Will investment banking analysts survive the current economic crash? Arguably, they were an endangered species even before the current crisis.
Integreon’s Chris Niccolls (SVP, Account, Implementation, and Program Management), formerly Managing Director of Investment Banking Operations at Bear Stearns, penned an opinion piece called The Next Shoe to Drop in the The Deal Newsweekly (10 Dec 2008).
A just-released survey suggests that US law departments will, by 2013, spend $2 billion on legal outsourcing.
The Change Agenda: Looking Ahead (American Lawyer Magazine, Dec 2008) reports on a survey by law department consultant Rees Morrison and American Lawyer editor Aric Press, conducted on the professional social network, Legal Onramp (LOR). One survey question asks
“Between 2008 and 2013, ___% of our law department’s spending will move to lower cost offshore service providers, whether directly or as a subcontractor to our in-country law firms.”
Based on the answers to this question and some conservative assumptions, we estimate that U.S. corporate law departments will spend about 3% of their budget on legal outsourcing. This translates to US legal process outsourcing (LPO) spending in 2013 of almost $2 billion. To be completely transparent, we spell out how we make this estimate; following that are some caveats and comments.
* * * *
Estimate Step 1: Percent of Inhouse Counsel Spending that Will Shift to Outsourcing
The answers to the question above about shifting spending to LPO by 66 law department respondents at companies with more than $1 billion in revenue are as follows:
| Respondents | Percent | |
| >10% of total spending | 10 | 15% |
| 6-10% of total spending | 11 | 17% |
| 1-6% of total spending | 11 | 17% |
| Decrease, we are moving more onshore | 2 | 3% |
| No change | 32 | 48% |
To determine the percent of spending that will shift, we need to calculate a weighted average:
| % Spending Shifted to Outsourcing | Weight | Weighted |
| 11% | 15% | 1.7% |
| 8% | 17% | 1.3% |
| 3.50% | 17% | 0.6% |
| 3.6% |
For “% Spending Shifted to Outsourcing”, we assume for those answering answering “greater than 10%”, an 11% value, which is a conservative approach. For those answering 6-10% or 1-6%, we use the midpoint of each range, which is the typical convention in the absence of other information. The “Weight” column simply copies the percent each answer represents of the total number of responses. The “Weighted” column multiples the Spending Shifted by its Weight.
We could conclude that by 2013, 3.6% of inhouse counsel spending will shift to legal outsourcing. We are not comfortable doing so, however, because of possible sample bias. This survey was conducted on Legal Onramp, a social network targeted at corporate law departments. The current LOR members are “early adopters” of social networking and, by extension, could be LPO early adopters. Adjusting for this is, by necessity, arbitrary but we think adjusting downard by 20% is appropriate. Applying this adjustment factor, by 2013, 2.9% of inhouse counsel spending will shift to legal outsourcing.
[There is insufficient data to be able to account for the two respondents decreasing outsourcing. Given the conservative estimates here and in subsequent assumptions, we feel comfortable not adjusting for this.]
Estimate Step 2: Determine Total Law Department Spending
To what dollar spending do we apply this percent? We need to know the total US law department spend. Most AmLaw 200 revenue is from corporate law departments but some is from deal-makers, small businesses, and individuals. We believe that a conservative approach is to assume 80% of the AmLaw 200 total revenue is from corporate law departments.
The AmLaw 200 total revenue for 2008 was $81.5 billion. Applying our 80% adjustment brings it to $65 billion. (American Lawyer Magazine articles report on 2008 total revenues: Amlaw 100 for 2008 and Amlaw 200 for 2008.)
Something is missing, however, from this estimate. The survey question asks about total legal department spending. Prior survey questions refer to outside counsel spending. Consequently, we should add to the $65 billion an estimate of law department spending for their own lawyers and operations. Rather than apply other survey data that might allow an estimate, we exclude this big chunk to keep the estimate conservative.
Estimate Step 3: Multiply for The Answer
Applying the 2.9% shift in spending to $65 billion yields $1.9 billion of US legal outsourcing by 2013.
* * * *
Comments and Caveats
Estimate Does Not Consider Legal Market Growth. In the vein of conservative estimates, we are not adjusting for revenue growth; were we to assume a conservative 4% growth through 2013, the number would be about $2.25 billion.
UK Legal Outsourcing Would Probably Add Another $1 Billion. The estimate above is just for the US market. UK firms are ahead of US firms in outsourcing and currently account for a disproportionate share of legal outsourcing. In 2007, the top 100 UK firms generated a bit over 12 billion GBP (see links to the 2007 revenue tables at UK 200 in TheLawyer). Applying an exchange rate of 1.8 USD per GBP, UK top 100 firms generate about $22 billion. Given that UK firms outsource more, it is reasonable to apply 5% rather than 3% by 2013. If so, that would add $1.1 billion to the total legal outsourcing market.
Comparison to Other Estimates. We think that most LPO observers would likely agree that $2 billion for US legal outsourcing represents significant growth from where we are today. As a point of reference, a widely-cited ValueNotes study from 2007 predicted an India-only LPO market of $640 million, growing from a base of $146 million in 2006. The National Law Journal today, in India work grows, with glitches, cites another widely study by Forrester, which predicts a legal outsourcing market of $4 billion by 2015. When considering the different years of each forecast, rapid LPO growth, and the different countries covered by the forecast, the estimates are not that far apart.
The Impact of Postivie Market Dyamics. The estimate here is static; it does not account for market dynamics. As more law departments outsource and discuss their findings, this will affect the decisions of other general counsels. We are optimistic that this “feedback loop” will increase the spending shift to legal outsourcing.
* * * *
Update 23 Dec 2008: The Law Society Gazette, in In-house counsel survey on offshoring (11 Dec 2008), reports on a legal outsourcing survey it conducted. Applying the same weighted average method as above, this survey finds that in the next two years, inhouse counsel will offshore 2.3% of their work. Considering the above is a five-year estimate, the Law Gazette findings are reasonably consistent.
How should knowledge process outsourcers (KPOs), their clients, and their employees respond to current crisis in financial markets?
Choose your vendor carefully – If there was ever any doubt, the current turmoil shows that that service quality and price should not be the only factors customers consider . Long term vendor financial stability is critical as well. Vendors with only a few hundred employers who depend on a handful of clients may find it difficult to survive even a single client loss. Depending on how much business they lose and their financial backing, a key client loss can put at risk continuity of service to remaining clients. Buyers should seek vendors with scale, good financial backing, and a broad customer base.
Outsourcing as a survival tool – Outsourcing is not just about cost savings – it can be a company’s lifeline too. Unless you remain competitive, you may not survive as a business. You may be able to save more jobs (and create new ones) by outsourcing if done smartly and with the right vendor. Choosing the right vendor will help you improve business economics, achieve flexibility, innovation, and help create growth (jobs). The downturn could last quite some time so it is important to consider both your cost basis and operating efficiency, even as your deal with what may be emergency circumstances.
Reduce client concentration - While it’s always good to get more business from existing clients, look to balance the client mix. Otherwise, if your biggest client accounts for 40% of revenues and suddenly disappears (which seems to happen very often these days), you may not be able to survive the impact. Diversify into more verticals and geographies. Winning new business in this economy may be hard, but point your sales team in the right direction now.
Enhance capital – Clients will start asking more probing questions about the financial stability of your business and access to capital. Cover your financial bases. Work towards moving to profitability and get an investor who can be there to support you on your long term business plan/strategy
Leverage opportunities to consolidate /buy cheap assets - A major economic downturn is a time to be simultaneously conservative and bold. Be conservative in managing operating costs but be bold in buying good assets (companies, people), especially when many outstanding properties are available at the lowest price in years. Tight operations coupled with strategic acquisitions will pay handsome dividends when the economy eventually turns around.
A downturn is not the end of the world. It’s not first time it’s going to happen. The economy will recover and KPOs will grow again at a rapid clip. This is perhaps first time that global events have had a direct impact in India, specifically immediate job losses. Previously, these types of incidents were limited in scope and barely would even be covered in the press. Now, however, the impact has been pronounced, both in captives and third party vendors. KPOs are not the only ones affected by the global turmoil; many other sectors have shared in the turmoil (e.g., consider what has happened with domestic Indian airlines). The pervasive impact of the Western downturn on the Indian job market shows that the Indian economy is now more tightly integrated into a US/global environment. So it is natural that Indian jobs in many industries will rise or fall based on events in US/global markets.
But, there is hope among this bad news. Outsourcing is expected to pick up even more strongly in the months to come and that should drive new job creation.
Investment Banks are famous (or perhaps infamous) for their analyst programs. The premise of these programs has long been suspect if you examined the facts carefully. Now, with the Wall Street and legislative meltdowns, investment banks must truly re-think the analyst position.
Since the early 70’s, investment banks grew their analyst programs, high paying but physically demanding employment programs that provide entry-level experience for the very best graduates of top tier colleges and universities. A theory existed to justify the 100-hour weeks: employees got high pay, great experience, and a career path to banker; banks got the analytic horsepower they needed.
Several trends, however, undermine the theory. First, banks face increasing competition from other high-paying financial positions in hedge funds and private equity firms. Second, recent graduates now want lifestyle balance more than bragging rights to working the most hours. This makes it hard to recruit the same quality of candidates. And third, earlier traumatic events – specifically industry-wide retractions of offers to analysts immediately following 9/11 – raised doubts for some candidates.
So analyst-employees have been questioning the theory for some time. So too should the bankers and deal makers. They complain about analysts’ outputs and resent the re-work often required. Further, if they really understood the cost per analyst, they might have more than second thoughts. My back of the envelope calculation is that each analyst costs $250,000 per year.
Now comes a crisis many compare to the Great Depression. Can investment banks realistically maintain the analyst programs as they have existed? The trends described above were bad enough. Now, with the increased economic pressure on newly reformed I-Banks, can they still afford to pay hundreds of millions of dollars for these programs?
Does Wall Street have alternatives? Absolutely. In fact, Wall Street has been investing in these alternatives for years… automation, outsourcing, and improved market data services among others. These initiatives, however, focused on tweaking rather than re-thinking the role of the analyst. Today, the new shape of Wall Street is a pretty good indication that analyst programs need to become much more aggressive in defining the real requirements and then cutting the cost of delivery.
Now is the time for a real re-think: what analytic outputs do bankers actually need; how should banks recruit or groom future deal makers; and what combination of human and automated resources will best meet 21st Century needs.
The bank(s) that get this right can gain a tremendous competitive edge. It’s not just about saving money, it’s about creating a well-oiled machine that can pitch and win the most and the best deals, whatever those deals may look like post-crisis.
We read with interest that Quatrro, a busines process outsourcing (BPO), knowledge process outsourcing (KPO) and legal process outsourcing (LPO) company, plans to acquire three US BPOs. (Economic Times, 7 August 2008.) We wish them well, but as we previously wrote in BPO Players Moving Up the KPO Value Chain, we think that building a combined BPO/KPO/LPO is a difficult strategy to execute.
We have extensive experience working with demanding professionals such as lawyers and investment bankers. On the one hand, they are apprehensive about dealing with BPO generalists, who are not focused domain-specialists in their markets and therefore may lack the relevant people, process, judgment and technology systems. We are seeing some reversals of earlier decisions to outsource KPO work to BPO generalists where those BPO suppliers have struggled to deliver the appropriate level of professional service, failed to deliver ongoing continuous improvement, promised transformation but did not deliver, or did not create the training and career path that would keep professionals from leaving.
On the other hand, lawyers and investment bankers want to make sure their business partners are financially stable and a suitable scale to serve their business continuity plans (BCP) and breadth of service needs. In our view, the LPOs and KPOs that will thrive long term are those that specialize in these professional support sectors with scale. BPO services such as mortgage servicing and voice support are different enough businesses that they ultimately don’t fit well with KPO and LPO work.
The annual Black Book of Outsourcing survey results were recently released. Beyond the rankings, authors Douglas Brown and Scott Wilson report on several important findings in their “state of the industry” report. (For the record, Integreon scored very well in the rankings; see our Black Book press release.)
We think the most striking finding is what the authors calls reverse outsourcing:
“Outsourcing is taking on a new twist. Rather than U.S. jobs going to India, the latest evolution of outsourcing is moving in reverse, with India’s leading service providers opening offices on Main Street, USA. The reverse outsourcing development is too new for Indian companies to point to actual cost savings yet, but moving front office processes closer to the client is fast attracting buyer interest. Major suppliers are responding to the demand for enhanced, locally delivery customer service.”
Several Indian outsourcing firms have established and grown US presences, not only for front office marketing and sales, but also for delivery of services as well. TCS, Wipro, Satyam and HCL are notable examples. Outsourcers have multiple reasons to adopt “dual shore” strategies. One is purely administrative, linked to visa challenges.
The bigger and more important reason is the realization that the best customer service requires a combination of an offshore and onshore team or, in some instances, pure onshore teams. In Integreon’s view, supported by the Black Book findings, firms with only offshore operations will find it increasingly difficult to provide world-class solutions.
The authors also comment on what buyers value. For client segments in the early stages of adopting outsourcing, for example legal process outsourcing (LPO) such as legal document review, “client relationship and cultural fit and trust and end-to-end service” is key. This may be because the providers may not have differentiated themselves on service delivery in early stages and cultural/relationships issues become proxy for potential performance.
For more mature segments – document process outsourcing (DPO) or knowledge process outsourcing (KPO) such as research and analytics – “innovation and deployment and comprehensive end to end service” are the key to successful relationships. This finding adds to the already overwhelming evidence that as outsourcing clients gain sophistication and develop increasingly high expectations, providers must deliver more than simple cost-arbitrage. Innovation, cultural fit, and domain expertise are among the critical success factors for the future.
Two separate articles in the New York Times yesterday illustrate the impact of the web and the huge quantities of information available. Ironically, I think the deluge of data described in these articles, rather than liberating professionals, makes life hard for them. There is just too much to assimilate. What’s the answer?
Dirty Job, but Someone Has to Do It (NYT, 14 April 2008) describes how a small web site with just three reporters is doing very well just by searching the web for documents and information to a broader audience. The columnist observes:
“As working reporters, we are able to get information – through the public and government Web databases and proprietary digital sources – that our ancestors in the business would not have dared dream of. I know because I’m one of the ancestors.”
He Wrote 200,000 Books (but Computers Did Some of the Work) (NYT, 14 April 2008) reports that
“Mr. Parker has generated more than 200,000 books, as an advanced search on Amazon.com under his publishing company shows, making him, in his own words, “the most published author in the history of the planet.” And he makes money doing it… But these are not conventional books, and it is perhaps more accurate to call Mr. Parker a compiler than an author. Mr. Parker… has developed computer algorithms that collect publicly available information on a subject – broad or obscure – and, aided by his 60 to 70 computers and six or seven programmers, he turns the results into books in a range of genres, many of them in the range of 150 pages and printed only when a customer buys one.”
The web and its proliferation of information feeds new businesses like the two described above but also creates problems. It’s an old adage there is a progression from data, to information, to knowledge, to wisdom. I’ve personally talked to professionals who say they just cannot keep up with the vast flow of data and information.
This deluge seems likely to continue feeding the knowledge process outsourcing business. Yes, a range of technology helps manage the deluge. RSS feeds help consolidate information. Smart search tools help find information. Semantic engines can even summarize articles. But ultimately, you still need smart people to make sense of the huge volume of information and create knowledge from it. Knowledge-intensive businesses that drown in data will likely keep turning to smart professionals offshore to help them make sense of it all.
The President of Copal, a financial services KPO, is quoted in The Economic Times (March 15th, 2008) Copal Partners eyes LPO foray via buyouts: “We are in discussions with 10 LPO firms in India whose revenues are in the range $5-75 million. We hope to close one or two acquisitions this year.”
I have noticed savvy customers starting to ask questions in RFPs, during the sales cycle, and drafting change of control terms into contracts, to protect themselves from entering into a contract with an outsourcer, only to find the provider subsequently sold by the founders or investors to a new owner, which doesn’t like the terms and seeks to renegotiate at the earliest opportunity. Sometimes the terms of the initial contract were agreed at better than market rates with the founder(s) (who might have pursued revenue growth to bump their valuation for sale), and who were the customer’s primary contact, but who unfortunately have moved on with their proceeds from the sale. This might leave the customer without an advocate, working with a provider who might feel that they have negotiating power because of how much work the customer invested in launching the KPO program. Other customers are multi-sourcing their work around to more than one provider. And still others are choosing to source multiple services from only one provider that they believe is going to be one of the industry aggregators, i.e. not going anywhere.
A just-released study highlights some of the benefits of and shifting views about “knowledge process outsourcing.”
Tekrati, which bills itself as “The Industry Analyst Reporter”, reports in NelsonHall Study Links KPO with Market Entry and Product Introduction (11 Feb 2008) on a new study by NelsonHall, a BPO analyst firm. Findings of the study as reported by Tekrati include:
Integreon’s experience mainly confirms these findings. We take issue, however, with the emphasis of data crunching skill over industry specific skill. In our work for leading financial institutions (e.g., investment banks, private equity, and hedge funds), we find it critical that our knowledge workers have deep financial market know-how. We hire experienced analysts and regularly provide intensive, industry-specific training. Separately, we think the growth rate, high as it may seem, is probably on the low side.
February has been a banner month for comprehensive reports of business and knowledge process outsourcing. The three new studies have something for everyone, whether you are provider, a customer, running a captive, or developing government policy related to outsourcing. I’ll briefly list the studies and expect my colleagues will have more to add in the near future.
Why Settle for Less? Deloitte Consulting 2008 Outsourcing Report provides an overview of outsourcing trends. It finds that overall, customers are happy with outsourcing but that many customers do face problems. “Themes of unrealized potential and lost opportunities echoed throughout the survey results.” This leaves performance improvement opportunities on both sides of the table, which requires closer cooperation. The report is broken into five “dimensions:” Rightsizing the Deal, Build a Solid Foundation, Vendor Selection Now Means Something Different, Striking the Deal, and After the Deal is Signed. This report offers some good practical “how to” advice for effective outsourcing.
KPMG’s Knowledge Process Outsourcing (KPO)- Unlocking top-line growth by outsourcing “the core” is a deep dive into knowledge outsourcing for financial services companies. This report is so rich in analysis that it’s hard to know where to begin. It discusses in detail the shift from “cost arbitrage” to “intellectual arbitrage” and the shifting boundary between “outsourceable” and “on-outsourceable” activities. This is an excellent follow-up to our prior post about Infosys in making clear the big difference between business and knowledge process outsourcing.
NASSCOM’s joint study with Everest, India BPO Study (free registration required), is focused on what India needs to do maintain its fast growth in business process outsourcing. It suggests that the bigger future opportunities for the Indian BPO sector lie in higher value, knowledge-intensive services.
© 2012 Integreon or all of its affiliates. All rights reserved. Sitemap | Terms & Conditions | Disclaimer Regarding Practice of Law | Privacy Policy
