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— Judgment Call —
Almost in the blink of an eye, the credit crisis ushered in a new era on Wall Street. In a matter of months we've seen the investment banking landscape drastically change: Big names disappeared and major earnings generators evaporated. Wall Street must adjust to a new world of less leverage and lower profits. You can be sure that the bean counters will be licking their chops and one outdated investment banking stalwart has the proverbial bull's-eye on its back: the investment banking analyst program. To some, the analyst program summons up nostalgic thoughts of 16-hour days rewarded with Yankee games and steak dinners. It's a rite of passage akin to military boot camp. To others, those were dark days that served the sole purpose of determining that life's too short for that kind of work-life experience. But ask either of them if the process was efficient and they will uniformly agree the answer is no.
Having spent more than 10 years helping to support Bear Stearns' analyst program, I saw firsthand the euphoric highs analysts felt when contributing to a major deal and the lows of working 120-hour weeks over and over without a weekend off in sight. But I also realized early on that between the cost of the program and a return on that investment was a gaping void. In its most traditional form, the analyst program was meant to train the investment bankers of tomorrow. Analysts would support front-line dealmakers by providing them with a constant stream of pitch books, comp models, company profiles and general library services. And let's be frank, analysts are to be at the beck and call of those they presumably aspire to be. I've seen it at its worst. A late-night "all hands on deck," "work through the weekend 'til you drop" fire drill to pull together a massive presentation. Analysts jumping through hoops to build the 300-page document that would land the deal of the year, all but paralyzing their presentation center to get this one book ready, and in the process working on databases that they haven't yet mastered and therefore don't realize will generate a bill in the tens of thousands of dollars. And after consuming these massive resources? Finding out the next morning that there was a "small miscommunication" in the chain of command; there never was a real need for this presentation. And, of course, I've seen it at its best. Which looks surprisingly like the previous scenario, the difference being that it turns into a successful deal. The point is the model is never efficient, at least not in any way that would be recognizable in any other environment. Perhaps more importantly, at least to bank management, the analyst program is a cost center -- a loss leader that no longer serves its grander purpose. I estimate that a typical analyst position costs a bank $250,000, leading to a program-wide cost of as much as $200 million. This factors in all of the additional expenses from IT support to car services and late-night meals. Clearly, reduce costs here and you add it to the bottom line, not the top. Yes, technology improved efficiency and online data revolutionized corporate library services but at the same time, a strange trend emerged: Investment banking was no longer the only career path chosen by the best and brightest finance professionals. Buy side firms, global consultancies and any number of other financially and intellectually rewarding jobs competed for these individuals. The net effect was that many potential analysts were no longer available, and some even opted out of employment offers. For the first time, investment banks could no longer be sure that analysts would complete their two-to-three year program and recruiting, training and administrative costs went up. And while analysts migrated away, other highly trained and connected individuals flowed inward such as corporate strategists and domain experts. To meet the still growing need for research and pitch books, banks turned to outsourcing as a solution. While Bear Stearns was an outsourcing early adopter and I personally developed many outsourcing "firsts" at Bear, I saw that many other support services could be better managed either by an outsourcing firm, or with an outsourcer's help. It seemed obvious that at some point, many of the services that were traditionally managed in-house would move to outsourcers. I voted with my feet and joined such a service provider. But onshore analyst programs still account for the lion's share of investment banking's support services. In a typical bank, the cost of the analyst program might run between $100 and $200 million. The most outsourced components of the program, today, are the presentation and business information centers, which might run between $10 million and $20 million of the total cost. So even with outsourcing encroaching on the borders of the analysts' world, the model hasn't really changed that much. With banks desperate for earnings and capital, this track cannot be sustained. New models are emerging based on three principles: Good. Fast. Cheap. If a firm wants to change the dynamics of the analyst program it needs to embrace at least one of these principles: Good: Invest in better research for a better pitchbook, and win more deals. Fast: If you have faster turnaround on your books, always arriving first will lead to more wins. Cheap: If you don't pitch, you can't win. Every bank chooses to "let go" of some deals, usually the smaller, less profitable ones. But, lower the cost of these deals through equal measures of outsourcing and analyst program re-engineering, and new profits are possible. As an extra bonus, providing mid-level bankers with inexpensive analyst resources gets them staffed on enough deals to build a reliable pathway to developing senior bankers. The next generation of investment banking support must address these three principles in order to succeed. As for the dealmakers of tomorrow, M&A services will always attract top performers because it is both lucrative and prestigious. Client and investor facing functions will always require person-to-person interaction. Day to day operations won't change for clients, and deals will continue to be global, as will the support teams. Yes, it could be painful for those who yearn for the past and think the analyst rite of passage is useful and necessary. But change has never been easy. Tomorrow's dealmakers need to have a global prospective and embrace the flat world. But change has already happened. Today's senior banker is a
BlackBerry-wielding, laptop-toting road warrior, who will spend less
and less time in the brick and mortar office. It is only natural that
this banker will be supported by a growing network of international
support staff, around the world as well as around the clock. Chris Niccolls is vice president of Integreon Managed Solutions Inc., a global provider of outsourced knowledge support services to professionals. Comments
From: Thom Thom,
Finally, whispers that the HR model in IBD is broken, something that everyone in IBD senior management across the Street knows but doesn't want to admit. Let's start with the analyst program - I actually think the author presses his case too much. Onshore analysts will always be a part of the program. But intelligent use of offshore programs have to start to play a greater role, because the cost savings potential and gains in efficiencies is too great. But close to 100% offshore won't work, simply because a key "soft" component of the analyst programs is that the analysts feel responsibility for getting things right (a must in our industry), and it takes direct interaction with people in the local office to develop this responsibility. I have found that offshore programs lose this critical component, which generally causes work quality and timeliness to go way down. You know how the local Presentation Center doesn't get you things fast enough, because they get to take a lunch break? Now add 7,000 miles and a 12-hour timezone difference to that. An effective offshoring program would include: That being said, there will be certain things that rarely get outsourced, things like, M&A and complex financing models that have high frequency feedback loops - offshore will never work well when the need to turn documents quickly is high. Execution on corporate finance engagements is also a local thing. And let's not forget that analysts do need to learn the key skills, many of which will eventually be outsourced. So this has to be part of the overall program as well. Still, let's acknowledge one of the author's theses: that IBD loses its best people to the buyside and the endless 100-hour work weeks and the inefficiency and occasional stupidity of the process and the prospect of no end in sight to these hours is a key driver of the reduction in talent levels, which brings up the real issue on the Street: the lack of talent and capacity in the mid levels (particularly after the recent layoffs). Coverage officer development is a completely broken process which has created a void of talent across every bank's IBD. Clients will be the big losers over the next several years as there just aren't enough bankers to serve the need. But that's for another article...
Posted on:
December 15, 2008 2:19 PM
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The person who wrote this clearly never worked on the business side of investment banking and has no understanding of the way banking works. Winning business by doing pitch books faster and through more thorough research? What is he talking about? You can outsource creative services, information research and certain other commodity functions, but that's a fraction of what real analysts do. How could you work on a deal with an outsourced analyst with whom you have no relationship and more importantly no face-to-face communications? Anybody who's ever worked on a deal can tell you that it would never work.