The financial research outsourcing (FRO) industry, which is largely driven by the banking and financial services industry was deeply impacted by the recent global financial crisis. The crisis triggered widespread losses across the banking and financial services industry followed by a drop in contracts from the banking and financial services sector. This adversely affected many FRO service providers with some even shutting shop. However we found that a section of the FRO players emerged stronger, developing multi-sourcing, multi-locational delivery capabilities.

Shifting Focus

Traditionally, the trend has been to outsource research support and basic modeling/quantitative research functions but the research impacting strategic decision-making was retained in-house. Financial research emerged as a high potential segment that picked up steam in the last four to five years. Most of the large India based BPOs including Genpact, Infosys BPO, TCS, WNS, already handle some research and analytics work aside from the regular business process outsourcing work. These companies added the research aspect primarily as a value addition to their services portfolio. Alongside these large service providers, several pure play (Research and Analytics) R&A companies also emerged. Notable among these are Copal Partners, Aranca, Adventity, Irevna and Amba Research.

Over the last two years, mid-sized and smaller service providers (especially those heavily dependent on banking and financial services industries) were worst affected by margin pressures. While the large BPOs have been able to de-risk themselves by shifting their focus to other areas, many smaller service providers experienced short-term hiccups in terms of workload and had to downsize. But a quick look at the five pure play financial research outsourcing service providers indicates that these companies have actually grown steadily despite the slowdown. Most of the players have grown two to four times since 2006 in terms of their manpower size.

Exhibit: Manpower Growth

Currently, service providers earn a large share of their revenues from the US market. However, with the slowdown in the US economy, service providers are looking at alternate geographies like Europe, and the Asia Pacific. For instance, Irevna set up a new delivery center and a client relationship office in Paris and Poland in 2008-09. Last year, Irevna also set up another client relationship office in Hong Kong. Similarly, during 2009, Copal Partners opened a research center in Beijing and a business development office in Hong Kong.

Further, over-dependence on banking and financial services verticals hurt several pure play service providers. Several providers are now making aggressive efforts to de-risk their business and diversify their client base. Companies are looking at customer segments and verticals other than banking and financial services.

The Road Ahead

While the downturn resulted in a short-term negative impact on growth of the outsourcing industry, the long term outlook for financial research outsourcing looks positive as the global economy walks on its road to recovery and outsourcing becomes strategically important for the financial service providers.

Service providers are maturing rapidly and have acquired the financial, managerial and operational capabilities to build and run centers at multiple locations globally. Some vendors have clearly laid down strategies to build capacity (onshore, offshore and nearshore). In line with this trend, service providers are innovating with a focus on "differentiating" their services offerings. Going forward, we believe that service providers offering multiple services to multiple verticals and multiple markets will be better positioned to sustain the growth in this industry.