Does research outsourcing work for buy-side firms?

buy-side research outsourcingOne of the questions that I have come across—far more than I would expect—is if outsourcing research works at all for the buy-side? Before I go ahead to respond with a resounding YES, and elaborate on my answer, let’s take a while to look at the differences between buy-side and sell-side research itself.

The two main differences lie in the nature of the firms and in the objectives of the research itself. Buy-side analysts are employed by entities, such as mutual/pension/hedge funds that invest on their own accounts. Unlike the sell-side, which includes brokerage firms and independent research providers, research produced by buy-side analysts is usually unavailable to anyone outside the firm. In fact, buy-side analysts often source research from sell-side analysts as a base for their own research.

A sell-side analyst’s focus is on recommending the investment to the firm’s clients, whereas a buy-side analyst would only decide if the investment is suitable for the firm’s investment strategy and portfolio. A sell-side analyst simply decides if the security is a buy, a hold, or a sell. These recommendations are, but naturally, broad (blanket recommendations) and may be inappropriate for certain investor profiles.

A buy-side analyst has an account, fund, or institutional client to serve. In other words, instead of answering the question “is this a good bet?,” a buy side analyst aims to answer: “is this a good bet for client X based on client X’s risk/return objective, time horizon, liquidity constraints etc.”

Going by the above, it should be evident that leveraging a KPO for supporting one’s research needs—be it buy-side or sell-side—is more a question of the provider’s research capability and the element of trust. Buy-side firms often deal with relatively more sensitive data pertaining to clients and investment portfolios, which implies the need to establish robust information security standards and processes. In my opinion, given the “non-blanket” nature of buy-side research, smaller boutique KPO firms/providers work better, given their ability to devote more time and management attention, in addition to a possible specialized focus. What eventually ensures success is the level of trust leading to a shared objective – something that can be made tangible with a performance-linked upside for the KPO firm and the analyst(s), as opposed to a fixed-fee model. After all, a buy-side analyst’s success depends on the number of profitable recommendations he/she makes to the firm and the same should apply to the support team, be it within the firm or outside.

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I wrote this article based on my own experiences while leading Research at Karvy Global Services, a specialized KPO providing outsourced knowledge services and part of India’s leading non-banking financial services group.

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