Tag Archives: Investment Banking Outsourcing

Introduction

Investment Banking is a special type of banking that helps organizations or individuals raise capital and provides consulting services to them. It helps in conducting large complicated transactions such as mergers or acquisitions or raising an initial public offering (IPO) using underwriting.

Investment Bankers are experts in the field of finance who have their fingers on the pulse of the market. As acknowledged worldwide this is one of the most complex financial mechanisms in the world.

As has been the case with different sectors, it has been for some time now that organizations have started investment banking outsourcing services to third-party vendors as well. Outsourcing one means giving the authority to outsource one of its services to these third-party vendors so that the company can save on operating costs and get specialized services from highly skilled staff- all this while ensuring adequate data security and adherence to regulatory compliances.

This helps organizations not only streamline their services but also provide value-added services to customers that they couldn’t have thought about earlier.

It is important to note that the nature of investment banking outsourcing and the services provided by vendors have evolved alongside technological advancements. The first and foremost is business digitization, which has resulted in increased transparency and visibility for clients, as well as a better end-user experience for customers. This has resulted in improved strategic partnerships and, as a result, higher quality work being outsourced by investment banking outsourcing clients, which can only be met with strategic partners.

Challenges Faced by Investment Banks

Modern investment banking faces various kinds of challenges that are listed below:

Challenges Faced By Investment Banks

Challenges Faced By Investment Banks

Scarce Capital Resources

Due to recession and depression all over the world, almost all markets, companies, and individuals are not comfortable investing their money in the capital markets. This has created a world where capital resources have become scarce. The job of an investment banker is to invest capital more efficiently, but due to the scarcity of resources, there is a reduced business for investment banks in general.

Need to Reduce Costs

Markets have become more competitive. As a result, the cost of goods and services is decreasing. This has an impact on the finance industry as well. Investment banks’ margins are shrinking, and thus their cost of capital is decreasing. As a result, they must reduce costs to encourage their investors to invest money.

Increased Regulations

The new structured products created and sold by investment banks go through strict regulations since the mortgage crisis in 2008. This creates a limit on the operations of investment banks. These increases cost for investment banks and they have to maintain a different department of qualified professionals so that they could create and bring in new investment opportunities after scrutinizing them.

Technology Disruptions

Rapid technological advancements have drastically altered every industry in the world, including investment banking. The fintech industry has emerged over the years as new technology. This industry revolves around providing the same financial services at a lower cost. They have access to cutting-edge technology and a modern network, allowing them to raise capital at a lower cost.

Cross Selling Complexities

A huge area of the investment banking services sector relies on cross-selling. For example, if someone is looking for mergers and acquisitions, the investment bankers provide them with the services such as issue management, capital structure advisory, and many more. This way they bring value to their clients. But due to limited budgets, they are limited to the services they offer. The declining budget causes decreased revenue for research and other departments.

Benefits of Investment Banking Outsourcing

There are several reasons why investment banking outsourcing is becoming increasingly popular. We have tried to highlight some of these reasons below. They are:

Benefits of Investment Banking

Benefits of Investment Banking

Focus on Core Business

Investment banking outsourcing can help companies in focusing on their core competencies rather than focusing on mundane tasks and being worried about their day-to-day operations.

Controlled Costs

Cutting operational costs is a challenge that exists with organizations throughout. Investment banking outsourcing provides an avenue where companies can take care of differences in the relative value of currencies to derive as much as 30-50% savings in costs.

Increased Efficiency

Investment banking outsourcing is a specialized operation and the workers who work for these banks need to be highly skilled for this. A similar talent of MBA’s exists in low-cost destinations like India where the operations can be outsourced to them. Highly skilled talent helps in improving the efficiency of investment banking services.

Changing Economic Factors

In today’s uncertain world, the political dynamics are changing daily. This has an impact on the economies of the world and since we are so intertwined today the ripple effects of adverse conditions in a globally connected country are bound to have effects on the whole world. Investment banking outsourcing ensures the risks are well hedged with specialized partners operating from different geographies across the world.

Technological Changes

Investment banking outsourcing has ensured that the companies are up to date with the latest technological advancements that are occurring worldwide at a fraction of the cost had they invested real-time into adopting them. The use of the latest technologies by third parties ensures that all the technological challenges are met.

Time Zone Advantage

The gap in time zones between your country and the area you are outsourcing to, in addition to the cost advantage, is another important benefit. By doing so, you can focus on your primary tasks all day long while also having finished your day-to-day operations by the time you get up the next day. It gives you the benefit of round-the-clock business operations.

Magistral’s Services on Investment Banking Outsourcing

The outsourcing of investment banking may be a way to cut operating expenses. In an era of growing complexity in both established and new industries, investment banks are extremely nuanced. Smaller investment banks have a difficult time juggling their project pipelines and manpower needs. Medium-sized banks are eager to develop their expertise in emerging industries, which are bustling with activity and volume. However, large banks are more concerned with cutting costs while maintaining the quality of the services they provide to their customers. Magistral provides a range of service options to support Investment Banks.

Some of the services that are associated with Investment Banking Outsourcing that is offered by Magistral consulting are:

-Deal Sourcing: Performing industry and market analysis, finding potential targets, and publishing newsletters are various kinds of services provided under deal sourcing.

-Data Cleansing: Data cleansing and mining are done to perform analysis on suitable data.

-Valuations: Valuations are done by creating financial models by various methods such as LBO/DCF Modelling, Comparable Analysis, Precedent Transaction Analysis, and Impact Analysis.

-Due Diligence:  Research-based due diligence both primary and secondary are performed to uncover the true potential of an asset while giving a completely independent opinion on investment quality.

-Deal Execution: Teasers and Investment Memorandums are made along with identifying the potential investors/buyers.

-Portfolio Management: Providing ESG compliance monitoring, preparing financial reports, business development support, and procurement support is provided.

-Equity Research and Analysis: The services provided under this head include fundamental analysis, quantitative analysis, credit analysis, and country analysis.

-Marketing: This includes creating white papers, case studies, thought papers, CRM management, etc.

About Magistral Consulting

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates, and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modelling, Portfolio Management, and Equity Research.

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The article is Authored by the Marketing Department of Magistral Consulting. For any business inquiries, you could reach out to  prabhash.choudhary@magistralconsulting.com

A Brief Introduction

Consumer and market insight report and analyze consumer behavior, information, and feedback. The comprehension and analysis of these insights assist adjustments to customer support systems and business development. Companies collect feedback using customer surveys, statistics, reviews, and focus groups to understand the underlying attitudes underlying consumer behavior and decision-making processes.

There is no formal definition of consumer and market insight, but it may be summed up as any measurement that can be utilized to observe and understand what customers think and feel. It might be their eye movements when viewing your page, how long they spend on it, how much they order, which options they choose, etc.; the list is endless. While certain information may be utilized alone to make a specific determination, marketers often use a variety of consumer insights to make their decisions.

Consumer marketing insights are also crucial when testing new initiatives within your company. You may learn from consumer insights how placement on the page, product details, SEO, and many other aspects affect your sales. Businesses employ consumer insights to understand their audience’s thoughts and feelings more deeply. Companies may better understand their customers’ needs and wants, and, more crucially, the reasons behind those needs and wants, by studying human behavior, which is likely to boost revenue and brand value thus.

Sector concentrating the more spending on market research 2020, by sector

Sector concentrating the more spending on market research 2020, by sector

Consumers today have virtually limitless store options and complete freedom over how they assess and interact with media and companies. In the wake of the COVID-19 epidemic, research has revealed that 81 % of consumers would continue reorganizing their spending this year, while 46 % of customers have experienced new expenditure restraints.

Benefits of Consumer and Market Insight

Consumer and market insight has the power to create or destroy a marketing plan. This dependency on data monitoring has only increased across all businesses considering the COVID-19 outbreak. Businesses and consumers are switching to a digital-dominant strategy enabling more precise insight measurement. Consumer insight may help determine the characteristics your consumers are seeking and find demands that your rivals are still not meeting. Social media and search engine trends might be helpful in this regard. To stay informed about what your target audience is searching for, you may set up alerts for movements and rivals.

This takes us to a further advantage of consumer insights: They provide a detailed picture of how you may compare your company to others’ businesses in ways other than sales and revenue. You can see how you compare to your rivals on various business-related terms regarding search engine rankings. 71% of consumers expect companies to deliver personalized interactions. 3/4 will switch if the customer doesn’t like the experience, so it’s vital to keep care of the customer experience.

Build effective category strategies that increase sales and promote sustainable growth by utilizing solid, impartial, and contextualized insights. Make quick judgments based on proactive information and forward-looking insights to stay one step ahead of the competition. Data and information make it easy to mitigate risk and identify strategic priorities.

How to get Consumer and Market Insight

Utilize social media analytics

According to a research survey, only 1.9 % of marketing executives said their businesses have the skills to use marketing analytics. With the popularity of social media as a tool for marketing, companies may communicate directly with their customers and discover their precise attitudes and responses to their offerings. Nowadays, many social media platforms have survey and questionnaire tools that can also give valuable information about consumer attitudes or behaviors. YouTube analytics, google trend and analytics, and google audience retention tools are the best source of collecting marketing insight.

Getting Consumer and Market Insight

Getting Consumer and Market Insight

Conduct surveys

Getting direct customer input is a terrific method to learn about the industry. Many businesses opt to do this by sending out feedback forms as soon as a client connects with or purchases their product or service. They may follow up later to obtain a more comprehensive customer experience analysis.

Access to public data

Because of the internet, businesses now have access to an infinite quantity of data, much of which is public information. When deciding on their marketing strategies, companies might utilize information about consumer buying patterns, financial situations, and the condition of their respective industries or economies.

Conduct market research

Focus groups are typically gathered as part of market research, a traditional method for businesses to collect data for market insights. These test subjects’ responses might offer valuable information about how the broader public might react to a particular product, service, or marketing campaign.

Customer feedback

Asking clients for feedback is one of the simplest methods to obtain consumer insights. However, there is a need for this. To guarantee that their customers feel comfortable sharing, brands must develop trust.

The impact of global consumers has changed

The transition of consumers to digital has increased significantly. Gen Z customers have created applications to discover extra food and purchase more goods online. People are preferably buying more on online sales or in big billion deals.

73% of Indian consumers return the product after shipment, so the company’s return policy should be easy to attract the customer and create trust. Myntra had 8 million orders during its end-of-reason sale in which 5 million buyers bought 4,636 brands. In the sale, 10 shirts were sold every second, 3 pairs of jeans were sold every second, and 17 sarees were sold every second, which signifies consumer behavior. Sales influence consumer behavior, those not in need also buy something.

44 % were undecided or made three or more assertions that they disagree with near shopping sustainability. A 23 % rise in expenditure across six or more categories was forecast by consumers worldwide. In the six months starting in April 2021 and concluding in September, 24 % of consumers worldwide do not anticipate increasing their expenditure in any category.

How to use Consumer and Market Insight

Set your goal

A list of questions and objectives is often where research starts. Determine the data type needed to finish your analysis before asking for input. Data on consumer demographics, corporate reputation, brand awareness, product issues, market rivals, and customer service initiatives may be included in the objectives for consumer insights.

Choose the research methodology

The research techniques you choose will depend on the information and results you are looking for. Data on consumer demographics and public relations may be found through focus groups and customer surveys. In customer evaluations and surveys, suggestions, and issues with goods, features, and customer service may come up. Pick the best approach to serve your research’s objectives and produce the most satisfactory outcomes.

Conduct research

Install data gathering technologies to compile information from sales processes and website visits or assemble participants and ask them to share their perspectives. Customers who respond to surveys and provide feedback frequently receive rewards from businesses. To gather information for analysis and determine consumer happiness, solicit and record consumer insights.

Analyze the result

You may find and visualize common issues, trends, and causes that arise among your customers by analyzing the outcomes of the data you collected. Create a graph or written report to summarize customer data and examine patterns like demographics, consumer behaviors, and product issues. Improvements and modifications that address frequent difficulties and feedback can be made using knowledge of the reasons and reactions that occur most frequently.

Apply changes

Consumer insight and market research are primarily used to develop and improve products that better fulfill the demands of consumers. Product development and marketing teams build solutions and work to answer customer complaints after collecting and evaluating the data. The organization’s understanding of customer service is demonstrated using these enhancements.

Why Magistral Consulting?

-Customer insight: Utilize tools like social media sentiment analysis, U&A insights, N.P.S. tracking, bespoke surveys, and more to stay current on consumer trends, requirements, and purchasing patterns to identify focus areas and create successful marketing plans.

-Market expansion: Receive timely, essential insights and evaluations of markets and regions to aid in partner selection, local market intelligence, understanding of shifting legal and regulatory environments, and developing successful ready strategies.

-Updated information: Proactively updates on recent and pertinent developments in your markets and categories will help you find new opportunities for innovation and growth.

-Expert insight: A comprehensive understanding of your company’s possibilities and difficulties by combining data from internal, external, and third parties. We have expertly selected insights on markets, categories, rivals, and consumers to assist your commercial and marketing teams in making more informed strategic decisions.

-Custom tools: You may create world-class category growth strategies fast and easily using pre-built templates and unique tools.

About Magistral Consulting

Magistral Consulting has helped multiple companies to reduce operations costs through its offerings in Procurement and Supply Chain.

About the Author

The article is Authored by the Marketing Department of Magistral Consulting. For any business inquiries, you could reach out to prabhash.choudhary@magistralconsulting.com

Introduction- What is Portfolio Management?

Portfolio Management Services are the services that keep a portfolio of investments healthy and prime them to produce expected returns on investments.

Sometimes portfolio management is passive, where it mostly deals with analyzing the assets and its performance. In some cases, portfolio management is quite active, where the manager is expected to get into the operations of the invested company and make sure its operational aspects are fine-tuned so that the asset enhances its intrinsic value

Whatever is the underlying nature of the portfolio, portfolio management concerns about managing the asset properly and prepare it to give superlative returns for the investors

What constitutes a Portfolio?

A portfolio has a different meaning for different institutional investors. A Venture Capital or a Private Equity firm may mean invested companies as its portfolio. These companies can vary in size. Sometimes they are start-ups or smaller companies, whereas some other times they could be multibillion-dollar enterprises with businesses in many countries. These companies could be public or private

A Hedge Fund calls the stocks where it has invested as its portfolio. These are publicly traded stocks and trade on global exchanges.

A Fund of Funds will call its underlying Hedge Funds as its portfolio. A Fund of Funds invests in funds like Hedge Funds. So all the hedge funds where it decides to park the money are its portfolio

A Real Estate fund will call its Real Estate investment as its portfolio. Various funds specialize in multiple RE asset classes like residential, commercial, infrastructure, and multiple other versions of it therein.

An Investment Bank or a Commercial Bank may have different asset classes, depending on its business model and clientele, calling an underlying asset as the portfolio. They can be Real Estate, Real Estate Classes, Cryptocurrencies, Commodities, and anything else that generates a return and is invested with an aim of either generating returns or appreciation in capital value.

Depending on the underlying asset, the portfolio management approach takes different paths

Portfolio Management for Private Equity and Venture Capital

When Portfolio Management is talked about for Private Equity or Venture Capital firms, it means helping the portfolio of companies, mostly private, in appreciating its valuation. This appreciation in value comes from improving revenue or cutting costs. The ultimate aim of investing in companies by Private Equity or Venture Capital firm is to exit at a valuation that is multiple times over the initial investment. A significant part of the fund is in the portfolio management business.

Multiple things could be done to make sure the portfolio company grows its revenue and keeps its costs in control

Outsourcing some of these services produce multiple benefits like reduction in operations’ cost, improvement in quality, etc.

Here are the services and all of it could be effectively outsourced in the portfolio management process to further net in the cost savings:

Portfolio Management-Companies

All the elements of companies’ portfolio management that could be outsourced

Business Research

Business Research touches multiple aspects of operations for a small company. It plays a vital role in Finance, Sales, Marketing, Strategy, and Procurement. Almost all research tasks in these functions could be outsourced. Investors taking in hands the research function take the nerve cells of the organization in control. From there, the company could be managed more closely and with better control. One of the most important aspects of business research is fine-tuning the business strategy. Investors can devise the expansion plans and study whether they are on track.

Marketing

Marketing and specifically the elements of Digital marketing could be outsourced well. Components of digital marketing like content marketing, web design, social media advertising, SEO, and everything else related could be outsourced and outsourced well. Marketing is the most important lever when it comes to growing the business of a small company aggressively. Topline growth increases the valuation of the company almost simultaneously.

Business Development

Specifically, for B2B businesses in the portfolio, there are multiple outsourceable elements for business development. This includes list and lead generation to onboard newer accounts faster. Also, account-based management is important for bigger clients of a smaller portfolio company.

Mergers and Acquisition

After the initial investment, the struggle for the investor takes another direction. It is to raise further rounds of fund-raising or start finding a bigger buyer for the company. Multiple activities are spanned out of this objective. For example, generating the list of potential buyers or investors and all the accompanying documents that go towards an M&A exercise.

Fund-Raising

Fund Raising is an ongoing cause for venture-funded companies. After the seed round, the preparations start for a further round of fund-raise like Series A, Series B, Series C, and so on. This leads to a continued quest for generating a pipeline of investors for further rounds of fund-raising. This activity of generating and populating pipeline could be effectively outsourced while the management focuses on revenue and profitability

Outsourced CFO

A full-time CFO is something that a small start-up may struggle to have. When a VC fund invests in multiple start-ups, it could have a centrally located CFO for all these companies. To further save costs, this CFO or parts of the CFO team could be outsourced. An outsourced CFO brings in the expertise of a tenured CFO along with the scalability of an outsourced team.

Product Design and Development

Many investments specifically in the VC space happens in the pre-product development stage or immediately after the proof of concept still leaving the product with some problems that need to be ironed out. This is when product design and development services come into play. It helps in setting up websites, making apps, and initial marketing to gain the users and change the UI or business strategy if required. It’s just that with outsourcing, these business and technical iterations become a lot cheaper.

Lead and List Generation

An ongoing company needs a list-building exercise all the time whether it’s about getting a new client or an investor or a vendor or anyone else for any other type of business collaboration.

 

Portfolio Management for Hedge Funds, Investment Banks and other Asset Managers

This section is for anyone else who is not dealing with investing in private companies. This is also for anyone who does not get into an active management role in a company’s day to day affairs. The underlying assets in this portfolio could range from Real Estate and all its classes like residential, commercial, land, buildings, infrastructure, etc., cryptocurrencies, public company stocks, commodities, and everything else that is bought, sold, or traded for capital appreciation or returns. Portfolio Management strategies, in this case, differ significantly from explained earlier and here different tools and models are used for Portfolio Management

Here are the aspects of such a portfolio management project that could be outsourced effectively

Portfolio Management- Funds

Activities that could be outsourced for Portfolio Management of funds and other assets

NAV Tracking

Almost all types of assets need regular NAV tracking. NAV which stands for Net Asset Value is the underlying value of the asset that changes from time to time.  All the changes need capturing for investor communication periodically. NAV of some assets is easy to capture, whereas with other assets it follows a difficult process. Portfolio Management and Investment Analysis are connected as the successful investing strategy need to be doubled down on. Several KPIs for Portfolio Management are tracked as well.

Investor Relations

Investors need to be reached out for all the information like the value of their holdings, taxes, fund management fees, waterfalls, etc. Sometimes they would also need a primer on the strategy of the fund or change in the plans by the fund manager. A Portfolio Management dashboard is often prepared and is automated for the information of investors

Middle Office

All the middle office activities like fund administration could be effectively outsourced. This form majority of research, and analytics jobs performed at a Fund. Automated tools for portfolio management is used here.

Back Office

All the tasks like book-keeping could be outsourced at a fraction of the cost. There are multiple software for portfolio management and book-keeping that could be used in the process

Marketing

Most marketing activities like CRM, Marketing communications, reports, and content could be outsourced as well.

Why outsource portfolio management?

Outsourcing has multiple benefits for a Portfolio Management Office. Cost-saving is an obvious one. Here are the factors that add to the charm of an outsourced deal:

Cost: Cost savings of 30-70% from outsourcing portfolio management is very typical. The cost that you save depend on the geography from where you want to outsource and the technical skills required to do the job effectively

Skill inventory: Many small fund management teams operate at a suboptimal level and are not able to meet the standards of bigger funds as their support services don’t match up with that of much bigger funds. Outsourcing presents an opportunity for smaller fund teams for skill enhancements. Outsourcing brings the skills to the team without permanent hiring

Quality: The work quality that is outsourced is of global standards and helps raise the bar for the internal team as well

Risk: Outsourcing reduces the portfolio management risk significantly

Flexibility: A Portfolio Management Analyst can either be hired full-time offshore or in parts or services can be availed on an hourly basis

Magistral has helped multiple fund managers in outsourcing portfolio management and other aspects of operations.

About Magistral

Magistral Consulting has helped multiple funds and companies in outsourcing CIO related activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.

 

 

In the last decade or so, almost all functions of investment banking have seen major disruption. An investment bank from pre dot com bust era is almost unrecognizable in the present scheme of things. Almost all banks are struggling to keep in tune with the historical profits that the industry is quite used to. It’s an era where factors like Technology, Outsourcing and Innovation are relaying the rules of the game for Investment Banks

Here are the major trends that are being observed in the industry:

Changes in the IPO business

Traditionally assisting corporates in accessing the public markets has been a major source of revenue for investment banks. Banks have typically charged around 3% to 7% of the money raised as their fees. Bigger and simple IPOs commanded less percentage while smaller IPOs and complex deals commanded higher fees percentage. The number of IPOs has gone down significantly, and the average size of the fund raised has increased. Also, most bigger IPOs have been from tech firms like Facebook, Uber, and Softbank. As the tech firms are already a household brand name even before the IPO, it does not necessitate a reputed Investment Bank underwriting its shares. That gives more bargaining power in the hands of these tech firms as compared to Investment Banks and hence the fees commanded by Investment Banks are under stress.

Apart from the major trend of lesser IPOs and more bargaining power to tech clients, here is what that is further making the industry more challenging:

The trend of staying Private

The last decade also saw the emergence of multiple Private Equity and Venture Capital firms, which formed an alternative to raising funds by going public for the companies. Firms like Softbank have mega-funds which have raised hundreds of billions of dollars to be invested in companies. Raising money from private investors is faster and attracts lesser scrutiny from regulatory authorities. Companies can also function independently in a much efficient way without the pressure of retorting to QoQ profits that public companies are subjected to. This has led to even fewer companies using the services of Investment Banks to go public.

Direct Public Offerings

This concept was first shown in practice by Spotify which went public without underwriting its equity. As tech firms have previous acceptability and brand established, It is easier for them to access money due to its own brand name, rather than a Goldman Sachs or a Morgan Stanley backing it up. Spotify has shown the way to other tech firms, who probably will use this route of public listing more and more in the future.

Alternative Exchanges

There have been multiple substitutes for traditional stock exchanges like NYSE that have cropped up. These exchanges like Investor Exchange or Long term Stock Exchange (LTSE) provide an alternative to list without many complications. All of this leads to a further reduction in the fees commanded by Investment Banks. There have also been multiple platforms that bring together investors and companies using technology. One such platform, Axial Network is now known to be the Tinder of M&A.

Initial Coin Offerings

Still at its infancy but ICO is expected to be used more and more in the future. Here a company offers its equity or right to equity in a blockchain or crypto-based coin. It is still facing too much suspicion from regulatory authorities to become mainstream anytime soon.

Changes in the M&A landscape

M&A activity saw a major boom in the 80s and 90s on the back of public companies looking to improve their EPS and hence improving their valuations. Investment Banks had a bigger role to play as M&A activity was driven more from a financial angle. Presently most of the M&A activity is on the back of the strategic vision of the management, rather than looking for a quick bump in the EPS. This has led to more active role play by the Management and less importance to the value that Investment Banks bring to the table.

Apart from these following are the underlying trends that are rewriting the rules of M&A

Boutique banks and Specialization

There are multiple boutique banks that have shown spectacular growth in their business on the back of specialization. Banks specializing in tech space have shown bigger increases when compared to bigger and more generalist banks. This is because boutique banks understand the industry well and are in a position to recommend vision, strategy, and synergy-based M&A targets.

Technology

There are multiple platforms that are aiding to DIY M&A. Axial network, which is known as Tinder of M&A, connects start-ups with investors, is showing tremendous growth regarding the transactions on its platform.

Changes in Asset Management landscape

Asset Management which still forms the major chunk of revenues for bigger Investment Banks is also going through multiple changes.

Although the major chunk of revenues of bigger investment banks comes from Asset Management, it seems Banks are losing to specialized asset management firms when it comes to traction and growth.

After Lehman brothers collapse, regulatory changes led to bigger investment banks to hold bigger percentage of funds as liquid. This took away the advantage that the banks had in terms of their scale. Specialized Asset Management firms turned out to be agile and relatively less susceptible to regulatory constrictions. Specialized ETFs have given better returns than the funds managed by Investment Banks.

Changes in Equity Research

Equity research for investment banks has been commoditized to a great extent. A huge chunk of information is available that is researched sometimes manually and sometimes using automated programs, but there is very little that is being absorbed. It meant less for the Banks and Clients and probably was not even being used in the way envisaged. Banks did not care much as the cost of the research was bundled along with the cost of a trade.

A recent European Commission’s directive called MiFIID II is set to change all this. Under this Banks are expected to bill the cost of research separately. This has led to banks across the globe, taking notice of their Equity Research operations. Now that the research would be paid separately, it makes sense to evaluate the value addition it brings to the table. Investors also are now more alert in consuming these reports given that they will be paying separately for this. All of this will lead to the elimination of useless repetitive and non-insightful equity research.

Changes in Sales and Trading

Of late after the Lehman Brothers episode, there have been multiple curbs on how much a Bank can trade in the market with its own and client’s money. This has led to curbs on the capital available for trading and thus killing another lucrative source of revenue for Investment Banks

How are banks countering all this?

Large banks have taken different strategies to counter the challenges I mentioned earlier. Here are the major types of strategies followed by them:

Offloading the loss-making verticals: Banks like Morgan Stanley are letting go business divisions that are not profitable and at the same time investing more and more in verticals like Asset Management, that is turning out to be increasingly profitable.

Investing in technology: Others like Goldman Sachs are investing heavily in Technology and Platforms. They are also outsourcing a lot of operations to Low-Cost countries like India. JP Morgan is coming up with Blockchain-based crypto called JPM coin.

Still in the world of Finance, the prestige of investment banks holds significant sway. Changes have arrived but still, the pace of change is expected to be slower as compared to other industries.

The Author Prabhash Choudhary. is the CEO of Magistral Consulting (www.magistralconsulting.com), a firm that helps Investment Banks in outsourcing their operations. He can be reached at prabhash.choudhary@magistralconsulting.com for any queries.

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Investment Banking as an industry relies on the brightest of the minds in the financial world. So when the concept of “outsourcing” is discussed, it is frowned upon by some as being unreliable and low quality. Doing everything in-house is a matter of “Unique Selling Proposition” for the bank.

Is it really so?

In this article, we will build a case for outsourcing against doing everything in-house.

Here are the reasons that you should consider before deciding ‘for’ or ‘against’ outsourcing.

If you are growing, doing everything in-house will bring down your pace of growth: For any organization, whether it’s an Investment Bank or any other, growth is a piece of good news. But it also brings with it, the huge uncertainties in terms of cash flow. You secure that big client that you were chasing for months and you sign a contract. You hire and then realize that the client has shelved the project. Now new hires sit there in your cost bucket without any revenue against them. If you let them go, it is usually bad for the brand. Hiring bright associates then becomes difficult once you are out again for hiring. Outsourcing here acts as a temporary patch. You get the project, you outsource it till the client stabilizes and then decide what to keep in-house and what to outsource. It brings down the cash flow risks dramatically. Outsourcing keeps pace with your project flow and you don’t wait for months for the new associates to join you. Read further, if you think handing an important client to outsourcing may be detrimental to your business.

 

Quality concerns around outsourcing are unfounded:  Another factor that is sighted against outsourcing is quality concerns. I encourage you to see the work that the Top 10 global investment banks are getting done in India. All of the top 10 banks have an India connection. Some have their biggest global delivery centers or captives based out of India while others have big contracts with Indian vendors, but no one thinks the quality is bad and avoids India altogether. Do you think this scale would have been possible with sub-standard delivery quality? You need to think again!!

 

There are unmistakable advantages in terms of costs: The complete business case of outsourcing is usually built around saving costs, and it is very difficult to miss the details. Depending on your location in the US, Europe, the UK, or Australia, outsourced analysts are cheaper in tune to 30% to 80% of the costs of onsite analysts. There are further savings in terms of lower supervision time, costs of databases, skill bandwidth of the whole outsourced team as compared to a few onsite analysts and the flexibility with which new resources could be added or removed

 

If you are small, you can’t do without outsourcing: It is understood that outsourcing will bring mighty savings on top of the headcounts in thousands. Though that is correct, there are immense benefits for small setups too. A small set up sometime may miss some of the critical skills that bigger banks have. Outsourcing plugs in that skill gap in smaller banks. Also with purse strings tightened for smaller banks, outsourcing sometimes is the only option for operational continuity without breaking the bank.

 

Not all Investment Banking jobs are strategic: There is absolutely nothing strategic about entering expense voucher details in excel or making the fund pdf editable, but these are the jobs that still need to be done and possibly at the lowest cost. Outsourcing is not only an alternative but the best one for these mundane tasks.

 

Selling “Outsourcing” to your clients: There is still a notion that Investment Banking clients will frown on outsourcing operations as it is perceived to be low quality. If a bank does everything in-house, it sends a signal that Bank has too little to do on its own. What advantage does it bring to do mundane jobs in-house? On the contrary, it’s perceived that the team is inefficient and has high maintenance costs. Who foots this bill? Your clients!! Say your management fees might come down by a few percentage points due to outsourcing and see the perception of outsourcing change. Keep the critical tasks in-house and outsource the non-critical ones.

 

Assignments move at double the pace: Outsourced team acts as an extended team to the onsite team. With time zone differences, it is like the combined team is moving at double the pace working in the day and the night as well. So an assignment that would have taken 30 days to complete may see itself being finished in 15 days’ time. Agility does have value in the marketplace.

 

No exit barriers from contracts: If you are not happy with the quality, timeliness, and responsiveness or have any other issues with your own business or the quality of services, the contracts have a swift exit clause. You can terminate the contract with a few days’ notice.

 

Competitive pressures regarding outsourcing: As suggested earlier in the article, the top 10 global banks are outsourcing work to India. It gives them an immense advantage in terms of costs and hence pricing their services to their clients. Someone who is doing everything in-house will be costlier without adding any additional value to the client. Competitive intensity regarding outsourcing is huge, and it may force everyone to outsource at some point. Early movers may rope in significant rewards though.

 

Hiring an individual Vs. Hiring a team: When you outsource, you don’t hire a single individual, you also hire the expertise of a team that is working across investment banks for years. This means an Investment Banking standard quality being delivered on day 1 as compared to months for an onsite hire.

 

Data Security and Privacy: Data security is a big concern for outsourcing. For this, it is suggested that outsourcing contracts should carry a penalty in case of a data breach. Usually, outsourcing players are organized on the basis of support teams for each client. There is little interaction between teams on assignment related issues. One analyst works with only one client at a time and hence there is safety in terms of sensitive news leaking to other clients. There are IT arrangements as well in terms of secured workplace access, IT firewalls, and inspection of all outgoing emails and online activity of each analyst.

 

If you are still tentative about outsourcing, please get in touch with Magistral Consulting (www.magistralconsulting.com). We support dozens of Investment Banks in outsourcing critical and non-critical work. We have a step-by-step, no-risk approach for Investment Banks to reduce their operational costs. A typical conversation starts around our capabilities. Our work samples are provided to the clients. Clients also get to talk to our references in their home countries, who have used our services. Further, we will ensure you get a pilot done to see the quality of our work before deciding on a long term engagement.

This step by step method ensures there are no financial or quality risks associated with you deciding to outsource your operations.

The author is the CEO of Magistral Consulting. Magistral has helped dozens of Investment Banks based out of the US, the UK, Europe, and Asia in outsourcing operations. He can be reached at Prabhash.choudhary@magistralconsulting.com in case of queries, observations or business inquiries.

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