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Investment Banks Outsourcing to India

A number of big names have quietly hired Indian firms or set up their own subsidiaries on the subcontinent to handle basic financial modeling and comparable analysis.

The offshoring trend has taken another surprising turn. Having successfully outsourced to India such back-office functions as IT, investment banks are now sending some of their financial analysis and research overseas. In recent months, firms including J.P. Morgan and Morgan Stanley have quietly hired Indian firms or set up their own subsidiaries in India to handle basic financial modeling and comparable analysis.

Two main factors are driving this trend. First, it’s cheaper. According to Dushyant Shahrawat, a senior analyst with Needham, Mass.-based TowerGroup, a financial-services industry research firm, the fully loaded cost of hiring an experienced junior analyst in India is between $20,000 and $25,000, compared with between $85,000 and $90,000 in New York. Such savings are especially attractive now that banks are no longer subsidizing sell-side research with investment-banking fees.

Second, banks hope that by freeing senior analysts to concentrate on analysis rather than running numbers, they will produce better—and more—research. “The bank always has to have the equity analyst sitting in New York, being able to talk to CEOs,” says Joseph Sigelman, co-CEO of OfficeTiger, one of the Indian firms serving Wall Street. “But if we can take away some of the very structured, re-petitive tasks, the number of companies the analyst can cover increases significantly.”

This will sound like good news for coverage-starved companies. During the past few years, there has been a steep dip in analyst coverage, particularly for small- and midcap firms. According to Thomson First Call, 6,100 companies had at least one analyst covering them in 1998; today that number is 4,142. Coverage will naturally increase as the economy improves, says Chuck Hill, Boston-based director of research at First Call, although not to the levels of the exuberant 1990s.

But will sending research to India quickly improve things for companies that have lost coverage? Probably not. Despite talk of severing the links between research and investment banking, sell-side analysts still have few incentives to cover companies that don’t generate investment-banking fees for their companies. For now, at least, this will likely mean more-intensive analysis of the fee-generating Fortune 500, not broader coverage. “The focus is not to send your research abroad to cover more companies,” says Shahrawat, “but to do a much better job with the companies you’re covering now.” And do it for less.

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