Outsourcing an Investment Bank

Ravi Kalia investigates why increasing numbers of financial institutions are choosing to outsource jobs

Discuss the issue of outsourcing an investment bank and you get a mixed response. Back (and middle)-office employees deny that it has any impact to their function, while front office staff say that it will wither the lower ranks, leaving the company leaner and meaner with the core revenue generating business left unscathed. (Interestingly very few appear to understand the business as a whole, even at the MD level).

The history of investment banks as partnerships and stories of wealth generation in yesteryears leads to a blinkered approach when analysing their own franchise. Yet quietly banks are going about outsourcing areas, careful to retain goodwill. This trend has been well-established in back office functions, with temporary staff used to train their counterparts overseas and then natural job cuts are announced. As prospective graduates entering the industry, this is an issue glossed over by recruiters but could be crucial to our career development opportunities.

One argument is that this is a back office issue and high value jobs won't be sent overseas. Given recent losses however, the trend for outsourcing is gaining a foothold in front office roles. Let's place ourselves as the embattled CEO of a bank facing a quarterly result forecasts.

Revenue can't be maximised in this market. To maintain or restore profits we have to cut costs. Suppose we made redundancies in all areas that could take them. We even take on temporary hires and long term interns (as one French bank is known to do). What now? Technology spend is curtailed, but a core spend is needed to keep the business efficient and facilitate further cost cutting in the future. Outsourcing is suggested. It worked well in back office roles, what about bringing it to the front, gradually. Which jobs can be commoditised and sent overseas?

Research

Bulge bracket banks have been working on shifting parts of their research function abroad. Given that the grunt work of building financial models and populating spreadsheets with Bloomberg updates. Now specialist outsourcing firms are offering 'the junior analyst' for hire to senior MDs. The cost saving can be significant; with 500% of the salary cost of having an analyst in London or New York, compared to Wroclaw or Pune. (There are banking outsourcing firms in Wroclaw, Poland!). It's simply not possible to deny this sort of cost saving. The best case scenario is that a smaller group of graduates are hired into junior research positions in financial centres. Worst case, why have research in expensive cities at all when it will just be emailed to clients anyway.

Sales

Outsourcing sales is a much harder proposition. The level of client interaction and the closeness of the relationship to the revenue stream and engagement directive is difficult to replicate without face to face contact. Nonetheless, any support functions can expect to be tinkered with in the near future.

M&A

Similar to research, junior level work in Investment Banking divisions is being outsourced to firms set up by American investment banks. But for the turmoil, many of these were to handle the IPOs of their counterparts. Although there are clear confidentiality issues, the nature of technology changes means that an office in New York is no safer than one in Kuala Lumpur or Singapore.

Senior managers can be supported by far fewer analysts in the long term.

Trading

Trading is a difficult one to place, because of the umbrella nature of the business. Prop trading is closer to asset management and that will likely be kept in-house. Recent edicts from regulators have impressed on banks the need to cut back on prop risk taking.

Flow trades, processed to offset client orders are becoming harder to profit from. Bloomberg and its rivals offer direct and immediate comparisons for clients of bid-ask spread across markets. Moreover, electronic brokerage means that computer algorithms are used more often to offload large orders, which rely on programmers and some input from experienced traders rather than large, costly trading desks.

So what's a graduate to do? Head to the buy-side? Sure that might offer some respite in the short-term. Buy-side shops have a tendency to copy the sell-side. In fact, why do fund managers and hedge funds need to be in locked down in any particular country? Why pay the extortionate rental rates charged in cities like London and New York. Watch out, the future of finance might lie with offshore tax havens, regardless of governments liking otherwise.

Ravi is a Third year DPhil Student in Statistical Finance at Oxford University.

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