What Lehman and Merrill turmoil means to its KPO business?

Both Lehman and Merrill are big players in the Indian KPO market.
Lehman has a captive in Mumbai, which serves as a one-shop-stop for all its verticals including investment research, banking, library management etc. According to ET, the company also outsources technology related work to Wipro and TCS.
Merrill is believed to work with third party vendors in India for its research and banking operations along side a captive in Mumbai. Satyam, TCS and Infy serves Merrill with Satyam being the biggest vendor, according to ToI.
Bank Am has as its captive in Hyderabad, Continuum Solutions, a 100% owned subsidiary that provides support in investment research, Wholesale and Consumer Banking operations. In technology space, TCS works with Bank Am, according to ToI.
What is the potential impact on KPO operations?
We believe Lehman’s bankruptcy puts an end to all new businesses (and most of the existing businesses) in its Mumbai center. However, there has been no official confirmation either from management or employees on lay-offs or shutting down its operations at its Indian unit.
On the other hand, Merrill’s outsourcing partners will have to adopt a “wait-and-watch” strategy. There has been no announcement made by Bank Am on outsourcing strategy but we believe the following are the immediate, medium-term and long-term implications on the Merrill’s KPO vendors:
Immediate: Receivables would become sticky and put pressure on revenue and margins. According to ET and ToI, some of the vendors have already been involved in talks with the banks to understand the situation.
Medium term: The lay-offs across the globe are inevitable for both Bank Am and Merrill. As a result, their offshore consultant/analyst teams will directly get impacted. While the captives will adopt the similar ‘onshore-type-lay-off’ path, we believe ‘pure-play’ BPOs and KPOs should be able to sustain in the medium term, albeit with an increased bench strength. IT BPOs with their deep pockets should be able to sustain much longer than pure-play BPOs or KPOs.
Long term: This is an interesting development to watch as the KPO industry is now going through its first business cycle. While it is widely believed that Bank Am will eventually consolidate its off shoring operations, it is unclear whether the consolidation will happen by moving its entire operations to its captive (either in Mumbai or in Hyderabad) or by opening it up to third party vendors.
KPO Experts view:
So far, in the outsourcing growth story, we believe that captives are lagging far behind third party outsourcing vendors. Going forward, we feel that there is very little appetite left in the banking system to make huge investments in offshore captives. Banks have been successful with vendor strategy in IT outsourcing and now they probably pursue the same strategy to outsource some of their research and analytical work to third party vendors, which is currently being done out of their captives. With good service level agreements on quality and continuity of service, banks should be able to derive better value from third party vendors. However, we believe that banks would still like to keep their captives alive and would still like to do some ‘critical-work’ in house due to compliance and confidentiality reasons.