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Outsourcing firms on edge as sub-prime crisis buffet US clients

Fallout for now limited to those that process mortgages

(BANGALORE) Indian outsourcing firms nervously hope the US loan crisis does not deteriorate as the business of processing mortgages in their biggest market dries up and some clients keel over.

Firms such as iGate Global Solutions and WNS that serviced American mortgage lenders are already feeling the impact of the crisis, which a US survey this week called the biggest short-term threat to the world’s largest economy.

India’s outsourcing industry is now worrying about the crisis impact and a possible slowdown in the US economy on technology budgets of banking, financial services and insurance clients that farm out work to India to cut costs.

‘The impact is now limited to individual companies that had a reasonable amount of mortgage servicing business,’ said Kiran Karnik, president of the National Association of Software and Services Companies.

‘We are hoping that it will blow over soon, but if the ripples travel to other areas of the US economy, it could be bad for the industry,’ Mr Karnik said on Wednesday.

Processing loan mortgages during the US housing boom was a profitable line of business for pure-play outsourcing firms that logged 47 per cent growth to 209 billion rupees (S$7.8 billion) in revenue during the year to March.

The mortgage business has virtually dried up as US financial firms try to weather the sub-prime crisis, caused by defaults on loans made to home buyers with patchy credit histories, by staunching credit.

‘In the US, sub-prime loan originations have almost ceased and, consequentially, the demand for origination services has dropped,’ said N Ramachandran, chief financial officer at iGate Global Solutions.

The company’s revenue from mortgage servicing fell to 7 per cent of sales for the three months ended June 30 from a peak of 10 per cent for the previous quarter, he said.

‘That said, these revenues continue to be at risk due to the ongoing sub-prime market turmoil,’ Mr Ramachandran said, adding that iGate had assigned other duties to about 100 employees that used to process mortgages.

The outsourcing arm of Infosys Technologies, India’s second-biggest software maker, and iGate Global Solutions, both based in Bangalore, lost a major client when GreenPoint Mortgage was shut down by parent Capital One Financial Corp.

Mumbai-based outsourcer WNS said last month that it expected to lose business from US mortgage firm First Magnus Financial, which had been expected to contribute 5 per cent of its revenue for the nine months ending next March.

First Magnus has filed for bankruptcy, forcing WNS to assign other duties to about 500 staff, a press report said on Wednesday.

Software firms such as Infosys are better protected from the US loan market turmoil than companies that earn revenue from back-office services such as transaction processing and risk management.

Still, any US slowdown would hit the entire information technology industry, which earns two-thirds of its US$50 billion annual revenue from the US.

‘We have been speaking to our clients, economists and financial analysts every 15 days,’ said Infosys chief executive officer Kris Gopalakrishnan.

‘There have been concerns of a slowdown in the US economy for two quarters . . . but our clients do not anticipate an actual slowdown,’ he said.

Clients concerned about declining profits tend to initially cut costs, including on outsourcing, but will farm out more work over the ‘medium term’ as they try to increase revenue, Mr Gopalakrishnan said.

Some outsourcing companies scent an opportunity in the crisis.

Quatrro BPO Solutions last month paid an undisclosed amount to acquire the mortgage processing business of USbased Preferred Financial Group.


Source: AFP (Business Times 1 Sept 07)

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