Subprime Mortgage Crisis: Impact on the Outsourcing World

US mortgage markets and the economies of outsourcing countries – what’s the relation you might ask. The extent of globalization and economic interdependence in the new world comes out in full view with events like the subprime mortgage crisis in the US and its reeling impact on the global economy. Ideally, only companies in the US real estate sector or subprime mortgage industry should have been affected. But countries all over the world, right from Europe and India to Tokyo, are facing the brunt of the US subprime mortgage meltdown.

The subprime mortgage crisis in the US

What exactly is the subprime mortgage crisis that has sent tremors through the world, not to mention the global IT and call center industry? The US real estate industry experienced a boom between 2001 and 2005 with property prices scaling unprecedented highs because of factors like low interest rates, price-to-rent ratios etc. But when property prices began to fall due to saturation or lack of demand, the owners were left with mortgage loans higher than the value of the property they held. The breakdown of the US market had a staggering impact on the mortgage industry, housing values, real estate companies and hedge funds. In late 2006, several US subprime mortgage companies closed down due to losses, with many filing for bankruptcy.

Implications for the outsourcing world

The link between the sub-prime mortgage crisis in the US and the global outsourcing economy stems from the fact that many mortgage companies have outsourced their operations to outsourcing countries. With the closure of these units, outsourcing contracts were automatically cancelled.Many back office operations were shelved as a result, and billing rates, employee makeup and strength, pay structure and profits were all drastically altered. As Deutsche Bank, Germany's biggest bank, rightly points out, global economic growth is taking a direct hit as a result of this crisis. WNS (Holdings), India’s second-largest BPO, has reported that the US subprime lending crisis would have a “material adverse impact” on its financial performance. The Bank of China, one of Asia’s biggest banks, also disclosed considerable exposure to the US impasse. IT major TCS has raised its billing rates by 3 to 4% for existing clients and by 5% for new clients because of rising wages and rupee appreciation against the dollar. And technology giant Infosys has declared that the impact of the subprime crisis will be close to a $1 million this year. The list continues…

So is the situation very bleak? Not so, according to industry experts across the world. Only a handful of companies in outsourcing countries like India are facing considerable exposure to the mortgage industry and the impact will be confined to this number. Big players are in liaison with large mortgage firms that have the capacity to tide over subprime problems. But there is a more prominent silver lining in all this. Companies like IT forerunner Infosys are taking the crisis in their stride, in spite of losses amounting to around a million dollars and having to reassign employees who have lost jobs in their BPO wing. Why the optimism? The possibilities of these large mortgage firms withstanding the crisis and consolidating are very high. The result – more outsourcing contract and that too of higher scope! Outsourcing economies would win more business from the US when the subprime crisis curbed spending there and companies are driven to cheaper service providers in other countries. So this brief deadlock would actually work to the advantage of outsourcing countries!

But the proposal of the Indian Industry body PHD Chamber (PHDCCI) is worth consideration here to avoid future impasses like this: To overcome such situations, the BPO segment should increasingly go for balancing their risks by taking up projects outside the US and focusing on e-governance and wiring companies.

Vidhu Panicker
Outsourcenews.com network