What does Back & Middle Office mean in Investment Banking?

It is normal to get excited by the prospect of working at a bulge bracket IB firm especially when they come to your campus for interviews or you get a call from a headhunter for potential opportunities. However, sometimes it may so happen that you realize as part of the recruiting process that the role being is either with the ‘Middle office’ or ‘Back office’. We try to provide a broad overview of each of these roles below.

What are Middle Office roles?

• Middle office roles generally refer to roles (especially at the junior levels) with revenue-generating teams, commonly referred to as “profit centers” of the firm (Eg – investment banking division, derivative trading, portfolio management, asset management etc.).
• These junior roles get outsourced to countries (typically emerging economies) where the cost arbitrage driven by savings in employee costs is meaningful.
• This practice is most common in investment banking jobs, which involve a substantial amount of heavy lifting by the junior team (e.g., preparing pitch books, making IMs and financial models, preparing data for diligence) without necessarily requiring face time with the client.
• As a result, it makes financial sense for a large bank to set up an office in an offshore location to support the front office teams globally. For a bank which operates in all major global markets (think NY, London, Hong Kong, Singapore, Dubai, Australia), it is cost effective to create one office in a country like India and set up a team of 60-80 analysts who can support multiple teams in each of these geographies at a lower cost base.
• Even after paying competitive salaries by local standards, most global firms end up saving substantially in payroll costs as compared to employing the same number of employees directly in the operating markets.

What are Back Office roles?

• Large global banks and financial institutions have multiple teams dealing with complicated financial products (investment banking, trading, corporate credit, capital market issuance, portfolio management etc.) across different markets.
• This brings a very high degree of compliance and accounting requirements for these firms. Most large banks are also listed in highly regulated markets like the US and London, which brings its challenges in terms of quarterly reporting to the exchanges and exposes them to audits from multiple federal agencies.
• To overcome these challenges, the banks need an army of compliance, accounting and legal teams. Similar to the concept of middle office, global banks often centralize all the compliance and accounting work in one low-cost geography to drive economies of scale and enjoy arbitrage in employee costs.

Back office roles focus on:

• Accounting (closing books of accounts, preparing financial reports, conducting internal audits, coordinating with statutory auditors etc.), 
• Compliance (filing reports, preparing compliance statements, keeping checks on front office teams, reporting deviations to regulators etc.) and
• Operations (ensuring record keeping, posting regular accounting entries, maintaining checks and balances, providing back-end support, reconciling data etc.)
• These teams hire candidates from relevant backgrounds – For example, in India, CAs for accounting roles, lawyers for compliance and commerce graduates (BCom / BBA) for operations.
• The job involves coordinating with the front office folks, reporting to the head of respective teams and ensuring business continuity. Career advancement opportunities tend to be vertical, i.e., shouldering more responsibility with the same team rather than lateral (i.e., moving to front office or business roles).
• These functions are generally cost centers and do not generate revenues of their own. Consequently, compensation, expectations and entry barriers are also relatively lower compared to front office roles.
• Firms that have sizeable back office operations in India include Goldman Sachs and JP Morgan. Among the buy-side firms, DE Shaw and Blackrock also have a significant presence.