Mum's the word on outsourcing research to Mumbai

Equities analytics and research work is growing fast in India, although it's almost impossible to get Wall Street firms, or their Indian partners, to talk about each other on the record.

JP Morgan Chase and Morgan Stanley have equity research teams in India, and Indian business publications have said that Bear Stearns will start doing equity research there as well. Much of the research is centered in Mumbai (Bombay).

Paradoxically, firms that are providing research and analytics from centers in India are hiring people in New York, Chicago, and London to manage client relations, develop new business, and ensure clear communications between Indian analysts and their investment banker clients.

Thank you, Mr. Spitzer

Under profit pressures in a difficult economic climate, forced by regulators to objectify their research, and facing the reduction or end of swapping research for commissions in soft-dollar deals with money managers, not to mention several multi-million dollar fines, investment banks are finding India's lower prices attractive.

'Equity research was never really profitable, but Eliot Spitzer made it less so,' says a spokesperson at a major New York investment bank, singling out the New York State Attorney General. 'We are trying to make it less unprofitable.'

The bank employs 40 professionals in Mumbai. The spokesperson says, 'They help gather the information and do some of the analysis going into what the senior researcher uses. It is the kind of work that a new Stanford MBA would do.'

Nobody in New York lost a job when the Indian research office opened, she adds. 'We are adding people there to make our people here more productive.'

Another New York bank said it had less than ten employees working in India. 'They are not analyst positions, but associate level,' a spokesperson says. 'If the analyst needs help with a model, he can turn to the associate. They do a lot of the number crunching.'

Onshore-offshore model

Manoj Jain, CEO of Pipal Research, says the three-year old firm supports the research that banks do. Pipal has a team in its Chicago office that works with U.S. clients and a knowledge center in New Delhi where the work gets done. ICICI OneSource, a business-process outsourcing firm in India, acquired a majority stake in the company at the beginning of September. Pipal provides general research for corporations and equity research for investment banks.

Jain estimates firms save 50% to 60% by outsourcing their work to India. 'We do not offer buy-sell recommendations,' he says. Rather, the firm provides research that banks can put their own label on or use as the basis for a senior analyst's report. Pipal also tests quantitative models for banks and hedge funds.

'We are getting a lot of traction from new hedge funds that have just raised money and want to hit the market,' Jain says. 'They are very careful about their quantitative models and want us to work backward to test the models and see if they provide good ROI for investors.'

The management team is all ex-McKinsey. Jain describes the company as onshore-offshore. He is currently hiring a U.S.-based MD with cardio-vascular expertise for medical research clients. 'We look for real experts in the field so they can get deep into client requirements and guide the team in India.'

He is also looking for a manager for Pipal's London office to work with existing clients and develop new business.

Cast of unnamed characters

Outsourcing companies won't name clients, and investment banks that have created their own equities research centers in India won't talk about them on the record, at least not before the U.S. presidential elections, because outsourcing is too hot an issue. But banks and outsourcing firms expect that the equities research business in India will only continue to grow.

It's unlikely, however, that outsourcing research will cause the outcry that business-process outsourcing - especially in information technology and call centers - has created, says Dushyant Shahrawat, a senior analyst at TowerGroup, a research and advisory firm.

The main reason is that there are just not many equities research jobs to be had - perhaps 25,000 to 30,000 in the entire world. The work is done in different hierarchies, with data collection at the bottom and reports with recommendations at the top.

Buy-sell recommendations require a U.S. presence, so the senior analysts can meet personally with executives and visit the companies or their retail operations. The work is not going to attract big outsourcing firms such as Wipro because they aren't interested in businesses of under $10 million, Shahrawat says.

Infosys, however, one of the largest Indian outsourcing companies, is offering equities research through its subsidiary Progeon, partly owned by Citigroup Investments. Based in Bangalore, Progeon says it will not do more than 30 percent of its business in call centers but intends to focus on business-process outsourcing aimed at financial services, telecom and knowledge services.

The company is now running a few pilots on equity/fixed income research and credit analysis, says Anjali Gupta, manager of corproate communications. Progeon's confidentiality agreements mean it cannot name customers, she adds.

Ramping up, quietly

Wall Street firms appear to be starting to outsource research at a relatively modest level while they test the Indian facilities and train the staff.

Office Tiger, one of the older outsourcing firms with five years under its belt, was started by two U.S. investment bankers. Now approaching 2,000 staff, its headquarters are in New York, research is conducted at a center in Chennai in South India, and it has offices in London and Germany. It has 50 people in its New York office and another 100 working in the U.S. with clients.

Elena Christopher, vice president and head of OfficeTiger's research and analytics, says, 'We launched with document services for financial services firms, such as pitch books, but then clients asked us to go from formatting their content to developing their content.'

Research firm Aranca, based in New York, has 40 analysts working in Mumbai, two in the U.S. and two in London, says Shiva Badruswamy, head of U.S. operations. 'Banks that were in the lawsuit settlement with Spitzer are looking to outsource research; they have dropped a lot of coverage, but they still have to provide research, especially on corporations that are customers.'

At the same time, pressure on soft-dollar arrangements and corporate government regulations like Sarbanes-Oxley require banks to find ways to produce quality research economically. Badruswamy says, 'A company like us that can provide high quality levels and economies of scale is appealing to them.'

With outsourcing still a hiring topic under a cloud in the U.S., it's not hard to understand Wall Street's obfuscations while replacing its fallen Chinese walls with Indian ones. Perhaps when profits return, both camps will stop stonewalling about who their partners are.