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Equity research will clearly be a major part of the next big outsourcing wave. We are likely at the cusp of the greatest period of innovation and experimentation we will ever see in equity analysis, a wholesale reexamination of the research we produce, how we produce it, and who pays for it. Right now the Street is losing USD4bn a year producing equity research.
David Weil, Chairman and CEO of US-based The National Research Exchange, an electronic marketplace for equities, December 2004
From a negligible size in early 2000, to a current size of between USD1.2bn and USD1.5bn and a predicted size of USD15-USD17bn by 2010, the global high-end research outsourced market is growing at a scorching pace. This new sector of knowledge process outsourcing (KPO) comprises companies providing higher-end research and analytical-based services to overseas clients in a wide spectrum of business areas. These include basic data research, integration and management, market research, equity research, engineering design, animation and simulation, medical content and services, remote education and publishing.
For those who believe in the Harvard Business Review's stance that outsourcing is one of the most important management ideas and practices of the past 75 years, this comes as little surprise. But the runaway success of outsourcing as a business strategy has generated enormous interest among companies that previously would not have considered it. That low-end tasks can be outsourced effectively for cost, scale and competitive advantage reasons is well known. However, outsourcing of high-end, knowledge-intensive business processes was always considered tough. These processes entail value creation and are often intrinsic to the business. Unsurprisingly, they were thought of as impossible to outsource. Yet things are changing fast. The question is no longer if high-end research could be outsourced at all; the question now is, what else can be outsourced?
Key drivers of financial research outsourcing
As stated earlier, the current understanding of the KPO space includes a wide range of sectors. We will limit our exploration in this paper to financial research outsourcing. According to a 2003 study conducted by the financial services practice of management consulting firm A T Kearney, US banks, brokerage firms, insurance companies, mutual funds and other financial services firms are planning to relocate more than 500,000 jobs offshore, representing 8% of their workforce over the next five years. Indeed, by the end of 2005, Deloitte & Touche expected the top 100 global financial-services firms to offshore more than USD200bn of their operating costs and save more than USD700m.
Factors causing this stream to turn into a torrent are:
- Huge cost savings of anywhere between 40 and 60%
- Shrinking stock research margins due to internet-aided trades
- Global research settlement and the resultant need to provide independent research to clients
- Proliferation of independent research firms due to huge under coverage of small and medium stocks
- Acute shortage of skills and high personnel costs in key markets
- Huge talent pool in outsourced markets
- Ever-improving information and communication technology
- Mature process and project management capabilities at both ends due to prior experience of managing business process outsourcing (BPO) engagements
Devil is in the details
Planning for and managing high-end outsourcing is easier said than done. The outsourced partner must be capable of delivering similar or better quality output at competitive cost. In that sense, a successful outsourcing relationship is as much a function of the sourcing company's management skills as it is of the outsourced firm's delivery capabilities.
Among the key drivers of high-end outsourcing, cost savings of anywhere between 40 and 60%, are the primary incentive. The outsourcing of specialised skills results in higher savings as compared to those achieved in the traditional BPO models involving standardised and repetitive processes. However, cost alone cannot be the key driver, at least in the case of high-end outsourcing. And for good reason.
If we illustrate a typical financial research project involving fundamental analysis of a stock for institutional investors, then what really matters is not a few pounds saved by chasing cost. Rather, it is the capability, rigour, resources, and rapid turnaround times, and the ability of the outsourced partner to adapt to the client's requirements and processes and deliver to specifications.
In many cases, outsourcing institutions typically have `their way' of working and looking at the market. For the outsourced partner, it then becomes imperative to be agile, resourceful and skillful in learning the client's `way' without impinging too much on the latter's time. Keeping the learning curves short, ramping up quickly and delivering quantity without diluting quality are the most important attributes for the outsourced partner. In a way it is tricky, but successful outsourcing companies know how to make maximum use of the client's time and advice. They basically do their homework well. And well in advance.
Not a one-way street
The success of the high-end business outsourcing model depends not only on the execution abilities of the provider but also on the extent to which the client is involved.
That high-end outsourced services are complex is a no-brainer. However, what is not often appreciated is how overwhelming this can be if either of the parties does not understand the brief clearly. In other words, if they do not get on the same page, pretty soon outsourcing becomes a big headache for all concerned.
Typically, high-end outsourcing requires high-engagement and active client involvement in the initial stages. This effort must be seen as an investment, for if done well, the benefits are long-lasting. Considering the fact that such projects are iterative and require continuous involvement and communication from both parties, this investment is worthwhile. Shying away from this would imply lack of seriousness and the project would be doomed from the start.
All outsourced projects involve confidentiality issues; high-end projects, more so. For, chances are, the outsourced partner will be working with client's proprietary information. In such cases, a mere service level agreement that alludes to respect for confidentiality is not enough. It must be enforced, tracked and monitored for compliance.
Using IT to drive workflow
Outsourcing companies who seek high-end research projects are more than aware of these issues. Typically, they have data security processes that adhere to BS 7799 standards. Their IT infrastructure is designed in such a way that all inter- and intra-office communication is monitored and logged. Access control is stringent and audit trails maintained. They go out of their way to ensure that information belonging to and produced for clients is kept that way.
In fact, progressive outsourcing companies leverage the advances in IT to not only streamline, automate and manage these processes, but also to build their own working processes around it. For instance, all digital assets are typically stored in a centralised place duly protected with intrusion prevention systems, encryption tools and a backup service at a non-co-located hub. Access to these assets is provided on a need-to-know basis only. The entire infrastructure is web-enabled and available 24/7. Project management, monitoring, resource planning, messaging, collaboration, event-based alert management, file access and such others are woven together. The end-users get a uniform and user-friendly view and access to resources they are entitled.
At Aranca, for instance, all workflows, project management information, and work-in-progress files (among other things) are seamlessly integrated on world-class IT infrastructure. This allows us to do something that was previously unthinkable: open information portals to clients on their specific projects, live. Clients can directly participate in development and analysis and interact with our analysts in real-time. They can deliver or pickup their deliverables at our hub. Not only does this strategy save time due to reduced iterations, it also helps clients see the exact status of their project.
Finding the right partner
Stories of high-profile yet failed outsourcing marriages abound in the media. The trouble is, some service providers promise the moon even while they are maturing. Capabilities are hyped, resulting in poor delivery standards. Moreover, due to intense competition, attrition has reached devastating proportions. The fight for talent not only erodes competitiveness and margins, but also seriously affects continuity in the project. Service providers sometimes ignore these basic realities before committing themselves to projects.
However, it is unfair to place all the blame for failed relationships on the service providers. Clients who seek to outsource must learn to manage such efforts. There is a lot more to outsourcing management than initial screening, due diligence and capability assessment of the service providers. Every outsourcing project involves transplanting some processes, knowledge and monitoring skills; in high-end outsourcing projects, even more so.
Learning to manage internal expectations is an important element of successful outsourcing. Willingness to coach the outsourced partners, and handling teething troubles with patience, are some of the other attributes that can make outsourcing click.
India: now, a KPO hub as well
India is set to move from being the most preferred location for business process outsourcing to the centre of knowledge process outsourcing. A paper prepared by the Confederation of Indian Industry has revealed that KPO could grow at 46% to reach a staggering USD17bn by 2010. The study suggests that the growth of the services sector would be over 8% and its contribution to India's GDP would be more than 50%, affirming that India's transition from a BPO destination to a KPO destination is imminent.
As a country, India enjoys several advantages over other destinations. Chief among these is its knowledge pool. In India, there is no shortage of institutions that train finance specialists. India has the largest number of accountants in the world with over 100,000 certified chartered accountants and 200,000 apprentices. The tests for qualifying as a chartered accountant are very rigorous and the entry and qualification criteria for a finance MBA degree are even more challenging. Both courses produce talent that is strong on finance and the use of IT.
With a growing number of Indian companies listing on American stock exchanges, Indian finance professionals are acquiring domain knowledge in US GAAP. Many of them keep track of evolving regulatory guidelines such as Sarbanes-Oxley and are conversant with its requirements.
Perhaps this is one reason why international investment banks and brokerages have come in droves to set up shop in India. Financial services majors such as Lehman Brothers, JP Morgan Chase, Morgan Stanley, ABN AMRO, Citibank, GE and HSBC have also established research bases in India. They are exploring outsourcing functions like equity analysis, market research and even patent filings.
Here to stay
From providing back-office support, to complementing marketing efforts, to high-end work, outsourcing has come a long way. In countries such as India, the culture of outsourcing has matured considerably. From a lot-to-know to a lot-is-known, the journey has been marked by many successes and some spectacular failures. The successes shared the commonsense traits highlighted above - traits that will help to ensure increasing success in the future.
