Cutting the Cost of Research: KPO For Financial Services

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New York – With fears of recession looming, many institutional investors are undoubtedly worrying about the impact an economic downturn may have on their investment portfolios. To offset losses from a potential downturn, we suspect that the more proactive financial institutions have already begun investigating cost-cutting measures.

A common cost-cutting tactic employed by companies in all industries is outsourcing. Recent advances in the second and third world have eroded many of the competitive advantages of the US labor force, and many companies now have an incentive to move jobs towards cheaper talent overseas. Until recently, most outsourcing activity related to job functions that were low-level and operational in nature, like back-office document management or customer support work. Yet in the past few years, many higher-level analytical jobs have moved overseas as well. Given the pace of development in outsourcing centers like India and Singapore, this trend, known as Knowledge Process Outsourcing (KPO), is likely to continue in the coming years.

The rise in the KPO sector poses challenges and opportunities for analysts on the buy side and the sell side. Junior analysts are now competing with a vast pool of cheap talent, willing to work for less and on an on-demand basis. Meanwhile, senior analysts and directors of research have to deal with the difficult question of whether and how to outsource some of their analytical work. Outsourced analytical work has many short-term cost advantages, but it can be difficult to manage.

Research firms that have decided to outsource some of their analytical work also face the question of whether to establish a captive KPO structure or employ a third-party KPO firm. In recent years, dozens of KPO firms have emerged to serve the needs of buy side and sell side analysts, and intense competition in this sector has driven down prices for many of the services provided by third-party KPO firms. For companies that have an ongoing need for outsourced analytical support, however, captive KPO structures might make the most sense in the long-term, even if there are hefty start-up costs in the short term.

Integrity is watching development in the KPO sector closely and tracking the offerings of the major KPO firms. In our upcoming ReseachFocus report on channel checking, we will provide information on the KPO firms that are best suited to provide outsourced channel checking services. Eventually, we plan to produce a major report on how buy side and sell side analysts can leverage KPO to enhance and streamline their analytical processes.

In the meantime, stay tuned for more analysis on the KPO sector in this blog.

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  1. India: In these days of economic uncertainty and financial sector turmoil it would be interesting to watch the development of the KPO sector. The current state of the financial sector is due to the reduced valuations of the mortgage backed assets and the lack of liquidity. This is leading to distress sales, government takeovers and major internal restructuring. Most firms are going to very busy doing that and until this dust has settled we will probably not see the same growth in outsourcing to the KPO firms as seen in the last few years.

    Simran Wadhwa (www.sganalytics.com)

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