Bloomberg’s Mark Gilbert on Outsourcing in the Investment Industry

The Next Job Outsourced to India Could Be Yours

By Mark Gilbert
Link to the original article

Oct. 26 (Bloomberg) — “We Think, They Sweat,” wrote author and former hedge-fund manager Andy Kessler in an article on Asian manufacturing and the U.S. trade deficit for the Wall Street Journal two years ago. If “they” start thinking for us as well, maybe we are the ones who should be sweating.

When you hear the words “outsourcing to India,” what springs to mind? Customer-service grunts answering queries in call centers from prepared scripts, perhaps? Number crunchers processing and cleaning digits in a data farm? Low-level programmers knitting bits of software?

Here are a few alternative visions. Master of Business Administration graduates scrutinizing earnings reports and regulatory filings in a Bangalore research laboratory, and publishing buy/sell notes. Master of Science holders in Chennai analyzing the debt profiles of global borrowers and writing research about their creditworthiness. Doctors of mathematics in a Mumbai trading room shifting billions of dollars between stocks, bonds, currencies and derivatives, going head-to-head with the guys and girls in New York, London, Tokyo and Singapore.

Instead of relying on countries such as India just to cut wage costs, the world’s smartest companies are likely to start tapping Asia for brainpower. Since global investment banks claim to be stuffed with people skilled at divining how to make companies as efficient as possible, they should be leading the charge to hire knowledge workers in locations other than the world’s main financial centers.

`Talent Pool’

“Globalization means that banks will increasingly be looking to places like India for future hiring,” says Steve Major, global head of fixed-income strategy at HSBC Holdings Plc in London. “If your strategy is to just focus on cost, you’re doomed to fail. You have to look at deepening the talent pool first, getting the quality employees.”

Entry-level jobs in bank research departments have been the first to drift to India. As regulators around the world cracked down on allegations of bias in recent years, research lost its subsidies from investment banking. Banks responded by slashing the volume of analysis, and cleaving the cheaper business of building spreadsheets from the more costly exercise of writing reports and marketing trading ideas to clients.

“The analytical need to keep the roles whole clashed with an operational need,” says Darren Sharma, the founder of Frontline Analysts in Bangalore. “We’re essentially tribal. Customers weren’t keen on receiving market views from a place that wasn’t on their mental map.”

Credit Research

That resistance is slowly fading, he says. Frontline has a team of three senior analysts assessing the creditworthiness of financial-services companies for WestLB AG, Germany’s third- biggest state-owned bank and Sharma’s former employer, where he spent five years as a London-based credit strategist. He’s in negotiations to build a second team for WGZ Bank Group, a central and wholesale bank for 240 of Germany’s cooperative lenders.

JPMorgan Chase & Co. has more than 80 analysts in India, while Merrill Lynch & Co. and Morgan Stanley each employ more than 50 there. Goldman Sachs Group Inc.’s Bangalore office will soon reach 1,500 employees, overtaking its Tokyo office as the firm’s third-largest, the Financial Times reported last month.

That shift has been driven by cost. The average 2005 Wall Street salary was almost $290,000, according to a report this month from New York State Comptroller Alan Hevesi. That’s about 6.6 times more than the nation’s average per-capita income of $43,740, based on World Bank data.

Beyond Cost

Apply that multiple to India’s average income of $720, and you get to an annual salary of a bit more than $4,700. Even at three or four times that level for qualified banking staff in India, the cost attractions are clear.

“Research has now become a cost which cannot be subsidized by the banking business,” says Krishnan Sakotai of Karvy Global Services in Hyderabad, India. “On the other hand, there are some firms who are also outsourcing research in order to gain competitive advantage, something beyond just cost.” Sakotai runs a team of about 33 people selling research to banks and brokerages.

Most of the hiring so far has been for junior workers in low-level jobs. Frontline’s Sharma says that has led to disenchantment among highly qualified Indian employees frustrated at the lack of opportunity for promotion. “You have to recruit commensurate to the job offered,” he says.

For now, senior analyst positions in India are more likely to be in bond research than in stock analysis, Sharma says. “Fixed income never had data crunchers versus opinion formers,” he says. “Equity analysts aren’t always opinion owners, whereas all fixed-income analysts publish.”

Traders Next?

Once you have a research team in India, it might make sense to open a trading floor. Deutsche Bank AG, Germany’s biggest bank, is hiring staff in Mumbai for its Global Markets Center, according to a recruitment e-mail from Ma Foi Management Consultants Ltd., which says it is India’s largest human- resources service provider.

The jobs on offer include creating hedging strategies for the bank’s energy customers, advising insurers and pension funds on multi-asset investments, and coming up with borrowing strategies for Latin American clients. “The teams in GMC will be front-office teams acting as virtual extensions of the trading desks in London, New York, Singapore,” the e-mail says.

India has a couple of key advantages over China in the race to become the West’s offshore intellectual workforce. Language barriers are lower, and there’s a diaspora of Indian managers already running business units all around the world.

Two-Way Traffic

Most of the U.S. and European literature on the growth of financial services in Asia focuses on whether the locals will lock up their domestic markets before Western firms can establish a beach-head to market insurance and banking and credit cards to the 2.4 billion inhabitants of China and India.

“A threat may come from the use of local expertise to establish a separate rival indigenous financial services industry that shifts the balance of global services toward Asia,” said the City of London Corp., a local government body, in a report this month on how India and China might affect London’s financial district.

Maybe that emphasis is wrong. Instead of focusing on what we might or might not be able to do to “them,” we should be worrying about what “they” might do to us.

While I’m not quite in the camp that says we should all be teaching our children Mandarin, the words of former Chinese Vice Premier Qian Qichen resonate with me. In the official China Daily newspaper’s November 2004 online edition, he said the U.S. “is dreaming if it thought the 21st century was the American century.”

In Kessler’s 2004 article, he takes comfort from how U.S. companies are “moving low margin, low paying jobs overseas, but, fortunately, are left with high margin, high paying intellectual property jobs.” Anyone who believes the U.S. and Europe have some kind of monopoly on intellect is cruising for a bruising.

(Mark Gilbert is a Bloomberg News columnist. The opinions expressed are his own.)

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