Few trends in the hedge fund industry have been as dramatic as the outsourcing of middle- and back-office functions. And most of the time, outsourcing means India. So why is one major hedge fund administrator abandoning the subcontinent after just two years?
Citing the difficulty and escalating costs of hiring skilled workers, among other factors, Spectrum Global Fund Administration is pulling the plug on its operations in Bangalore, and will soon transfer nearly 100 middle- and back-office jobs back to the United States. The move, expected to be completed by the end of the year, brings down the curtain on a two-year effort by Spectrum in India and is being seen by some as the start of a much larger migration from India in coming years.
But Shankar Iyer says India’s moment in the outsourcing sun is far from over.
Iyer, the CEO of Viteos Capital Markets, says he is genuinely puzzled by Spectrum's upcoming exit. Iyer finds little evidence of a worker shortage in his native country, even among the chartered accountants who form the backbone of the fund administration business. In fact, he says, Viteos' operations are going so well that it plans to soon open another office in Mumbai, the center of the Indian finance industry.
"It was quite the surprise," Iyer said of Spectrum's departure, noting that universities and professional schools in India continue to churn out huge numbers of chartered accountants each year. Also, he said the country's geographic position between the major financial markets in Asia and Europe makes it an ideal location for doing the books and other administrative tasks for the global hedge fund industry.
Spectrum President Ron Suber explains that while rising costs were a factor in the company's decision to leave Bangalore, the key reason prompting the move was the need to ensure quality and customer satisfaction.
"Administration is all about accuracy and on-time delivery," he said in an interview this week. "We want happy clients…it was a tough decision but it was the right decision."
Suber declined to detail how much Spectrum spent establishing its Indian operations, but he said the firm currently is working to find other jobs for its Bangalore workforce. The company was "fortunate to find the talent we need in the U.S.," he said, adding that he would not be surprised if executives at other firms that have shifted operations overseas make similar decisions in the future.
"I think if you asked them candidly, most would admit that it is not working out as well as they expected," he said.
From his perspective, Iyer said if there is a problem being based in India, it may be the nine-and-a-half hour difference between it and New York. For example, completing after-market reports following U.S. trading means convincing employees to show up for work after midnight, and, as might be expected, "it's difficult staffing that shift."
Iyer, however, tackles that predicament by keeping about 20 of Viteos' 160 employees at its corporate headquarters in Somerset, N.J. Another 125 work in India, with most of the remaining employees in the Cayman Islands, home to about three-quarters of the world's offshore hedge funds.
Covering The Globe
Viteos, which began as the business process outsourcing arm of Bangalore-based Velankanni Software, got its first break in early 2003 when it snagged Goldman Sachs as a client just as the top-shelf investment bank decided to move a portion of its back-office operations out of New York. Viteos now works with 108 funds with approximately $8 billion in combined assets under administration. Revenues are now approaching $10 million a year, Iyer said, an 80% jump over last year.
And fortunately for Viteos, all of its clients so far have dodged the upheaval resulting from this summer's credit crisis, Iyer said.
But challenges remain. The sheer number of North American and European companies that in recent years have outsourced operations to India and other lower-wage countries—either by contracting with providers like Viteos or launching their own subsidiaries—is boosting competition for skilled employees and driving up salaries. Attrition is another problem as workers jump between companies to take advantage of the wage surge. On the macro side, the Indian rupee's appreciation against other currencies (up 10% since March versus the U.S. dollar) further reduces the cost advantages of doing business from India.
Yet according to a recent study by Stephanie Moore, an information technology analyst at Forester Research, the solution to these problems lies in Indian providers finding ways to insulate clients from the higher wages—in particular, by structuring deals and developing new products that ensure clients receive better value even with increased labor rates.
For Viteos, that evolution includes a new strategic partnership with Credit Suisse. Under the deal, signed in June, the Swiss bank took a 20% stake in Viteos, which will perform certain prime brokerage services for CS in addition to its outsourced back-office responsibilities.
The recent pact also allows CS to expand its broker relationships with hedge funds and to begin taking on accounting, risk-management and other administrative services, such as calculating net asset value and portfolio reporting independently from its brokerage operations—a critical concern given the intense desire for secrecy among hedge fund managers.
Iyer said the proliferation of hedge fund strategies likewise plays into Viteos' continued growth.
"Back when it was mostly long/short funds out there, the funds could do most, if not all, of the back- and middle-office work internally," he said. "It's when the complexity (of asset classes) goes up that you require more help."
With brokers now stepping up to better handle the changing needs and sophistication of today's hedge funds, there has been a corresponding surge in acquisitions of fund administrators. In May, for example, Citigroup paid $670 million to purchase the investment services division of Bisys Group, while State Street Corp. recently scooped up IFS and Investors Bank & Trust.
Both Viteos’ Iyer and Spectrum's Suber said they are expecting more deals involving fund administrators, especially among the smaller and mid-sized firms.
"Those $10 million to $80 million a year firms are just ripe for acquisition or consolidation," said Iyer, later noting that at Viteos, "We see ourselves more as being the acquirer rather than the acquired."
Suber said he also has fielded the occasional call about a deal, although he strongly asserts, "We are not for sale."
By Dave Price