Lehman, Merrill and Offshoring

Filed in archive Outsourcing Issues on September 15, 2008

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Photo courtesy of iStockphoto, Alex Slobodkin

Today's bankruptcy of Lehman Brothers and the takeover of Merrill Lynch by Bank of America will present huge challenges to offshoring in the near- to mid-term. Aside from the clear consolidation in the markets that this will create, the penumbral effects of this crash will be felt throughout the markets. There is no doubt that these and other failures and troubles will have a far greater effect than the presidential elections.

First, it is important to remember that these crashes were caused by woeful risk management. Poor and risky management led to these crises. The result of this will likely be far more conservative management - on both the expense and profit sides. Remember, offshoring is still seen as a higher-risk way of doing business. More conservative management will likely lead to less offshoring - and a greater focus on fundamental business issues.

Second, without regard to political party, we will likely see a move to a real "country-first" approach that is, in one way or another, more inward-facing. I predict that the U.S. will "circle its wagons," and focus on rebuilding its fundamentals - without regard to the effect on the countries with substantial offshoring infrastructures.

Third, offshoring vendors have done a generally poor job of showing their commitments to the U.S. This is different than Japanese automakers - the whipping boy of the late 70's - reacted. Japanese automakers realized that they had to invest in the U.S. market, not just take from it. Offshoring companies, however, have not made that investment into the US market. As such, when the U.S. turns inwards - Wipro, Infosys and Satyam - will be left out. Unless these capital-rich companies step in and help during this time of crisis, and the clock is quickly running out - American business may turn away from offshoring.

Finally, there is little doubt that either administration, if elected, will face substantial pressure to take a "job creation" approach. I would expect some massive public works projects if Barack Obama is elected, or a continued and expanded war effort if John McCain is elected. Both create jobs - and neither are particularly friendly to offshoring.

In this difficult time, the U.S. will, no doubt, turn inward. As we do so, our standard suite of offshoring providers - particularly India and China - may be left on the sidelines.