Everyone is talking about the global financial crisis and how it will adversely affect Indian business process outsourcing (BPO) companies. But what exactly is the crisis? Why are the BPOs so vulnerable to something happening half the world away? We explain what the mess is, why the BPO industry is so worried and how it will impact you, the employee.

The Meltdown
For years, banks in the US have been lending out huge sums of money in the form of sub-prime mortgages. These are basically housing loans given to people who, by definition, are unlikely (relatively speaking) to repay them. However, since housing prices were consistently rising, the banks faced little risk: if the debtor defaulted on the loan, the bank could simply seize and sell the house.

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Then, housing prices started falling. And kept on falling. Soon the banks couldn't recover the loans and started losing huge amounts of money. In a world where commerce is delicately interlinked, these losses had a domino effect. Lehman Brothers collapsed. Morgan Stanley faltered. The US government recently spent $700 billion bailing banks out. Despite the government's intervention, the damage is likely to be immense.   

The Link
According to NASSCOM, the United States is one of the largest contributors to the revenues of BPO companies hovering at 60 per cent. The US financial sector, in turn, is one of the largest customers and the liquidity crunch that has hit these companies will directly cause them to start shedding weight -- with customer care and backroom operations being first to go. But you might not be spared even if your company doesn't have American banks as clients.

"The contagion will spread to other parts of the US economy," says Zubin Ray, a third year Economics student at Delhi [Images] University, "In this globalised world, the economies of countries like the UK, Australia [Images] etc will be affected." These countries are also substantial contributors to India's BPO/KPO revenues, so to expect cutbacks across the field would not be entirely incorrect.

Employment rate set to plummet
According to NASSCOM, the BPO industry offers employment to seven lakh people.

As of this moment, companies aren't expecting to fire their employees any time soon. However, the explosive growth of the BPO industry is pretty much over. Although companies still expect to hire more people, they won't need nearly as much.

Says Sameer Walia, managing director of Gurgaon-based KPO The Smart Cube, "The future hiring rate of BPOs will be far worse off as compared to the KPO firms. The BPO employment rate is projected to decline by 60 per cent within a span of one year." The Smart Cube currently has 130 employees and expects the employment rate to fall 30 per cent.

The higher-end nature of knowledge process outsourcing companies and legal process outsourcing firms insulates them to some degree from the damage being wrought on voice-based BPOs.

Of course, promotions will suffer too. "Most of the promotions that happened in the last few years have been made possible by fast expansion, which had plenty of demand for experienced employees," says Zubin, "When expansion slows, so will promotions."

"We expect to have to shuffle employees soon," says a source from within the industry that prefers to remain anonymous, "The future of many financial companies who are our clients is uncertain. The abrupt dissolution of Lehman Brothers shook many people up. It was there one day and gone the next. We aren't sure if we have to re-negotiate our contracts -- or if the contracts currently in place are still valid. We aren't sure how future contracts will be signed. The industry will undergo an unpleasant patch for six months or so and then only can we know anything for sure. Lehman left a big hole -- hopefully someone will fill it soon."  

Competition from the Philippines
Interestingly, the current crisis may actually increase outsourcing in the medium-to-long run, if a report by the Everest Research Institute is to be believed. The report states "business process outsourcing (BPO) from the financial services sector will increase 40 to 45 times the current market size over the next five years, with key drivers of growth coming from cost pressures". In other words, under pressure to cut costs and stay afloat, these companies may shift out more and more functions. This sounds like good news -- until you realise that it isn't India they're outsourcing to.

"The future of contact centres in the Philippines is bright in the wake of the US economic crisis because the BPO industry is cost-based," said Nanette del Monte, chief of the Cyber City Services, "Philippine BPOs do not pay huge salaries compared to those found in other countries, the contract cost they offer to foreign companies is also not that much. As a result of this they are expected to expand as US companies come under pressure."

Currently many small financial companies -- those with fewer than 5,000 employees -- did not consider outsourcing to cut costs to be a high priority, but that is set to change. Some of that business may come to India but the Philippines provide worthy competition because of a substantial English-speaking population whose wages have not yet climbed to the levels they have in India.

Wait and Watch
In a recent interview, Som Mittal, president of NASSCOM said that the meltdown is "a cause for concern, not panic. The Indian IT sector is resilient to bear the impact of the turmoil. We need to wait and watch to find out how deep is the crisis. There will be some downside in the short and medium terms, which will be two-to-four quarters."

Although the current system may be shaken up, the labour-arbitrage powered model of outsourcing is unlikely to grind to a halt. There is no telling what surprises innovation and global capitalism will throw up. It is advisable at this point to simply tighten your belt, build up a good skill-set and prepare for a career slowdown.