First it was call centres and medical transcription, then entire back-office operations were shifted from the United States and Europe to low-cost countries in Asia. Now Wall Street has joined the exodus, shifting financial research and analysis to India
By Joanna Slater/CHENNAI Issue cover-dated October 02, 2003
PRASANNA MADAN'S phone rings in Chennai, formerly Madras, in southern India and she hears a familiar voice half a world away. On the other end of the line is an American investment banker who wants an analysis of the performance of energy companies when tracked against certain macroeconomic parameters--by tomorrow. The 23-year-old Madan and her colleagues scramble, combing databases and corporate reports. "There's lots of pressure and lots of deadlines, but we want to make our bankers happy," she says.
A HUGE OPPORTUNITY
. Finance firms have moved $8 billion worth of back-office work to India over five years . They plan to move 500,000 jobs offshore in the next five years . Work includes financial statements, settling claims, data modelling, research and analysis
Madan is part of a growing trend. Hammered by an economic downturn and regulatory woes, Wall Street firms are increasingly turning to India for low-cost help to crunch numbers and research industries.
Companies such as Morgan Stanley, JPMorgan, Zacks Investment Research and Moody's Investors Service are already contracting out research tasks or setting up their own support centres staffed by Indian chartered accountants and MBAs. Others have jumped in but are wary of revealing it for fear of alienating clients, alerting the competition or upsetting their own staff.
The researchers-for-hire say that a large amount of the work that goes into a research report--earnings forecasts, stock comparisons, industry backgrounds--can just as easily be done in India. A handful of senior analysts in the United States or Europe with years of experience can handle the rest, they say.
"We're not arrogant enough to think we can do the job of someone who knows the industry inside out," says Joseph Sigelman, a former banker at Goldman Sachs and co-CEO of outsourcer OfficeTiger, Madan's employer. "But we can support them in a very meaningful way."
Sending financial research abroad, however, also brings with it new complications. Investment banks have serious concerns about confidentiality and regulatory compliance that the Indian firms servicing them must address. There's also often a drop in productivity, at least in the short term, as staff in the U.S. and India adjust to the new set-up.
Still, moving work to India is especially attractive at a time when companies on Wall Street are grappling with how to fund their research operations following a landmark settlement with New York Attorney-General Eliot Spitzer. Under the deal, research arms will provide independent investment advice and refrain from helping to generate other business, a practice that led to memorable conflicts of interest in recent years. But it also means fees from those other deals will no longer subsidize research, making it more difficult to hire staff.
Enter India. While a junior analyst in the U.S. could be paid $60,000 or more a year, a similar position in India would cost less than a quarter of that, say outsourcers. Indian talent "will play a major role in preparing the background research for senior U.S. securities analysts," predicts Anil Joshi, senior managing director of Zacks Investment Research in Chicago. In order to remain competitive, he says, financial firms will "need an offshore model as an integral part of their research."
For now, the number of people involved in performing such tasks in India is relatively small--between 1,000 and 2,000. In contrast, a single call-centre facility in India can employ that many staff.
However, the tasks are more specialized and the field is growing. Zacks says it will expand its approximately 40 staff in India while Morgan Stanley and JPMorgan are planning to open centres in Mumbai that will each employ roughly 50 people to start with. Even the titans of Indian information technology are getting in on the act: Software giant Tata Consultancy Services is exploring ways to offer research services at its back-office joint venture, says CEO S. Ramadorai.
OfficeTiger's Sigelman says he and his co-CEO, Randolph Altschuler, realized the potential power of the concept about four years ago during a late-night phone call as they commiserated about the difficulties of completing a presentation in the middle of the night. Their company began by assembling documents and Power Point presentations for harried investment bankers and lawyers. Later, it expanded into performing the research and analysis that underpin presentations and reports. Today, about one-third of the work involves deadlines of less than an hour.
Getting the processes into place is no easy task, however. In the first three to six months of sending work abroad, productivity can actually drop, says Sigelman, before climbing. Customer concerns about confidentiality also require a series of extra measures.
At OfficeTiger's headquarters inside a busy Chennai shopping-and-office complex, no employees except senior managers are allowed to bring cellphones into work. There are no CD-ROM drives on the computers and printing is strictly monitored. Employees are instructed not to talk about their clients, who in some cases are competitors. At least there are relatively few insider-trading worries: For now, Indians still cannot trade in individual foreign stocks (though they can buy mutual funds focused on overseas markets).
Another challenge was to recreate the time-is-money culture of Wall Street amid India's famously more flexible approach to deadlines. OfficeTiger's new employees get intensive training on the Western approach to time--five minutes really means five minutes--and the consequences of missing delivery times. Sometimes there's a culture clash, like when Sigelman made the mistake of trying to motivate staff by handing out cash bonuses on the spot for employees meeting deadlines. The tactic backfired: Most staff felt it was demeaning to accept handfuls of money in front of others.
"You can't just throw a bunch of smart people into a room and expect it to work," adds Selvan Swamy, CEO of Irevna, a financial-research firm with offices in Chennai, New York and London. "We've got the scars to prove it."
With time, he says, the company has developed the tools and techniques to perform sophisticated research on behalf of investment banks and asset-management firms. Citing confidentiality agreements with clients, Swamy won't reveal how many customers or even how many staff Irevna has. He's also had to hammer out an indemnity arrangement with his customers in case a legal claim arises from work done in India.
One area where companies have faced little difficulty is securing a steady pipeline of talented people. "I didn't know they were as highly qualified as they are," says Steve Turner, co-founder of New York-based research firm Capital IQ, who made his first trip to India recently.
At Capital IQ's centre outside New Delhi, the staff grew from about 15 people to 100 in just two years. Most spend their time ferreting out information about private companies in the U.S. and Europe that is then incorporated into the firm's software platform designed for investment bankers and fund managers. "It made a huge difference for us," says Turner. "Because of the lower cost structure, it expands the number of things you can take on."
One possible result of the move to outsource research-related work is that Wall Street will reduce the number of junior analysts it hires each year, suggests an investment banker whose company works closely with OfficeTiger. "Those you do hire will not just be doing scut work," he says. "A junior analyst's job will still be boot camp, but a little more intellectual boot camp."
The new breed of researchers-for-hire sidestep criticism that they're contributing to layoffs. "People on Wall Street were losing their jobs well before the outsourcers came along," says Anand Aithal, who quit his job as a research managing director at Goldman Sachs to join Amba Research, a Singapore-based start-up that's opening a support centre in Colombo, Sri Lanka. "By all means keep your star analysts," he says. "But make sure the work they're doing is justified."