Q&A: David Wyss, Chief Economist, Standard & Poor's

Phil Searle, Advisory Board member of Shared Services News, questions David Wyss, Chief Economist of Standard & Poor’s, about the current markets and the potential for shared services operations.

(David Wyss will be taking part in the Keynote Panel Discussion on "The Economics of Shared Services" at 8.15am, March 24th 2009, at the 13th Annual North American Shared Services Week. For more information see the Shared Services Week website.)

Phil Searle: We live in interesting and dramatic times. 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?

David Wyss: We are headed into recession, specifically in the industrialized nations of the world, although the commodity producers will undoubtedly be impacted because commodity prices are falling significantly with the decline in global demand. I see us coming out of this in the spring of next year. The US will likely go through a moderate recession while Europe will probably go through a milder recession that that in the US. However, both are heading into recession.

PS: Where do you see exchange rates, interest rates and inflation going from here after the recent government and central bank actions around the globe?

DW: On exchange rates, the dollar has effectively recovered all its losses recently. This is the result of a number of factors including that Europe is now perceived as going into recession; that the US has lowered interest rates first and others must therefore follow – effectively, voting that European interest rates must be cut; the belief that the US has been in this longer and is likely to come out first; and "flight to safety" to the US dollar. However, remember that currencies are relative and not absolute measures. The US might well be "the best-looking horse in the glue factory" right now.

Interest rates are definitely on their way down and need to come down quickly, in Europe especially. They have already come down, of course, in the US [at 1.5% at time of interview] and Japan [at 0.5% at time of interview].

Inflation in the US is not an issue. That is last year’s problem. In Europe, the UK’s Bank of England and ECB have been focusing on this more than they should have. They have been looking at uncontrollable commodity prices such as oil rather than other underlying inflation. Of course, commodity prices have come down significantly recently, as well. There is still some underlying wage inflationary pressure in Europe right now.

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?

DW: Globalization is a fact. The world is far more inter-connected today. Of course, there are still national problems but now no-one is immune from the impact of decisions made, actions taken and outcomes elsewhere.

The central banks definitely need to be more coordinated in their actions. And regulation must be more coordinated. There is no point in one country regulating tightly in one particular area in today’s global economy because people and organizations can simply move to another country where the regulations are not as tight, two recent examples of this being regulation around credit default swaps and short selling.

In terms of globalization’s impact, it has contributed to a long, sustained period of economic expansion and prosperity. However, bad policy is still bad policy. Somebody else’s bad policy can bite you at home and imbalances will cause more imbalances. Trade surpluses are a good example of this. For every surplus there must be a deficit; if all countries want a surplus it could push the world into a deeper recession than necessary. Currently, everybody wants the US to get rid of its deficit but nobody is volunteering to get rid of their own trade surplus.

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

DW: Shared services is the collecting together of a certain volume and/or services in one location, to then provide these services to various "customers" or users distributed throughout the business, wherever they may be located. Shared services as an umbrella title includes outsourcing. An example of shared services that is very relevant to the financial sector has been in technology, software development and data management which can be, and have been, maintained and managed by shared service centers or third party outsourcers for use by multiple stakeholders.

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

DW: Shared services and outsourcing has contributed to the tying together more closely of economies all over the world. This approach has also allowed businesses to reduce costs and improve service levels and tap into expertise from lower-cost locations such as India. A good example here is software development and data entry in India, where companies are able to employ more qualified people, such as qualified accountants, to do this rather than using people at their home locations. From an offshoring perspective, India has been very successful at this. China really hasn’t entered this space effectively yet, due to a number of issues including language, but has, of course, done very well in manufacturing for global businesses.

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?

DW: In general terms, yes. Those who have implemented successful shared services and outsourcing strategies have been able to both reduce costs and improve service levels. However, there have also been failures and this should not be forgotten.

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?

DW: Yes, this is critical to the business. Person-to-person access has gone forever. With the significant developments in technology and telecommunications services can be provided, and are sought, from anywhere. The trick is to make sure that shared services and/or outsourcing achieve the aim of delivering effective services at lower cost. While reducing cost is of course critical, it is ultimately all about value as services, and control must be effective.

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

DW: Outsourcing, or at least the impact of outsourcing in terms of where work goes, is definitely better understood than is shared services. Indeed, I would say that shared services as a delivery mechanism for the provision of "back office" support services, and the opportunity that comes with this, is not that well understood.

PS: How do you view the significant move to offshoring to "lower cost" countries over recent years?

DW: This is part of globalization. As I mentioned earlier, globalization and within this "offshoring," has helped us achieve many years of sustained growth. This trend will continue.

PS: Has this move been a complete success or where have things not been done so well?

DW: Success has been mixed. There are some great success stories and some failures. As a more general closing comment, remember that shared services and outsourcing is not a goal in itself for companies. It is a means to an end in supporting the core strategic goals of the business. Shared services and outsourcing for the sake of it is not the right answer. The rationale for doing so and the approach to implementing are both critical to success.

About the Interviewee

David A. Wyss, Ph.D. is chief economist at Standard & Poor’s, based in New York. In this position, he is responsible for S&P’s economic forecasts and publications, and co-authors the monthly Equity Insight and the weekly Financial Notes. David joined Data Resources, Inc. in 1979 as an economist in the European Economic Service in London, which was acquired by McGraw-Hill. He came back to the United States in 1983 as Chief Financial Economist for DRI/McGraw-Hill, became chief economist for Standard & Poor’s DRI in 1992, and chief economist for Standard & Poor’s in 1999. Before joining DRI, Dr. Wyss was a Senior Staff Economist with the President’s Council of Economic Advisers, Senior Economist at the Federal Reserve Board, and Economic Advisor to the Bank of England. He holds a B.S. from the Massachusetts Institute of Technology and a Ph.D. in economics from Harvard University. Dr. Wyss regularly testifies before Congress, is quoted in the press, and appears on television programs.

David Wyss will be taking part in the Keynote Panel Discussion on "The Economics of Shared Services" at 8.15am, March 24th 2009, at the 13th Annual North American Shared Services Week. For more information see the Shared Services Week website.