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October 8, 2003
As It Tries to Cut Costs, Wall Street Looks to India
By SARITHA RAI
ANGALORE, India, Oct. 7 - Global companies have long taken advantage of India's large college-educated, low-cost work force. Now Wall Street firms, including J. P. Morgan, Lehman Brothers and Morgan Stanley, are joining the chase for more highly skilled Indian labor.
J. P. Morgan, the investment banking arm of J. P. Morgan Chase, plans to hire a few dozen researchers in Bombay by the end of the year. Morgan Stanley, which already has investment banking and mutual fund operations in India, will employ a similar number of researchers this year, also in Bombay. Both teams will consist of junior-level analysts collecting data, analyzing balance sheets and working on basic financial models.
This shifting of more sophisticated work to India comes on the heels of a rush of call center and other back-office nonmanufacturing jobs here, and is seen by many experts as yet another phase in the latest drift of jobs to low-cost countries that began in the early 1990's with Silicon Valley companies.
Some Wall Street firms are just observing the research trend for now, though they already have a presence here. Merrill Lynch has an investment banking, brokerage and asset management joint venture in India as well as a technology development center to build proprietary software for its global operations.
And Goldman Sachs plans to establish an Indian unit with 250 employees working on operations and technology. But neither firm has moved any financial research to the country.
Other skeptical firms are, however, being drawn in. Among them is Lehman, "though we are not big fans of business process outsourcing," said Peter Nag, vice president and global program management officer for Lehman in New York. Lehman has cautiously started a few pilot programs in Bombay for research-related tasks like data cleansing and creating presentations. The programs, which began a couple of months ago, are run by boutique Indian firms set up by former Wall Street employees.
Other financial giants, like Citigroup, are expanding the Indian side of their corporate and investment banking activities. Citigroup executives did not respond to requests for comment on research being shifted to India. But the company's Web site says: "Citigroup's global corporate and investment bank has expanded in India rapidly over the last two years. Currently, the firm has more than 40 staff based in Mumbai working in investment banking, equities, and equity research departments." Mumbai is the local name for Bombay.
There are two main forces behind the experimentation with research operations in India, experts say. Wall Street revenues are well below where they were when the market peaked, so cost-cutting is imperative. And the investment advice scandal involving 10 big securities firms that was resolved with a $1.4 billion settlement this spring has resulted in a heightened awareness of the need for fair and untainted research.
"The downturn in the capital markets has collided with cutthroat competition among Wall Street firms to create pressure on costs," said Christopher Gentle, the research director at Deloitte Consulting in London.
Such pressure is being felt across a broad spectrum of industries in the United States, and the farming out of all kinds of work once done only or largely domestically has been increasing rapidly.
The total outsourcing of business-process jobs by American companies is expected to grow to $136 billion by 2015, from $4 billion in 2000, and create 3.3 million jobs, according to Forrester Research of Cambridge, Mass. An estimated one million of these jobs will move abroad - a trend that dismays some American workers.
China, India, the Philippines and Russia are expected to gain most of the work. And many people expect India to snare much of the highly prized jobs, like the kind Wall Street is starting to export.
"India will see increased outsourcing of research in equities, economics, derivatives and debt research because of cheaper talent as well as language skills," said Andrew Holland, executive vice president for DSP Merrill Lynch in Bombay, a firm 40 percent owned by Merrill Lynch.
India's low real estate costs and salaries make it possible for investment banks to sustain the necessary round-the-clock coverage. On Wall Street, salaries constitute as much as three-quarters of total research costs. But, Dushyant Shahrawat, a senior analyst at TowerGroup, a financial services consulting firm in Needham, Mass., said "a junior sell-side research analyst from an Ivy League school costs $150,000 a year to the company, while an Indian equivalent from a top business school would cost $35,000 a year."
Hiring inexpensive junior-level researchers in India will free J. P. Morgan's highly paid senior analysts to spend more time with the companies they cover and with investors, a J. P. Morgan spokeswoman, Joanne Shephard, said.
The number of Wall Street research jobs in India is still small compared with the thousands of back-office jobs being added each year. The National Association of Software and Services Companies, the industry trade group known as Nasscom, estimates that only 200 such jobs have been created in India so far.
Sunil Mehta, vice president of Nasscom, said the movement of services jobs followed the model perfected by the auto industry.
"In the auto industry, the engine could be built in Brazil, parts could be sourced from India and China, and the assembly line could be in Michigan," Mr. Mehta said. And now, he said, "global corporations, including Wall Street firms, are obtaining portions of the service wherever it is available at the lowest price."
But shifting research is not as easy as shifting many other types of work, Mr. Shahrawat of TowerGroup said, and the trend will be slow growing, particularly for more senior research work.
Among the impediments, he said, is that research analysts need to be in close touch with management of the firms they cover.
"An analyst sitting in Bombay will find it very difficult to do a competent job writing a report that values Wal-Mart's stock if he has never even been to Wal-Mart and doesn't have a close relationship with Wal-Mart's management," he said.
He and other analysts foresee thorny regulatory issues in sending research abroad. "If it is anything more than basic number crunching and comes even remotely close to investment advice," Mr. Shahrawat said, "Indian researchers will be required to be registered as investment advisers, and have other accreditations."
There are other concerns as well. "The feasibility and risk mitigation aspects require much greater due diligence before we make any outsourcing commitments," Mr. Nag of Lehman Brothers said, although the firm's due diligence last year showed that India had a large pool of skilled workers.
Still, experts see the trend accelerating. Mr. Gentle of Deloitte Consulting, which has forecast that financial services companies will move a million jobs, mainly back-office and technology-related work, to India by 2008, said, "I see a significant increase in research jobs as well."
That, he added, would put the total "in the thousands rather than hundreds." And some consultants say that higher-end and more complicated tasks could eventually shift overseas.
At top Indian business schools, like the Indian Institute of Management, the prospect of a job with Wall Street firms has students excited.
Gayatri Srinivasan, 24, in the graduating class of the institute's Bangalore campus, says she dreams of a job with a top American investment bank; she will be competing for her dream job with at least 50 of the 200 students on her campus.
"Imagine working directly for a Wall Street firm while continuing to live in India," said Ms. Srinivasan, who interned this summer at Lehman's office in Tokyo.
Entry into the institute's four schools is highly competitive - only 1 percent of applicants get in, said Ganesh Prabhu, chairman of placement at the Bangalore campus. Still, the average entry-level salary for graduates last year was just 600,000 rupees, or $13,226, for jobs in India.
The jobs may not transport them to Wall Street, but Ms. Srinivasan and her peers feel that does not detract from the glamour of it all."It is not the location," she said, "but the job and the bank that matters."
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