The Crisis: Six Months In (Part 1: Global Impact)

Six months ago this Saturday the pillars of the financial firmament trembled with the announcement that the venerable Lehman Bros was to file for bankruptcy. Following on from the conservatorship of mortgage megaliths Fannie Mae and Freddie Mac the previous week, the downfall of the hitherto totemic Lehman Bros heralded a new phase of the financial crisis which had been gathering pace since the previous year; suddenly all the old certainties had flown out of the window, and a captivated world looked on as it appeared the entire fabric of the global financial system could unravel at any moment…

Six months on and it’s clear that while a systemic collapse was averted, the world economy (and the economies of certain developed-but-debt-crazed western countries in particular) is in dire straits, with the consequences of the financial crisis reaching into every corner of the globe. No industry or sector has been left untouched and there is, as yet, no consensus on how long, or how deep, the recession will prove to be. One thing, though, is clear: nothing will ever be the same.

To commemorate the six-month anniversary of the truly extraordinary events of last September, SSON reached out to network members from right across the space, asking for their thoughts on how they thought the crisis and downturn had affected shared services and outsourcing and upon their organizations in particular – and their views on how the next six months will unfold.

Over the next few days we’re bringing you an edited selection of members’ answers, giving a snapshot of the impact upon different aspects of shared services and outsourcing of what, it’s now clear six months on, has become the defining economic event of our times. We begin today with a look at the global perspective:

What have been the biggest consequences for the shared services and outsourcing space of the economic crisis over the last six months?

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Mark Cook
Chief Operating Officer, Steria UK

Strategic sourcing partnerships: savings are a key driver for companies facing significant budget cuts across their IT and service delivery, and with the economic downturn, we’ve now moved into the era of next generation sourcing. There’s no better way to bring about a process and IT transformation than through a mutually beneficial, strategic sourcing relationship. Processes and technology that enable the identification and collection of debt and ensure invoices are settled on time are invaluable in today’s cash-strapped economy.

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Anand Ramesh
Research Director, Everest Research Institute

Buyers of outsourcing services have become much more circumspect on spending. New initiatives, many projects are all on hold as a result of which only the regular run-and-maintain type services are being sought. In terms of net new contracts, we are seeing delays in decisions and spending even on initiatives that were well underway before the crisis.

Suppliers of services are faced with a situation where signing is moving slowly, but for most large players demand is fairly high. For offshore suppliers, this has impacted their ability to sustain the 30%+ growth rates of previous years. They have, as a result, cut recruiting and are focusing on optimizing available staff by improving utilization.

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Anonymous

I guess that the concepts of centralization/globalization and BPO have been given a significant nudge if not a big shove by the turmoil in the global markets. We are also being called upon more than ever to work as a partner with the business on cash flow initiatives especially those revolving around working capital management. Suppliers will continue to be pressed on payment terms; we also see this as a good way to get process compliance through adopting baseline date (pay to terms only when we have a clean invoice booked).

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Greg Lower
Director, Decision Support, Integrys Energy Group

Cost pressures are affecting the service quality/cost equation. There seems to be a very short-term earnings focus which is resulting in emphasis on non-sustainable cost reductions in areas such as compensation, T & E, and deferral of projects at the expense of more systematic continuous improvement efforts. Employees are being asked for an increase in output within a shorter duration without any process improvements to help them accomplish that so quality suffers. 

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Laura Eaton
Talent Acquisition Diva

Interesting times, aren’t they? Companies have begun massive spending reductions - on staff, marketing, development, travel - even entire business units, etc. Yet they will be expecting the people that are left to produce results that at a minimum meet prior benchmarks, and in some cases expecting this lean group to exceed previous results. Fear has caused major over-reaction or over-correction in my opinion. And redirecting this ship is going to be tough. Customers are not going to turn around and start spending immediately, but they are kicking the tires and checking available outsourcing solutions.

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Jean White
Principal, Deloitte Consulting LLP

As professional service providers to shared services organizations (SSOs) and companies that have or are considering SSOs, we’re seeing a lot of interest in controlling costs by making SSOs more efficient – no surprise in this economy. Even companies that achieved their initial cost-reduction goals with their SSO implementations are now asking themselves how to take SSO efficiency to the next level.

We also see companies that had not previously embarked on shared services – including those in very hard-hit industries – viewing the recession as an opportunity to change their business model and be better positioned for the future.

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David Lines
Manager Business Development, Oxfordshire Shared Services

Financial pressures are forcing organizations to consider what further scope there is within their organization to make efficiency savings.  There is renewed interest in leveraging more benefits from shared services than before.  Perceived limitations for the scale and scope of change that might be envisaged are changing as the political dimension of these decisions shifts.

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Prof. Dr. Soeren Dressler
Director, Offshoring Institute

Many corporations have revisited the option of SSC and/or re-assessed the question of outsourcing. The awareness that costs need to be reduced has (re-) opened the minds of many senior executives. However, most senior leaders had simply not enough time to focus on this question as they were battling other fronts such as banking loans, funds, liquidity and of course reduced demand and significant lower revenues. In times of urgent survival structured thinking about restructuring is not possible (I developed a model on this in my PhD thesis in 1994 – "Reorganization & Crisis"; my hypotheses back then (based on the collapse of the former GDP economy) have been verified in the current crisis again!).

As a result, many assessments and discussions on SSC and BPO are taking place but very few have really entered the contract or even implementation phase. If you remember [listen to Soeren's podcast on "Offshoring strategies in the face of crisis and recession"], I was clearly addressing my concerns against too quick and not well-thought activities towards SSC, BPO and/or new locations as a spontaneous reaction to the crisis – luckily most companies have reacted cautiously. 

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Marco Busi
CEO, Carisma RCT

The three biggest consequences in my opinion are a general, impressive, unsurpassed fear of failure at all levels and functions in all organizations (with all that it entails); lack of spending across the board; and lack of product/process innovation (being also the most worrying long-term effect). Clearly though, this depression has mostly had different impact on private/public sectors and on different industries, and larger enterprises have reacted and are reacting differently from smaller ones.

One consequence that we have observed for larger enterprises is the decreased number and size of investment made available for new product/service development, expansion into new markets and marketing. Measures of ROI are increasingly being requested and discussed from board level down to operational level. Accountability is also playing a major role: decision makers are being "measured" much more carefully than ever before and are being held accountable for the types of initiative (internal or external) they decide to fund. This is showing natural behavioral consequences, some good (e.g. increased buy in and involvement in the projects funded) and some bad (e.g. favor of business as usual rather than taking any risk in doing things differently).

The experience for Small and Medium Enterprises (SMEs) has been different though. Whilst it is true that SMEs are being hit hard by the lack of available finance, it is also true that the typical disadvantages of SMEs (such lack of resources, lack of structure, etc.) are actually becoming advantages at times like this. The ability to be leaner and more agile (and cheaper, let’s not forget) gives SMEs a cutting edge these days. Also, because of all the same reasons, SMEs are more prone to spend time developing new products and services, and this is paying off in terms of attracting new clients. Those SMEs who manage to tighten the belt and survive on their own working capital actually have a huge opportunity to exploit the impact that this crisis is exercising on the larger businesses. In a way, by reacting so rigidly and fearfully, larger enterprises are leveling the field of competition, allowing smaller enterprises to bid (and be considered for) more contracts.

Limited spending and increased attention to cost savings, in particular related to labor and infrastructure, have become the decisive decision driver lately. We have already started to see a number of outsourcing and shared services deals being put on hold. However, six months is too short a time to have witnessed what the major changes will be at the global industry level. Certainly though, both current and future improvement projects and outsourcing deals are being reviewed on this basis and I am pretty sure we will start observing the real consequences of this in six to 12 months’ time.

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Mark Ross
Vice President of Global Sales and Marketing, LawScribe

The financial meltdown has impacted the LPO industry in several ways. First, undoubtedly the overall interest level in how LPO can assist major law firms and legal departments in cost control, is on a major upward trajectory. The pressure imposed on outside counsel by corporate clients in reducing legal costs has been ratcheted up several notches, and put quite simply, outside counsel can no longer bill junior associate rates for certain, commoditized legal functions, and have a realistic hope of retaining their clients.

Second, conversely, some deals within the LPO space that were on the verge of being concluded have been put on hold, due to a sense of paralysis in the decision making corridors of power. Although counter intuitive, outsourcing can be viewed as an expense, and potentially one that can be cut. However the overall impact of the economic crisis, on balance, over the medium term, is a positive one as far as LPO is concerned.

Finally, I have also witnessed an increasing number of U.S. qualified attorneys applying for positions within my own company, and I am aware of this happening at my competitors. Law firms have laid off, and are continuing to lay off, vast numbers of associates and support staff. Many of these individuals are seeking to reinvent themselves within the LPO space, whether that is in a project management or business development role.

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Thomas Tunstall, Ph.D.
Advisory Liaison, ACS 

The economic uncertainty presents a good opportunity for company management to examine their entire operations, looking for inefficiencies and finding ways to notably lower costs. Many are rethinking their administrative operations, such as human resources, finance and accounting, IT or customer care, and engaging services providers to manage those non-core processes.

In fact, financial services companies are divesting shared service centers in favor of an outsourced model. What appeared to have been a core competency has now become a candidate for outsourcing as well an opportunity to free up badly needed capital in a harsh economic climate. Only the most specialized shared service facilities will be retained in-house for the foreseeable future.

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(These comments, representative as they are, are of course only a drop in the ocean: we’re keen to get your thoughts too, so why not write to the editor to give your own feedback? We’ll follow up with some more of your thoughts in a couple of weeks.)