Thoughts on Outsourcing in Finance
I’ve been hitting the books hard lately, in my effort to get a 4.0 GPA at a semi-target/non-target school (depending who you talk to) and keep coming to the same realization over and over again. The realization is that everything I am studying can very easily be outsourced. Even if I excel in school and achieve my goal of landing some sort of FO research job, the fact remains that someone in Asia, who is just as smart as me is willing to do the same job for a fraction of most Americans would consider a livable wage. My views on outsourcing in finance are as follows:
Investment Banking: I think it is safe to say that investment banking cannot be outsourced, because it is a field where people are willing to pay a significant premium for the best as opposed to the second best. The cost of paying Harvard educated banker in NY is justifiable, because the cost of a mistake can cost billions of dollars, and risk reduction is the name of the game.
Sales: I don’t even really think I need to make an argument for this one. When billions of dollars are being exchanged, no one wants to talk to a salesperson Sri Lanka.
Trading: I don’t really see it being outsourced, but I see traders being replaced by people with PHD’s in Physics.
HF: No one is going to pay 2/20 to a HF that does their due diligence in the Philippines. However, it may be possible for certain types of funds to hire large sales teams in NY or London and quietly outsource the research elsewhere.
PE: Pretty much the same deal as HF’s, only more so, because PE firms tend to have a more hands on approach in the companies they invest in.
ER: I personally hope it won’t be outsourced, because my game plan, pending I don’t get into ER out of undergrad is F500--->CFA--->ER--->sector specific HF, with no MBA involved, because I’d rather spend $100,000 on starting a business that involves outsourcing something to the Philippines. However, I believe writing reports and doing high school level math is something that is very easy to outsource, yet still has a strong chance to stay where it is, because analysts need to interview managers and visit the companies they are researching. Furthermore, if something blows up and clients find out one of the most prestigious banks in the world is outsourcing their research to a country they’ve never heard of, the effect on repeat business would be disastrous.
Operations: This entails many different job descriptions, but to sum it up, my belief is that if the clients have no idea who you are, or what you do, giving your job to someone, who is willing to work for $4 dollars per day and a box of soap, seems like the economically efficient decision.
In conclusion, I feel that the knowledge obtained in school is almost completely worthless. How smart you actually are is much less important than how smart you are perceived to be. If you are not dealing with clients, your job is completely replaceable. I am seriously restructuring how I manage my time, for now on my target is a 3.0 GPA, with 8 hours per day of cold calling and LinkedIn stalking, until I get an IB, PE, ER or HF internship.
What are your thoughts on outsourcing and do you see your current job as it is today, still existing 10 or 20 years from now?
Banks already outsource a ton
Banks already outsource a ton of stuff, they all run offices in Hyderabad. The fact is, the Indian team generally sucks - hardcore. When I send them even the most menial task to do, it takes me longer to fix their mistakes than to do it myself. In IBD at least, we've started to drastically scale back our Hyderabad operations because it's simply a waste of time and money.
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I think you're forgetting
I think you're forgetting that wages are rising in the EM's as well. I was speaking to a fund manager at Aviva, a big UK insurer, who was telling me that they use to outsource all of their financial statement modelling to a team in India. However, the wage demands of the analysts kept increasing to the point where it was just a cheap to hire a graduate in London to do the same work. I'm keeping my fingers crossed!