Posts Tagged ‘India’

In a Word, “GlobalBorderMalevolence”

Tuesday, February 16th, 2010

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. 

* * * * * * * *

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.

Indian Banking at a Glance

Tuesday, September 22nd, 2009

“Sunny with a Chance of Clouds”

By Mark P. Dangelo

www.Innovative-Relevance.com

Also published at the National Mortgage Bankers Association

Approaching the Next Decade

As 2010 approaches, the domestic market for Indian banking and capital markets is poised for a resumption of very strong growth. With GDP estimated to grow at 6% to 8% this year reaching nearly $1 trillion USD, it is an economy that has an increasingly educated population seeking enlarged global recognition. The last two years have spared the Indian public and private sector banks much of the chaos of their Western peers, due to their underlying social mission supported by durable supervisory oversight.

Consumer credit, loan products, and retail banking are all ready to once again resume their hyper-growth – albeit using very different banking models, measurements, and performance criteria. With a population of over 1 billion, the potential for market penetration of consumer financial products is not lost on public and private bankers both domestically and foreign.

While prohibiting much of the global derivative exposures, agencies and their regulators have a growing burden of non-performing debt that was based on social charters designed for a world of 50 years ago. Moreover, the next decade of Indian banking and capital markets presents new domestic challenges that have analogies within the Western banks – but a process and infrastructure capability that is still limited in sophistication.

Lingering risks with domestic credit portfolios, unsecured lending, commercial quality, and newly introduced product implications may expose weaknesses with internal systems and the underlying data needed for accurate decision making. Banking and technology investments and infrastructure are poised to amplify the consumer potential and market demands.

So, while the prospects are good for increased consumer deposits (> 20%) and support of domestic investments, banking and capital market consumer expectations will demand the highest operating standards for public and private firms – and the regulators that oversee their integrity.

A “Knee-of-the-Curve” Transformation

The lessons learned from the global recession of 2007—2009 are many. Yet, there are several key banking and capital market realities and emerging trends that must be enhanced within many of the public and private domestic banking organizations.

· End-to-end performance management across products and operations,

· Comprehensive and adaptable risk management balanced against social responsibilities,

· Adhere to the “letter” of regulatory compliance – and the spirit of its intent,

· Market, securitized, and portfolioed credit instrument quality against global markets,

· Cross-border M&A’s and the need for greater participation in global financial products,

· Consumer behaviors, rising educational standards, and shifting global wealth, and

· Adoption of consumer credit standards, infrastructure, and governance.

Underpinning the aforementioned directions are data and the analytics needed to determine success. The delivery of meaningful and correlated strategies and information will present difficulties for Indian internal teams to create from scratch – time to create, cost of delivery, and accuracy of integration. India is a set of regional markets poised for meteoric growth in the next decade. The ability to leverage the lessons learned, while avoiding the pitfalls of others, may determine if they become an Asian banking leader in just a few short years.