چه زمانی برون سپاری یک گزینه نیست : جابجایی بین المللی تحقیقات بانک سرمایه گذاری - یا نه؟

Outsourcing is high on the agenda of firms seeking to cut costs. Based on an enhanced value-chain concept we develop a model that determines the conditions under which outsourcing and offshoring are not expedient. The model allows for an integrated analysis of horizontal and vertical links to actors within and outside the firm. Equity and country research in investment banks and their outsourcing potential are used as case studies. We draw mainly on qualitative evidence from interviews with investment bank analysts, as well as data on locations of research units of foreign investment banks in India. The option of outsourcing certain stages of business processes and offshoring parts of the value chain within firms to low-wage locations depends crucially on how processes are ‘embedded’ in relation to other departments within and to corresponding actors outside the firm. Our analysis shows that there is little, if any, scope for outsourcing but some potential for low-level research activities to be offshored to low-cost regions.

Outsourcing and offshoring are high on the strategy agenda of firms seeking to cut costs. Based on an enhanced value-chain concept we develop a model that determines the modularity of business processes, and apply it to two activities in investment banks – institutional equity and country research – as illustrative case studies. Our model allows for an integrated analysis of horizontal and vertical communication links to firms, customers, and additional sources of information and knowledge in order to establish the conditions under which outsourcing and offshoring are not expedient. The options of outsourcing certain stages of business processes and offshoring parts of the value chain within firms to low-wage locations depend crucially on how processes are ‘embedded’ in relation to other departments within and to corresponding actors outside the firm. The financial services industry, in particular investment bank research, is an intriguing case in point for a host of other service industries and their spatial economic organization in an ever globalizing world. At present, wholesale financial activity and the accompanying financial research in banks are highly concentrated in Western financial centers (Clark, 2002). Increasing competition and regulatory pressure are important drivers of possible organizational changes in investment banking. For the first time even complex tasks at the core of financial services firms, embodying high value-added, such as equity and country research, are considered to be outsourced or offshored. However, despite outsourcing and offshoring being high on the agenda of financial institutions (Deloitte Research, 2003), investment banks are reluctant to rely fully on outsourced and/or offshored analysis only. This indicates some hidden obstacles for the restructuring that we carve out in this paper. We analyze two aspects of sourcing strategies for investment bank research, i.e. possible reorganization of research departments and location decisions contingent thereof. The analysis shows that there is only limited potential for some low-level research activities to be offshored to low-cost regions – if they possess specific prerequisites – but even then these activities are predominantly kept in-house, i.e. with little if any outsourcing occurring. Research in investment banks differs from the basic scientific or applied R&D-type research that has been so extensively studied by innovation scholars. Basically, institutional equity analysts cover a small number of firms that they analyze, in order to provide investment recommendations regarding stocks of these companies to institutional investors. Therefore, they use input from primary company sources, as well as secondary data. They present to investors written research reports, but also trading ideas they generate while writing a report. Thus they are supporting stock-traders of their bank's sales department with whom they work closely together. Investment banks' equity research on firms is distributed to investors. Contrary to that, commercial banks keep their information about the quality of firms private in order to prevent free-riding of other creditors and thus are reluctant to outsource that research. Research is an important cost factor in the financial industry: the total equity research budget for seven large investment banks amounted to 2.7 billion USD in 2001. Equity analysts are paid top compensation, with salaries accounting for up to three quarters of the total costs of research (see CGE & Y, 2004). Salaries for analysts with a comparable background, e.g. in India, typically are only 10–20% of an US-based analyst. Intensified competition and re-regulation lead to increasing pressure on the costs of financial services firms, especially now that banks are no longer permitted to subsidize sell-side research with investment-banking fees (Walter, 2004 and The Economist, 2005). Underwriting units of investment banks were profiting from analysts research coverage which has been used to help win business. For instance, analysts “hyped” companies before and after their initial public offerings, and in other cases did not – contrary to their findings – issue “sell” recommendations in order to keep their corporate clients happy and maintain investment banking business with them. Accordingly, analysts’ salaries were depending to a considerable extent on the investment banking revenues they contributed to. These issues have been addressed by the Sarbanes–Oxley-Act and especially the “Spitzer settlements” in 2002 and 2003, respectively. Analysts now must not be paid according to the investment banking business they attract and are in general disentangled from those units; e.g., banks are required to have separate reporting and supervisory structures. Most interestingly, ten of the largest investment banks have been forced to contract with at least three independent research firms and make that research available to their customers. Starting in October 2003, the banks had 270 days to comply with the new regulations, which are in effect for five years and bear costs of altogether more than $430 million to be spent on such additional independent research reports (SEC, 2006). Each stock that is covered by the bank's own research has to be covered by another, independent analysis, which is linked on the bank's website. Investment banks have been pushed by regulators to duplicate their in-house research with outside research providers, paving the road to completely outsource these activities. At the same time, in-house research gets more costly for the securities business units because it is no longer cross-subsidized by other investment banking units — arguably a push towards offshoring. Will there be a World Financial Research Centre in Mumbai? In this context sourcing strategy, comprising contract and location decisions, has drawn top executives' attention in investment banks. Yet, one can witness that most investment banks retain their in-house equity research units, and mostly in Western financial centers. It is a puzzle why outsourcing and offshoring of equity research activities of investment banks happens only on very rare occasions. We use a modified value chain approach to show the strong embeddedness of equity researchers, both in their respective banking organizations and in their locations in Western financial centers, that helps us understand this puzzle. The paper is structured as follows: After a review of the literatures on transaction cost economics (TCE) and modularity, with a focus on outsourcing and offshoring decisions, we develop a value chain framework for the analysis of possible business process reorganizations in the financial sector. The empirical section then presents micro-level results from interviews with financial analysts about their organizational and local embeddedness. Evidence from location of financial research in India is used to corroborate our findings. The last section concludes.

One of the most critical decisions for managers is to evaluate how – and where – goods and services are procured; recently this became true also for investment bank managers, particularly after regulators demanded fresh answers to flawed research reports that have occurred in the last few years. Outsourcing and offshoring of research departments is an issue discussed at many boards of investment banks. This study contributes by providing empirical guidance for managers in investment banks that institutional research is almost impossible to outsource and difficult to offshore — except for some junior tasks that are rather of a support type. According to our interview partners, pure outsourcing activities of banks' research are rare (in fact, none was able to give an example for that). Most banks still regard research as their core competence and an important source of competitive advantage, which cannot be completely outsourced. The Spitzer settlement requires additional independent research reports for each one produced in-house. This might theoretically induce banks not to double the efforts, but entirely rely on these external, independent reports. However, this is not the case — neither for small(er) banks, nor for the big ones affected by the Spitzer settlement some of which featured in our list of interview partners. Banks do, however, offshore parts of their research activities, but only in captive centers within their own corporate group. Our analysis of research departments revealed that the highly debated wholesale equity research analysts are so deeply embedded in Western financial centers that an offshoring is unlikely to happen. The results provide specific managerial directions. Despite the ubiquity of information and communication technologies, knowledge is still passed on best via face-to-face contacts. Continuous direct interactions with traders, other analysts and sales people are regarded absolutely necessary by the institutional equity analysts for developing their ‘ trading ideas ’ ;in other words, there are ‘ limits to modularity ’ ( Ernst, 2004 ). To a large extent, these stem from the economies of scope of the different tasks of equity analysts. Long-term reports and short-term advice are heavily interrelated. Clients regard original research as the main asset they are paying for and demand face-to-face contact with not only sales persons but analysts as well. Most likely, therefore, is the relocation of technical analyses and data gathering assistant work to India to save some costs — this might even take place in combination with outsourcing, as can be witnessed more recently. Remarkably, our interview results did not show strong differences between banks of different sizes. Our sample is too small to infer any statistically significant statements, but since economies of scale are not prevalent in equity analysis, this seems rather plausible: Even the smallest bank interviewed is considering sourcing junior tasks in India and is as reluctant to shift the whole task overseas as are the large banks. Other analysts – covered here are country analysts – are embedded only to a rather low extent and could therefore be transferred to a low-wage country like India without greater loss of information and knowledge. Due to the organizational proximity needed to feed the internal risk-management systems, captive offshoring is much more feasible than offshore outsourcing. These analysts are fewer in number and significantly less expensive than their equity peers, so the pressure to find a new sourcing strategy for their work is considerably lower. While this study provides a couple of managerial implications, one should note that it has some limitations that we should like to address in future research. Firstly, it does not allow judging the outcome – let alone the profitability – of different procurement strategies in investment banking research but focuses on the feasibility instead. Analyzing the impact of relational and structural embeddedness, e.g., on performance would add to our understanding in this field (see Gottfredson et al., 2005 ). Secondly, this study mainly uses interviews with the analysts themselves and does not include client evidence. However, since all analysts unanimously mentioned face-to-face contact as a standard industry practice, demanded by clients, we do not consider the answers of the analysts to be biased in this respect. Thirdly, junior analysts up to now are growing into senior analysts' jobs by doing information gathering and number crunching work and learning – in close spatial proximity – from the seniors. When junior analysts ’ tasks are offshored or outsourced, it is not clear where future senior analysts should come from. Will they move from India towards the Western Financial Centers? Or do more tasks with ever higher value migrate to India, despite the barriers mentioned in the paper? How should investment banks cope with these dynamics from a learning perspective? Another interesting future research topic is a survey on the conceptual relationship we established in this paper. It would be interesting to ask directly why banks did outsource or why not, respectively and relate that to embeddedness, different types of proximities, cost and competitive pressures. Despite these limitations, this study represents the first attempt to investigate the feasibility of innovative sourcing strategies for investment banks ’ research. We show that the concept of value chains – mostly used for the analysis of production systems in which services are regarded merely as facilitating links between production stages – canbeusedto analyze decisions whether or not to outsource and/or offshore services as well. While traditional value chain analyses concentrate on vertical relationships, we integrate also horizontal links to firms, customers, or other sources of information and knowledge. Modified this way, the enhanced value chain concept, developed in the paper, allows for an assessment of the local embeddedness of actors within the valuechain.The ability to slice upthevalue chain andto outsource certain stagesor phases of businessprocessesand tooffshoreparts ofthevaluechain within theirfirmsto low-wage locations, depends crucially on how the processes are ‘ embedded ’ in relation to a) the other departments of the bank and b) to the corresponding actors outside the bank. This general concept could be applied to a variety of industries in order to analyze opportunities for spatial and organizational reorganization.