Politicians may berrate firms outsourcing to lower cost countries, but in the end there’s little they can do about it, says Brian Caplan.
Indian outsourcers can rest easy about the future of their business if the remarks of Mellon Financial Corporation’s chairman and CEO Martin G McGuinn are anything to go by. He dismisses the political machinations in the US as mostly rhetoric that even members of the US Congress realise is unworkable in law.
His comments come at a time when Mellon is moving a significant number of jobs to India – in data processing and software development – and has also opened a call centre in the Philippines.
By the end of 2004, the 250 positions in India (through a mixture of direct employees and use of vendors) will increase to 2000 out of a worldwide total of 21,000. But Mr McGuinn argues that movement of jobs around the world is now a standard part of running a global corporation and argues that the overall success and growth of the business should eventually lead to more jobs in the US not less (see article on Indian outsourcing page 100).
With $3.5 trillion in assets under management, administration or custody, including $657bn under management, Mellon is the eleventh largest asset manager in the world, and – according to figures from FT Mandate newspaper – the sixth in the world in terms of assets under custody, with $2.8 trillion.
Its profits come about half from asset management and about half from security services. But competitive pressures still require that expenses are kept tightly under control, especially in the tough environment of the past couple of years.
“Politically I have argued to legislators that they cannot realistically tell us where we can and cannot do business,” says Mr McGuinn. “Do they mean us not to do business in London or just not in India, and if not in India where else?”
“There has been a lot of rhetoric but when you talk to legislators, they may make a speech about it but they understand it’s pretty impossible to legislate over this.”
“We are moving jobs all the time. We have just moved some jobs from Boston to Pittsburgh [Mellon’s headquarters] We have 2000 jobs in London. Should they be in Pittsburgh or Boston or New York? Well, no, because we see growth opportunities in Europe and we need to be close to our clients. We need to be in different time zones.”
Under political pressure
Continues Mr McGuinn, who in his five years in the top job has overseen a transformation of the bank: “I don’t want to concede we are taking political heat over this. We had inquires from clients who are US government entities [about outsourcing to India] but even they recognise there is a dilemma because on the one hand they are asking for the best services at the lowest cost and they want us to manage the business in a way that produces this, on the other hand they are sensitive to the public and media pressures.”
The great advantage of Mellon is its focus, since a strategic decision was made five years ago to get out of mortgages, credit cards and retail. Now 87% of income is from fees and the bank does not have the problems of managing a balance sheet, like a commercial bank, or of worrying about the impact of deal flow on underwriting fees like an investment bank.
“We want to build on the business mix we have and focus on the execution of our strategy. Acquisitions will continue to be important over time but only in a very opportunistic way. We have no plans to change our business mix, we have no plans to buy an investment bank or an insurance company.
“Europe in particular we see as an excellent opportunity for growth, due to pension reform, and we have made that our number-one priority outside of the US.” With its various businesses (including Newton Investment Management and Mellon Global Investments), the firm has 10 different offices in London that are currently being consolidated into a new headquarters.
Outsourcing and insourcing
In the spirit of the times, Mellon is both an outsourcer of its own functions and an insourcer of other banks, European asset manager F&C Management outsourced its fund administration to Mellon last November and Barclays has recently appointed Mellon European fund Services to provide a wide range of dealing services.
These type of contracts give a substantial boost to Mellon’s earnings and Mr McGuinn describes the former kind, at least, as a “sticky” business, meaning deals are unlikely to be broken.
“The decision to outsource is a major decision and the conversion to different platforms and so forth is such a major effort, that you really have to screw it up [to lose it]. You should be able to retain it because breaking the contract would be such a difficult decision [for either party]. That is why the upfront process involves tremendous due diligence on both sides and is time consuming in getting the contract right, the scope, the pricing, and so on.”
