Japan’s asset management industry opening up to outsourcing
03 June 2013
News, Asia, Japan
By Asia Asset Management
Asset managers in Japan are beginning to embrace the global trend amongst financial institutions toward increased outsourcing of non-core operational back- and middle-office functions to manage costs and facilitate expansion in line with global practices, according to State Street’s latest Vision Focus, entitled “The Trend Toward Outsourcing: A Case Study of Japan”.
While Japan’s outsourcing market is still at a relatively early stage, it is beginning to overcome the traditional resistance to outsourcing key operations, driven by increased pressures to remain competitive in the face of global economic challenges. Outsourcing offers asset managers operational flexibility and allows managers to focus on their core business.
Despite the fact that Japan’s asset management sector has remained static in terms of overall growth since 2008 and is currently sluggish, the longer-term outlook is positive. The Japanese market has by far the biggest pool of assets under management (AUM) in Asia – as big as the rest of Asia and Australia combined. It is projected to reach an estimated US$5 trillion by 2016, according to Cerulli Quantitative Update.
Japan’s asset management industry is facing a number of challenges that are compelling asset managers to consider outsourcing. Traditionally, asset managers in Japan have operated back- and middle-office functions in-house in order to control process and ensure the operational excellence expected by clients in a demanding market where reputation is critical to success. However, more than two decades of recession exacerbated by the global financial crisis and a rapidly ageing population are driving asset managers to attain greater efficiency. In addition, greater complexity and increasing regulatory and operational requirements are providing further pressure on asset managers to consider options including outsourcing.
There is also clear evidence of a changing mind-set on the part of Japanese asset managers. In the face of the global economic challenges of recent years, some international firms operating in Japan turned to outsourcing as a solution. Their experience helped fuel a change in the view toward outsourcing amongst both domestic and international asset managers operating in Japan. As asset managers in Japan look ahead to a continuing tough environment, many are investigating outsourcing as a way to support their business in the event of a prolonged downturn. Others are pursuing growth opportunities overseas, and seek to utilise an outsourcing partner to provide immediate scale and local knowledge to support these ambitions.
Companies interviewed by State Street for this report referred to the ‘huge impact’ that the entry of foreign outsourcing suppliers has had on the market, with one saying that their services and products have ‘significantly lowered the hurdle of using outsourcing service providers for Japanese financial institutions.’
Japanese asset managers realise that they face three options in addressing their current challenges: (1) continue to fight for share in a domestic market that shows no sign of immediate improvement or growth; (2) look for ways of increasing operational efficiencies and reinvigorate their focus on their core business of investment management; (3) diversify into other markets and asset classes.
Companies interviewed agree that outsourcing offers the potential to redeploy staff more effectively by concentrating personnel on the investment side of the business and enabling them to cut relative costs. Thus, Japanese asset managers are increasingly looking for service providers that can manage back- and middle-office functions, and free up resources to focus on their core business of investment management. As Japanese asset managers increasingly look abroad for new opportunities, they need service providers with a combination of global scale and knowledge and expertise in local markets to help them seize these opportunities and make inroads internationally.
“Outsourcing is set to play an increasingly large role in prompting growth in a Japanese market that offers strong growth potential,” the report concluded. “The new openness to outsourcing offers the opportunity to increase flexibility, by ensuring that the scale required to support expansion is available during a period of growth, while hedging the downside risk of excessive fixed costs in the event of an extended downturn."
More News >