Amba: Value Beyond Cost Arbitrage

A financial crisis nor the backlash against offshoring has been able to mute the demand for KPO firm Amba’s services. Its biggest challenge here: talent

By Shamindra Kulamannage.

Published on September 10, 2013 with No Comments

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The panic about Western job losses became a top political issue when the financial crisis that started in the US in 2008 sent unemployment soaring above ten percent. The backlash against bankers, government axing of crucial regulation and irresponsible borrowers who together precipitated the crisis was quickly accumulating other scapegoats. Anxiety about outsourcing overseas and its impact on Western jobs was seized on by politicians. They are proposing to offer incentives to firms that bring jobs back.

However the business logic for outsourcing remains compelling. Business managers have a responsibility to maintain a healthy return on investment over the long term. For decades businesses have been contracting out non core activities like mopping the floors, emptying dustbins and answering telephone calls. Contracting to specialists who can perform these functions well, and often at lower costs, allows firms to focus on their core strategy. But outsourcing isn’t limited to janitorial services or assistance that can only be contracted out from other businesses in the same neighborhood.

Increasingly jobs being outsourced and offshored are no longer limited to low level component manufacturing or call center operations. Often they are outsourced or offshored to countries half a world away. Nor are service jobs only going to India and manufacturing to China. From South and Eastern Asia to Eastern Europe, places where wages are lower and skills abundant have emerged as centers creating thousands of new positions.

However implausible, the argument that Western firms owe a debt of gratitude to the nations where their businesses were built and skills honed gathered momentum in the shadows of the financial crisis. Over the din of these critics, outsourcing has transformed businesses. Manufacturing firms have wider supply chains and service companies have efficient back offices, all at lower cost.

While goods trade feely around the world, services don’t because those offering them had to live where their skills were needed and travel restrictions prevented that. So firms that have been able to open opportunities for developing world citizens to integrate to global demand for services have created tremendous opportunities. Costs arbitrage varies depending on the level of service being offered.

“The cash cost savings is probably not as great as at the time of the big labour arbitrage back in 2003 but the value addition has increased at the same costs,” explains Chanakya Dissanayake, pointing out that a number of competing demands are added to the mix. Firms like Amba Research, which provide high level investment research and analytics support to clients where Dissanayake is a Director and heads the Sri Lankan operation, estimates the industry offers clients at least a 30% cost saving. “They are also getting more value for almost the same price,” Dissanayake says comparing the economics of the industry from a decade ago.

The financial crisis in 2008 was a moment of reckoning according to Sanjay Kulatunga, who is Vice Chairman of Amba’s Sri Lankan operation. “It wasn’t about us anymore, it’s them. Do they have the capacity? And will they continue, or pull back?” he recalls wondering. The financial crisis started unfolding at a time when a backlash against outsourcing by US firms was reaching a crescendo. Politicians were proposing legislation offering tax breaks to firms that don’t send American jobs overseas. Kulatunga, who had convinced Amba founders to locate their first offshoring center in Colombo a little over five years ago then, started wondering how deep the crisis was going to hit the business.

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Amba Research was founded a decade ago at a time the first wave firms taking up high skilled off shoring work were emerging. Its first research center in Colombo now employs 250 mostly financial analysts offering services to investment banks, private equity firms and portfolio managers and also provides deal structuring, compliance and shared services support to the global financial industry.

“We went slow on new recruitment for some time and we did face a contraction of our business in the immediate aftermath of the 2008 crisis,” It took a few months after the first tremors of 2008 and the Lehman Brothers collapse, but the ground beneath soon started shaking violently. “We didn’t recruit new people to replace the ones that were leaving, and for about a year we were badly off,” he admits. It focused on opportunities outside equities and sought out opportunities in debt markets. “While we saw very few growth opportunities post financial crisis in equity, we got lots of work in distressed debt analysis because the great thing about capital markets is that when one asset class starts underperforming there are other asset classes to where capital shifts,” recalls Dissanayake.

Q2Post crisis global capital market players are also under cost pressure and regulatory restrictions have limited the amount of returns investment banks and asset managers can generate. By the time the crisis hit, Amba had already emerged as a serious medium sized contender for outsourced capital markets research and analytics work alongside other Knowledge Process Outsourcing (KPO) firms like Copal Partners, Irevna and Evaluserve, some of them subsidiaries of major credit rating agencies.

Amba itself had global capital market pedigree from its founders Andrew Houston, Mohan Alexander, Brad West and Anand Aithal, the first letter from their names being the source of the acronym Amba. All four of them have held managing director level positions in global investment banks prior to forming Amba.

KPO operators like Amba are in an elite league of their own. The little leaguers are the call centers and back office processing offices. These ventures haven’t been as successful in Sri Lanka as they have been in India because of the profusion of job seekers who can be put at the other end of a receiver as soon as they can be taught to aspirate vowels the American way. A step up are the firms handling professional services outsourcing like legal, accounting and medical diagnostics. Amba type KPO firms occupy the top tier. Since its founding a decade ago Amba has admirably clawed itself up the value chain. Their teams are often integrated with their investment banking and asset management clients. “For example we provide an integrated team for a European bank that we work with which works with their equity research analysts, fixed income research analysts, investment banking analysts and also we support them on their actual report publication cycle,” according to Kulatunga who was with investment bank Jardine Fleming in Colombo and Hong Kong where he first met some of Amba’s founders. “It’s an integrated end to end solution that we provide as an extension to their onshore analyst teams.”

Chanakya Dissanayake is upfront about the two major economic trends forcing KPOs up the value chain. In an industry that would not exist in Sri Lanka if not for the cost arbitrage, the difference is narrowing. Firstly the cost of local hires is rising. “Due to very rapid economic growth in South Asia professional salary levels specially at the top 10% of the people we recruit have gone up because people have choices, they are a very mobile professional workforce that have opportunities in this region,” Dissanayake points out. Secondly because of slower global economic growth financial sector compensation growth has stagnated or has declined in some markets. These two opposing trends are narrowing the cost arbitrage opportunity that global investment banks and asset managers seek in their relationships with KPOs. Amba also has research staff in offices in Costa Rica and Bangalore, in India and employs over 900 people worldwide, 700 of whom are analysts. A second reason why global investment banks and asset managers choose to work with KPOs like Amba is the ability it affords them to quickly respond to market changes by hiring specialist teams quickly. In times of crisis the reverse is also true; the ability to cut costs without the demoralizing effect of mass layoffs.

Q1Soon after its launch in Sri Lanka, Sanjay Kulatunga convinced the board to hire then Fitch Ratings Lanka Chief Executive Ravi Abeysuriya to head the local operation, “I remember telling my partners  ‘If you don’t brand Amba along with John Keells you won’t be able to scale this’. Having Ravi here at the start gave the youngsters an impression of stature in the industry and we created awareness,” Kulatunga says.

In Sri Lanka a major constraint for Amba’s growth is the skills availability. Most of its hires are fresh graduates and passed finalists of the local and UK accounting bodies. The head of training and knowledge management Aruna Perera points out that fresh graduates often require to be coached on financial forecasting.  “Accounting qualifications teach them financial statement analysis, but they are unable to make a forecast and communicate that concisely and articulately without intense training,” he outlines the challenge. Amba conducts almost eight weeks of boot camp style training before placing the young graduate hires to work with clients.

ChanakyaChanakya Dissanayake, who was heading strategic initiatives at Amba Sri Lanka before his appointment as country head in early 2013, initiated partnerships with local universities. He believes as these partnerships deepen, Amba will be able to keep pace with the Indian operation, which despite having started after the local one, is more than double the size. “We need to work with organizations that have a trainable talent pool available like universities and professional accounting bodies and their best students,” he says. “If we have a better supply of globally marketable talent we can shift more work to Colombo. We aren’t short of growth opportunities, talent is the constraint.”

In many ways the top long term challenge remains unchanged. Sanjay Kulatunga recalls brainstorming with the founders at Amba’s then Park Street Colombo office, how the team could be scaled to 40 people. “We are seeing that there are certain difficulties in recruiting on an urgent basis. So I think the main thing we need to do in terms of addressing the market training is actually training the university students and final year professionals on the entire capital market. I think that is the key. My passion is to make Amba Colombo the biggest in the network,” Kulatunga stresses.

Amba managers believe the supply of talent for the knowledge services industry will drive the ability to do more business. They are encouraging Sri Lankans living overseas who have capital market experience to return to the island. Many already have. Back in 2005 Amba established a quantitative services unit where a number of these returnees have worked.

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Chamara Gunetileke heads the quant analytics division at the Colombo office, that applies statistical and mathematical methods to built portfolio optimization and risk management models forecast the price of securities. He says attracting math and engineering graduates to the division is an ongoing challenge. “A lot of people don’t choose maths as a subject fearing they won’t be able to get a job interview,” he says. “But Amba is one place they can use what they have learnt in their day to day work.”

Jehan Jeyaretnam, Amba’s global head of new projects, who has been with the firm eight years says that clients now are less patient and don’t want to spend time training people from their outsourced teams. Jeyaretnam is the first from Amba to meet new clients, once they have been signed on, to spec and set up new engagements. Once that is accomplished he hands over the work to the team and moves on to the next new engagement. All this is an indication that Amba has come a long way in adding value beyond simple cost arbitrage.

Demand for Amba’s services are back to pre financial crisis levels. Despite the general hollering against the offshoring, the trend persists because it makes economic sense. Firms at the vanguard of the trend, like Amba, add the greatest possible value per employee in the business. But it’s impossible to resist a trend when its promoters are as dynamic. “We have evolved to cover all the areas,” says Kulatunga. “We do everything from credit research to fixed income to derivatives, because we have the knowledge and the traction now to be world class.”

 

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