A word from our CEO.

by Elliot Clark

In the January/February 2008 edition of this column I predicted the recession (note: We were already entering it) and its effects on the FAO market. “For value-driven sectors like payroll and procurement and accounts payable, a recession can be a good thing. CFOs will look hard at fixed versus variable cost models and more expensive internal operations that have been maintained for the sheer force of inertia will come under scrutiny for outsourcing,” I opined. Big FAO market shifts are coming. One of the biggest is that global market share of brand-weak Indian provider firms will fall very rapidly.

FAO buyers are justifiably stunned by financial market volatility, decline in shareholder equity, and pending signs of consumer weakness. This will influence buyer behavior in the coming eight quarters. The Cato Institute says we have had eight recessions in the past 50 years, and we will weather this one. But these conditions with lead to two market shifts that warrant scrutiny by brand-weak providers.

First, the election of Senator Barack Obama is a game changer. He is the first president elect since Herbert Hoover who is not a free-market, free-trade advocate. In fact, his campaign stressed creating tax pressure on companies that “sent” jobs overseas. Companies will factor tax impacts and continue to outsource, because no one “sends” jobs anywhere. We compete in a global economy for both talent and products; producers with uncompetitive labor costs cannot maintain competitive product pricing. Producers will suffer if they do not leverage opportunities in low cost economies.

Second, the necessity for quick deployment and the collapse of timelines to “cost savings” will lead to a different kind of FAO deal. Simpler deals will be cut with fewer processes, but more company-wide scope. Buyer perception on the ability to deliver will be paramount. Many India-based providers have long operated with the misconception that investment in brand development, advertising, or PR was overhead cost. They believed that being inexpensive was enough and they could ride on the reputation “coattails” of their ITO businesses. This shortsighted strategy has run its course. Some of the largest deals in the past year have gone to U.S.-based and European-based firms that are solidifying their offerings. There is little brand differentiation in the Indian FAO provider market. These brand-weak providers rely on references in selling, but in today’s world of failure-phobic buyers, buyers are bypassing weak brands for strong ones. Buyers have directly provided this feedback on FAO Today surveys. The brand-strong are already beating the brand-weak. A simple seat license pricing model is no longer adequate.

Reducing “time to savings” will require high buyer trust. Trust is about brand perception. Even the largest providers from India are up against brand management champions like Accenture, HP, IBM, Capgemini, etc. Recently, the larger multiprocess deals are increasingly being won by these global “brands,” and the same is also happening in the point-solution markets.

To be fair, the Indian BPO market has grown dramatically on the “We are less expensive” message. I remember someone at a conference saying, “We went to India for cost and stayed for quality.” That’s nice until you recognize you have to get the buyer there first for this to work. With headwinds in global cost structures being imposed by a new U.S. administration, the economic calculus is changing. The market is seeking quick action and high levels of trust, and buyers’ preferences for brand will drive decisions.

In a recession, buyers become more cautious. The only way for Indian companies to hang on to the market share they have is to invest in building strong brands to differentiate themselves from the weak-brand crowd. Brand-strong U.S. and European FAO providers will begin cutting heavily into brand-weak Indian providers’ existing client base, and new buyers will ignore brand-weak firms. Sure, ignoring investment in brand is a way for Indian firms to keep costs low. But in the new more-competitive world a brand-weak provider is a provider that is too cheap to be credible.