November 10, 2005

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Outsourcing research

The New Economist points out a piece of Deustche Bank research on Indian outsourcing, which is ironic given equity research is being outsourced to India:

In one of Colombo's few skyscrapers, a battery of analysts is crunching numbers and writing equity research reports. But they won't put their name on them. Ghostwriters of international finance, the young analysts at Amba Research work in complete anonymity for the world's biggest investment banks and for a third or less of the cost of a junior analyst in New York, London or Hong Kong..."At a cost of one third to half of an onshore analyst, our clients get 75 to 80 percent of the functionality," said Amba co-founder Brad West at the firm's marketing office in Singapore.

Amba hires young accountants or MBAs in Sri Lanka and India, puts them through a five-week equity analysis course and then subcontracts its staff on a one-year basis to clients. Firms like Amba pay their analysts US$10,000 (HK$78,000) to US$25,000 per year and charge their clients upwards of US$50,000 per year. That compares with a total cost of US$150,000 to US$250,000 for a junior analyst on Wall Street or in the City of London, West said.

The head of research at a European bank that makes extensive use of firms like Amba said that outsourced analysts typically don't work on deal research, communicate with clients or corporates, or publish under their own name...But the banks are not eager to admit they outsource research, as they worry about perceptions of research quality. "They would rather admit to income tax evasion than to outsourcing," West quipped. The secrecy works both ways. Amba clients have code names, and "to talk about who your client is a firing offence," he said...

Industry players say that equities research outsourcing is part of a third wave of outsourcing known as "knowledge process outsourcing," which focuses on highly skilled jobs such as investment research, medical diagnosis and legal work. Analysts estimate there are only about 1,000 to 1,500 people working in equities research in India and Sri Lanka; half of them for so-called "captive" units of global investment firms...Industry players say that the growth of research outsourcing in South Asia has not yet led to job losses in Europe or the United States.

"Outsourcing has allowed research firms to be more thorough and to cover more companies," said Joseph Sigelman, co-chief executive of Chennai- based OfficeTiger.

Asks West: "The interesting question is what the banks will do during the next sharp downturn in global equity markets: will they cut back on in-house research or outsourced research?"

There are plenty of students slaving away in expensive business schools in the hope of landing those high paid analyst jobs in Wall St and London. Yet it only takes 5 weeks and one-tenth (the article says "third or less" - clearly fractions weren't this reporter's best class) of the wages. And equity analysts are just the beginning. Any enterprising academic could outsource their research in their quest for tenure. Likewise governments could save a fortune by outsourcing chunks of their public service. One day even bloggers could be overtaken by the outsourcing menace.

The future is here, and it's being outsourced.

posted by Simon on 11.10.05 at 02:39 PM in the Economics/Finance category.


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Hi Simon, nice blog entry. I actually used to work with those guys at Deutsche five years ago. I hear the outsourcing thing is working well - and unlike junior analysts, the outsourcers are not really interested in going on marketing trips - or at least they don't ask for client interface... the industry heads still need to scan through all the research and make occasional corrections, but by and large I hear it works great...

posted by: HK Dave on 11.10.05 at 02:47 PM [permalink]

But I wonder how those junior analysts feel? Maybe relief they don't have to do the drudge work, but vaguely threatened as well?

posted by: Simon on 11.10.05 at 02:55 PM [permalink]

Well, yes, it does add a little pressure. But then it also makes it clearer to senior management when hiring junior analysts that their marketing skills and ability to put clear investment themes together should be their key criteria.

posted by: HK Dave on 11.11.05 at 12:55 AM [permalink]

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