By Mark P. Dangelo
www.Innovative-Relevance.com
It has been repeatedly said that, “Desperate times call for…,” well you know the rest. With a weak economic recovery underway, many domestic financial leaders are trying to navigate unchartered territories, while endeavoring to avoid collisions with unique business obstacles – regulators, politicians, depositors, investors, and global capital markets.
With nearly 7 million domestic jobs lost in 32 months it may be 6 to 12 years before they can be replaced with equal paying positions — if history is any guide. The embers of technology investment are seducing many to believe the recovery is here – but is it a recovery that includes domestic workforces?
Moreover, with trillions USD in deficits piling up and an escalating trade war beginning (all but in name) with the U.S.’s largest creditor, can technology investment be sustainable especially for a mortgage market still under duress?
If origination volume in 2010 is estimated to be one-third of the levels from 2006 and with REO properties held in reserve equaling or surpassing the number of listed ones (another 8 to 10 months of supply), have we reached an equilibrium – or is there more to come?
Yes, as my mother used to say when I was a child, “You ask a lot of questions.” But these days, with so many “experts” at every corner, I feel compelled to query even more.
Perhaps a fable will help frame the concerns I have when it comes to the slippery slope of regulation and the hidden dangers subsequently facing the outsourcing industry over the next 18 months (within finance and mortgage markets (FMM) for onshore and offshore business process and technology outsourcing). My fable is titled, “GlobalBorderMalevolence.”
“It is often those nasty ‘unintended consequences’ that linger on long after the deeds are done. For example, with nearly half-a-dozen global regulatory discussions on going and increased taxes or fees nearly certain for financial lenders, won’t that create additional pressures to margins, profits, and an ability to lend?
If fees cannot be passed on either due to competition or regulation, then the obvious answer is cutting costs. For the last two decades, institutions have sought cost reduction and avoidance via outsourcing of functions to developing countries with lower wages and educated classes of laborers.
Therefore, will not an implication of cost cutting demand further shifting of knowledge jobs from west to east in an attempt to keep profits stable to meet investor and regulator solvency demands? Will not that have an impact on FMM domestic employment moving forward? If employers shift higher-paying functions to cheaper locales, does that not then mean less tax basis to offset rising regulatory costs and a Federal budget?
So when jobs are lost, now do we need then a ‘jobs bill’ to protect domestic workforces from disenfranchisement indirectly created from the very issues that taxpayers were seeking relief from – unemployment, lack of credit, or foreclosure? If we need a jobs bill, then don’t we also need protection from those ‘nasty’ outsourcers who are ‘exporting the future of our economy?’
So why not put an extra surcharge or tax on outsourcers and the firms they represent to ensure that labor arbitrage cannot be utilized to improve margins from those bankers who seek to reward themselves with huge bonuses?
If the Indian outsourcing industry increases at their projected 2010-2011 rate of growth approaching 15%, while domestic unemployment still exceeds 9.7%, doesn’t this mean that outsourcing is a perfect industry to target by regulators and politicians?
After all if outsourcers are growing offshore by shifting jobs west to east then are they not taking advantage of global imbalances created by currencies and export-driven state sponsorships? Aren’t they equally culpable as much as those ‘bad’ bankers who started the whole mess in the first place?
On the other hand, if outsourcers have let’s say 25% to 35% of their delivery capability taking place onshore in domestic centers of excellence, should they be treated the same as a service or technology provider who has only sales forces within the borders? Moreover, what should be done to rebalance the labor arbitrage differences for domestic firms who provide outsourcing service offshore but claim U.S. headquarters?
So goes the circular references and the convoluted requirements for even more regulation to determine who and what is being done to whom. Furthermore, if you start at one point in the value-chain, why not transcend all the way downstream to punish everyone who is making a profit as a result of changes created at the beginning of the chain? Is this regulation approach really about free-trade and open borders – or retribution and politics?
Besides, why stop there? What about any third-party partners involved in JV’s? How about technology solution sets and innovation needed to streamline processes, driving out costs, and displacing workers? Should anything and anyone that eliminates a domestic job not be ‘punished?’
Taking it to extremes, would market competition that arises between industries and their representatives also not fall under this disguise? If competing standards disadvantaged or displaced one interest group, should they not seek regulatory protection against the other?
What if secondary group demands created disintermediation within the origination and servicing institutions? Should they not be then regulated to stop their impacts on BAU and jobs?”
Whereas the fable may be a little “cheeky,” its intended seriousness is not to be dismissed. These hidden exothermic consequences are growing increasingly likely not just domestically, but within the EU and even within the Asian provider countries themselves.
Let’s also be very clear, that each side of the outsourcing equation has responsibilities that they have not lived up to in the past. The firestorm of criticism from many practicing xenophobia is fueled by those outsourcing firms seeking to “take orders” — playing into simple labor arbitrage needs and continually advocating the business model of moving jobs from west to east. These players still exist and are easily identified by their token domestic presence.
Conversely, without outsourcing to provide leverage and scale, not to mention aggregation of highly complex and specialized skills that cannot be efficiently integrated with traditionally organic approaches, industry innovation would not have been as great as we might think.
Why? Because the savings achieved by using global workforces would not have facilitated investments in other innovations needed – fraud, automated valuations, analytics, data mining, interoperable standards, and the list goes on. Stated another way, by using outsourcing for delivering commodity transactions in origination and servicing, investments in more specialized and complex functionalities could be made. They were made.
Outsourcing has benefited not just lenders, but homeowners, investors, regulators, and those seeking political advantage. It will continue to be a integral part of our process and technological solutions fabric. However, its usefulness can no longer be thought of as mere “exports” or “imports” by anyone within FMM’s.
There are polarizing factions that are escalating the rhetoric – they whisper “GlobalBorderMalevolence.” Perhaps this feeling of disenfranchisement has best been characterized by the creators of Comedy Central’s South Park, “They took our Jobs!” True, unchecked outsourcing based on mere arbitrage is not beneficial long-term to either party. Conversely, so is no outsourcing.
Just like bankers who are “bad,” the outsourcing industry should not be thinking BAU. Xenophobia has arrived as a new form of nationalism. Domestic or foreign firms with sizable local, heterogeneous workforces (i.e., not imported H1B’s within domestic borders) will be the best positioned to not only avoid this coming battle, but also profit from it. Integrated, domestic workforce outsourcers will be the survivors – and some very large international providers are already embracing a new business model.
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Undeniably, Humpty Dumpty has had a great fall. No amount of regulation, central bankers (i.e., Kings), or TARP bailouts (i.e., the King’s horses and men) will ever remake the fragility of an egg that tempted fate and spurned consequences by ignoring the market risks (i.e., the wall). The fall the FMM Humpty Dumpty was a “splat heard round the world.”
As a final point, the U.S. Administrations’ position on outsourcing and globalization has also become increasingly intriguing. For example, much has been read into Larry Summers, White House Chief Economic advisor, recent speech at Davos as he cited, “the case for free trade might not apply when countries were trading with nations that were pursuing mercantilist policies.[i]” Even if this particular challenge was directed at one particular country, could it not be also used against others within the same region covering both products and services?
So you see the challenge for lenders and their outsourcing providers will be buried across many nouns– xenophobia, jingoism, patriotism, nationalism, protectionism, and even cultural intolerance. The noun you select depends on your preference in the on-going debate. So as new regulation sets in motion the need for increased efficiencies, an implication of what they demand will lay the foundation for yet more regulation and national debates – just farther down into the value chain of mortgage and financial delivery.
As Abraham Lincoln once said, “A house divided against itself cannot stand. I do not believe that the house will remain divided – it will either cease to be divided,” or its foundations will wither collapsing the entire structure and advancements onto itself. But will free-market capitalism prevail? Will outsourcers stumble on their own past success? Will they seek to empathize with their domestic clients, and the escalating pressures they face?
This debate has only just begun – and it potential consequences are very, very scary.
[i] “How the Bottom Fell Out of ‘Old’ Davos,” Gideon Richman, Financial Times, February 2, 2010.