"I know of zero financial institutions that do not use external service providers for some facet of their operations," says Allen. At the same time, most every outsourcing service provider from global giants like IBM, HP/EDS and Accenture to small, localized players in India, Europe and elsewhere has financial services in their portfolio. That means everyone is vulnerable as deal flow slows. According to TPI, there were 132 financial services deals valued at $17.9 billion signed in the first nine months of 2007. That compares to 101 deals worth $10.8 billion so far this year.

Existing providers are "absolutely" hurting, says Allen. "The providers that were supporting Lehman Brothers, Fannie Mae, Freddie Mac, and AIG are feeling the pain of their clients' distress. And, those that were hoping for more business from Merrill Lynch or Wachovia are likely worried that the new regime will have another agenda and a different set of service providers with which to work." 

American firms like IBM, HP/EDS and others whose businesses are only partially supported by outsourcing are somewhat shielded from the fallout. But, as Allen mentions on his Consider the Source blog, pure play Indian providers for whom financial services account for a significant share of business are bracing for the worst.

And how might the consolidation affect the existing outsourcing contracts of acquiring banks and their targets? Banks will be scrutinizing contracts looking for any unnecessary costs, says Allen. But those banks will also look for ways to maximize the cost benefits of their outsourcing relationships. That could result in more work for service providers as newly merged organizations consolidate their operations. But don't expect any transformational outsourcing deals anytime soon.

"In the near term, I expect a very tactical attitude aimed at cutting unnecessary costs and rationalizing any redundancies.," says Allen. "Transformation is the product of a forward-looking strategy and there just isn't a lot of energy being devoted to the far future these days." - Suzanne Stevens