Wall Street is a bloodbath. Entering today, the S&P 500 Index had plunged 7.2% already this year, with more than 450 of its companies in the red and nearly 40 firms falling by 50% or more from their 12-month high, according to Market Watch. This isn’t just an oil-price issue affecting energy firms either. Analysts are projecting that even information technology, consumer goods, and financial companies will show negative growth when their fourth-quarter earnings per share results come in.
The impact of the carnage seems even worse when you factor in the slowdown of China’s growth, the slump in emerging markets, the U.S. Federal Reserve’s interest rate hike, and a strong dollar that is hurting exports. Considering all these headwinds, the stock-market volatility doesn’t seem like an early-year blip that will pass. Companies are growing concerned about how to navigate a longer downturn and ongoing difficulty.
In a major move, Morgan Stanley just announced a $1 billion cost-cutting strategy that includes a major focus on outsourcing and aims to not let Wall Street dictate its profits. “Our number-one priority is to control what we can control given the market realities,” said bank chairman and chief executive James Gorman about cost cutting on a conference call last week.
Room for Improvement
Industry experts say that others are likely to follow suit. “Companies are going to continue to look at outsourcing to improve their current cost situation,” said Aaron M. Oser, partner and leader of global sourcing at Pillsbury Winthrop Shaw Pittman LLP.
His firm has been advising companies on outsourcing moves since 1988, and he says it has participated in more than 1,000 transactions with a total contract value of about half a trillion dollars. In discussing the current situation, he brings up 2008. Today’s challenges obviously aren’t as dire as the turmoil that welcomed the Great Recession, but he now sees some of the same opportunities for companies to cut costs that his company tried to advocate back then.
In 2008, Pillsbury launched a webinar series called “No Better Time” that focused on why the crisis offered a perfect chance to ramp up outsourcing deals to cut costs and raise productivity. But he says that the economic situation back then was so bad that many companies couldn’t even act. They were in shock, wallowing in denial that things would turn around before catching on to the fact that the world had changed. And even those companies that were quick to understand the new reality had trouble finding the resources and energy to capitalize on outsourcing as a cost-cutting measure.
Those challenges are lesser now. Companies aren’t as disoriented. Rather, they have the time and flexibility to make more calculated decisions in a way that they could not in 2008 when they so many were just trying to get through the day without going under. “The stars are somewhat aligned as far as outsourcing being here to stay,” said Oser. “The economic challenges are definitely there.”
As companies continue to evaluate their books, they will soon realize that there aren’t a lot of in-house cuts left to make. They can put in place salary freezes or hiring moratoriums. But companies, even the behemoths, have been focusing on trimming expenses ever since 2008 to become as lean as possible. So if they want to realize further reductions, looking overseas is one of their last, best options.
“There are diminishing organic options for companies,” said Oser. “They don’t really have the buildup of resources to help them in this time to drive innovation and also keep the lights on … But there are reliable external levers that one could use outsourcing for. There could be short-term cost reductions.”
The Right Way and the Wrong Way
Stan Lepeak, KPMG‘s management consulting practice director who leads research efforts globally, echoes this sentiment. “A lot of firms have already taken out of a lot of money from certain functional areas,” said Lepeak. “There is only so much you can take out of F&A and procurement and HR because there just isn’t much money spent there anymore.”
So companies are now asking themselves how this and other work can be performed better and cheaper. “That’s where we’re seeing some shift in terms of what particular type of sourcing model is the best,” he said. This means that some firms are looking to push more strategic work overseas, partnering in a real way with firms abroad on design, development, and analytical projects rather than just sending back-office and transactional work to the lowest-cost provider.
While all this news may sound like a looming windfall for providers, obtaining this new business won’t be easy. The contracts are not just going to fall into their laps, especially since renewal rates with current clients among, for example, those in the financial services are upwards of 90%. And since this isn’t 2008, companies are looking to cut costs more strategically for the long term rather than making reactionary short-term moves dictated entirely by Wall Street volatility.
In chasing clients, Oser notes that IBM has been realizing losses, HP is “as flat as can be,” and many Indian providers are seeing their growth rates fall. “They’re all hungry,” he said. “They’re very hungry … But there is going to be a fair amount of energy that the supplier is going to have to bring to be able to prove that they can still extract value on the deals from either a cost reduction or improving business outcomes.”
Still, the momentum taking place in outsourcing is likely to be accelerated this year by a volatile stock market as long as the providers do their part. Major companies like Walmart, drugmaker AstraZeneca, and carmaker Daimler were ahead of the curve in strategically realigning their IT services.
Now, with the market in turmoil, others that have watched their competitors cut costs and expand partnerships are recognizing that now is the time to follow suit.