the beginning of the credit crunch with banks not lending to each other, or to businesses. And it is not just the banks that have been impacted, of course. The junk bond market has disappeared. The capital markets are seizing up. This has also manifested itself in extraordinary spreads, and hurdled rates into double digits. This is resulting in the freezing of business investment.

PS: Where do you see exchange rates, interest rates and inflation going from here?

BF: The recession started in the US but has moved to Europe and Japan. The recession will be deeper in Europe and Japan than in the US. On exchange rates, Europe, and the UK specifically, have had currencies that have been significantly overvalued. They are still uncompetitive at current levels. The pound has dropped from $2.10 to $1.60 now and I see it dropping another 20 points. The euro has dropped from $1.60 to $1.24 and I see this going down to $1.10.

The whole world has gone into a flight to quality. Investment has moved out of many countries, such as those in Eastern Europe, and has moved into US Treasury Securities. Europe will be further impacted by a decline in trade with both the US and Eastern Europe.

Interest rates have been way too high in the UK and Europe, and are on their way down from here. The central banks have been too slow to act and have been "target-driven" which has meant they have missed the bigger picture. There has not been the coordinated response that has been needed, either from a monetary or a fiscal perspective. This will result in a longer and deeper recession in the UK and Europe than some are currently anticipating.

Japan has a different problem. Interest rates there are already very low and the yen is appreciating. There is little room to maneuver. The NAFTA countries such as Canada and Mexico are also in trouble, with oil and other commodity prices falling.

Inflation in the US is not an issue. Deflation is. And deflation is extremely difficult to recover from. It is in reality easier to deal with inflation than it is to deal with deflation.

Europe is in an even worse position because it has wage inflationary pressures resulting from a far-less-flexible workforce. Higher energy costs have led to demands for pay increases in Europe that result in wage inflation, and with less flexible employment laws this will result in Europe becoming even more uncompetitive which will exacerbate issues elsewhere.

Unemployment will rise, with this happening faster initially in the US due to our more flexible labor laws.

PS: How do you think the significant trend towards globalization has played a part in where we are today – both good and bad – and where do you see the trend in globalization going from here?

BF: There is nothing wrong with globalization. However, there are serious political issues around the impact of globalization and outsourcing in terms of jobs seen to be offshored to other countries at a time of rising unemployment at home. There is no doubt that globalization has benefitted economies and countries and has lowered the costs of goods and services. However, the fact that we now live in even more of a global economy means that positive impacts are felt everywhere – but so are negative ones. Specifically, the mess in international finance has spread quickly across the globe and there has been a recent flight to quality, to the US. With money able to move freely across borders this move has been swift and dramatic.

The fact is that globalization exists today and will continue to do so. However, the danger is that countries deliberately aim to limit global impacts on their own national economies and start to restrict trade and capital movements. This could also be fueled by political pressure at home demanding protection for local jobs.

PS: Where do you see the regulatory environment going from here?

BF: There will be a massive increase in regulation across the globe. Things really got out of hand in the unregulated environment of the last few years. Regulation of the financial sector and businesses will increase. The US Congress, for example, has grown tired of bailing out the financial sector and Wall Street and will move to try to address the underlying reasons for this current mess.

PS: Can you give us your perspective on what "shared services" is and how outsourcing relates to this?

BF: Shared services and outsourcing are different ways of delivering back office services to the business. They are also well-known ways of cutting costs, especially labor costs, through centralization and downsizing. It is likely that organizations and companies will embrace shared services as a way of reducing costs and preserving cash. However, the picture may well be different for outsourcing, where this is negatively associated with offshoring jobs at a time of rising unemployment. As highlighted earlier, the labor force is more flexible in the U.S. so unemployment is likely to initially rise faster here.

PS: How do you assess the impact of shared services and outsourcing on both the global economy and individual businesses?

BF: Shared services and outsourcing have contributed to the global economy by reducing the cost of goods and services. However, I see a significant difference going forward in how the two are perceived, even though they are so closely related. Internal shared services will expand and grow as companies look to cut costs and the control environment, while outsourcing, at least politically in the US, may well be frowned upon where this is associated with reducing the number of jobs at home, especially with the change in the US to a Democratic government.

PS: Do you believe that companies that have implemented effective shared services and outsourcing solutions are better run, managed and controlled than those that have not?

BF: This is difficult to comment on because I have personally not seen the data on this. There are pros and cons of everything and there are successes and failures.

PS: Is shared services, or in more general terms, the effective and efficient delivery of support services to the business strategically important? If so, why?

BF: Yes, this will become more important. But I would emphasize that the focus will be mainly on the potential cost reduction, working-capital improvement and cash preservation benefits and less on improvements in service levels. This is, of course, due to the current economic climate.

PS: Do you believe that the opportunities that come with successful shared services and outsourcing (cost, control and service) are widely understood by economists and investors and, indeed, the boardroom?

BF: Yes I do. The concepts are understood. In a time of economic difficultly any way to increase efficiency and reduce costs through shared services and/or outsourcing is likely to become a higher priority to businesses.

The outlook for shared services as a delivery mechanism for back-office services is very good, looking forward, even more so than in recent times, given the current economic malaise. However, as highlighted earlier, it will be the more internally managed and resourced shared services initiatives that are likely to be the main focus, rather than outsourcing and, more specifically, offshoring through outsourcing. This is largely for political reasons. Again, with a Democratic government in the US it is likely that any move to offshore jobs overseas to "lower-cost countries" will be perceived negatively. The same perception is likely to follow in the rest of the world.


About the Interviewee

Brian Fabbri is the Chief US Economist for North America at the European banking and financial group BNP Paribas, based in New York. In this position, he provides BNP Paribas traders and clients with forecasts on economic, political and financial developments in North America and publishes a weekly economic report. Prior to joining the bank in 1994, Fabbri was chief international economist for Midland Global Markets, a director of the Midland Bank Plc asset-liability committee and executive director of Midland Bank. He also worked as senior vice president, chief economist and director of institutional research at Thomson McKinnon, and as vice president and senior economist at Salomon Brothers. He appears regularly on CNBC and other business networks and radio shows, and is a member of the National Association of Business Economists, the New York Association of Business Economists, the Downtown Economists Club and the Money Marketers.

Brian Fabbri will be speaking at Shared Services Week 2009 in Orlando, Florida, March 22-26. For more information see the Shared Services Week website.