In the past decade or so, early-career analysts in research and investment banking departments have faced the threat that work they perform can be outsourced to India. Two sentences squirreled away in a Standard & Poor's announcement this month raise the prospect that China might soon play a similar role.
"Looking ahead, S&P also will look to draw on China's rich talent base to provide data and analytical support for S&P's businesses worldwide. Shanghai offers attractive outsourcing capabilities with a growing pool of multilingual financial professionals that can help S&P grow its regional and global businesses," the index and credit rating firm said in announcing plans to establish a Greater China headquarters in Shanghai and expand existing teams in Hong Kong and Beijing.
Could quality fundamental research on U.S. companies be conducted more cheaply in China? Some investment banks, after all, have outsourced creation of financial models and pitchbooks to India for several years now. Reuters has covered most U.S. corporate and financial news from an editorial center in Bangalore since 2004. Even some Catholic prayer ceremonies are outsourced.
Senior Analyst Jobs Likely to Stay
A spokesman for S&P tells eFinancialCareers News: "We currently have no plans to ship our U.S. research abroad, especially in the ratings business. Our ratings business is one built on the strength of personal relationships and it would be impractical to implement that business from so far away."
That's corroborated by a New York-based sell-side equity research analyst. "The prospect of being 10,000 miles away from the companies they cover as well as social differences can lead to a diminished end product," says the analyst, who requested anonymity. Those investment banks that moved U.S. equity coverage of small and microcap stocks to India had "terrible" results, he says. It is difficult to judge a company's prospects from paper statements alone.
Spreadsheet Work Remains Vulnerable
To be sure, there is scope for a U.S.-based lead analyst - who concentrates on client facing and marketing rather than grunt work - to delegate mundane tasks to a contractor or subsidiary office overseas. Aided by time zone differences, a New York analyst can obtain edited Excel models and Powerpoint presentations overnight, creating a 24-hour complimentary global research tag team at relatively low cost. However, firms that use outsourcing to avoid ever having entry-level analysts around could end up shooting themselves in the foot. "A firm cannot create and develop U.S.-based senior analysts without training younger associates here at home," our source warns.
So, just what sort of work might S&P outsource to Shanghai? "I can potentially see work shifting from Hong Kong or Singapore to Shanghai to save costs," says Peter Hebert, co-founder and managing partner of New York-based venture capital firm Lux Capital.
Many U.S.-based firms already outsource background equity research to India, Hebert notes. "With Regulation FD, analysts cannot glean proprietary information from management and often use third party sources to learn more about the companies they cover. But in terms of gathering data and background information from public filings and financial statements, this can be done just as easily in Mumbai as in midtown Manhattan."
As it stands now, S&P's coverage is localized: U.S.-based analysts cover U.S. companies and indices, while China-based analysts will grow their coverage within their own country.
But as research gets more commodified, the days of young associates in New York pulling an all-nighter editing that pitchbook might be numbered.