MAY 2013
01 Introduction
02 Market Potential
04 Challenges for Japan’s
Asset Management Sector
06 Changing Mindset
08 The Way Forward
The Trend Toward Outsourcing: A Case Study of JapanJapan’s financial services outsourcing market is rapidly evolving. Japan-based asset managers are beginning to embrace the global move by financial institutions toward the increased outsourcing of back- and middle-office functions to manage costs and facilitate expansion in line with global best practices. While Japan’s outsourcing market is at a relatively early stage, it is beginning to overcome a traditional resistance to outsourcing operations, driven by increased pressures to remain competitive in the face of global economic challenges. The new openness to outsourcing means increased flexibility, by reducing asset managers’ ongoing investment in infrastructure and ensuring that the scale required to support expansion is available when required. Equally, outsourcing provides Japan’s asset managers the ability to focus on their core competency and achieve enhanced insights into their performance. Outsourcing is set to play an increasingly large role in promoting growth in the Japanese market.
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THE TREND TOWARD OUTSOURCING: A CASE STUDY OF JAPAN • 1
Japan’s outsourcing market is evolving from a domestic-focused service to one that
is more aligned with global best practices. The market is beginning to overcome a
traditional resistance to outsourcing key operations such as back- and middle-
office functions, driven by increased pressures to remain competitive in the face
of global economic challenges. The new openness to outsourcing offers asset
managers increased flexibility, by reducing their ongoing investment in infrastructure
and ensuring that the scale required to support expansion is available when
required. Equally, Japan’s asset managers are benefiting from enhanced insights
into performance available via outsourcing functions. Outsourcing is set to play an
increasingly large role in the Japanese market, and that in turn offers strong growth
potential for global outsourcing firms.
Introduction
As is the case elsewhere in the Asia Pacific region,
Japan’s outsourcing market is, however, at a relatively
early stage of development. Traditionally, both the asset
manager affiliates of major Japanese financial institutions
and the local operations of international asset managers
have resisted moves to outsource key back- and middle-
office operations. Now, this mindset is beginning to
change as firms face competitive and cost pressures
and become more comfortable with providers and the
services they offer. This trend toward outsourcing is
likely to spread across Asia Pacific as many of the same
drivers of outsourcing in Japan exist in other markets in
the region, such as China.
2 • VISION FOCUS
Despite its size and potential, Japan’s asset manage-
ment sector has remained relatively static in terms of
overall growth since 2008 and the market is currently
sluggish. The longer-term outlook is, however, posi-
tive. Japan has by far the biggest pool of assets under
management (AUM) in Asia — as big as the rest of
Asia and Australia combined. The Japanese market was
projected to reach an estimated $4.2 trillion in 2012,
compared with $2.1 trillion for the rest of Asia and $1.5
trillion for Australia (see Figure 1). The Japanese market
is estimated to eventually increase to $5 trillion by 2016.1
Japan’s domestic asset management sector has largely
focused on Investment Trust Management (ITM) funds
(i.e., unit trusts that are the equivalent of mutual funds
in other markets). Initially, most foreign-owned asset
managers concentrated on helping Japanese pension
funds to invest internationally, but over the past decade
they have also entered the domestic ITM market. The
balance of power in terms of growth has been shifting
away from pension funds into the retail ITM fund market.
Market Potential
1 “Cerulli Quantitative Update: Global Markets 2012.” June 2012.
Figure 1: Asia Pacific: Asset Management Industry AUM by Market
2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 4.6 4.1 4.2 4.2 4.1 4.2 4.4 4.5 4.7 5.0 1.7 1.4 2.0 2.1 2.1 2.3 2.6 2.9 3.3 3.7 1.5 1.2 1.5 1.5 1.5 1.6 1.7 1.8 2.0 2.2
5
4
3
2
1
0 2007 2008 2009 2011 2012E 2013E 2014E 2015E 2016E2010
A JapanB Asia ex-JapanC Australia
Chart Styles: Bar Graph Without Data Label
USD Trillions
E = Estimated Source: Cerulli Quantitative Update: Global Markets 2012, June 2012
THE TREND TOWARD OUTSOURCING: A CASE STUDY OF JAPAN • 3
2 “Japan’s Asset Management Business 2011–12.” Nomura Research Institute Ltd., December 2011.3 State Street Japan Client Interviews, November 2012.4 “BPO utilization expands amid changes in Western asset managers middle office operations.” Nomura Research Institute, January 2011. 5 State Street Japan Client Interviews, November 2012.
While many of the major international asset managers
have a presence in Japan, the local operations of these
non-Japanese institutions are relatively small compared
to those owned by the four or five major integrated
Japanese financial conglomerates, which dominate the
market. International asset managers tend to have a
global operating model in which Japan is generally an
outlier, while the Japanese managers have traditionally
had limited or no operations outside of Japan.
Growing role for outsourcing
This landscape in the Japanese fund market is now
changing, as international asset managers look to
leverage their commitment to Japan by doing more
with their presence in the market. Japanese institu-
tions are also beginning to explore prospects for growth
internationally, according to a recent Nomura Research
Institute (NRI) report. Many Japanese asset manage-
ment companies that already have overseas units are
planning to expand their overseas staff. For large asset
managers in particular, says NRI, seeking new clients
overseas is an inevitable trend.2 Outsourcing is beginning
to play a more important role in the Japanese market to
support this expansion. “We have seen outsourcing of
investment management associated with quantitative
expansion and diversification of investment in overseas
assets,” noted one market participant.3
A key difference in the Japanese market is that local
asset managers have traditionally taken on the task
of calculating NAVs and have not yet significantly
utilized back-office outsourcing.4 However, international
outsourcing institutions are finding that local asset
managers are increasingly willing to forego in-house
control, providing they can be assured that the quality of
services can be maintained and improved, and that local
regulatory requirements are met.
In addition, previously perceived barriers such as
local language requirements and lack of investment
management experience have been overcome through
technological advances and development of well trained
in-country teams staffed with industry veterans.
Clients interviewed by State Street noted that outsourcing
back-office functions had enabled them to cut relative
costs and ease seasonal business fluctuations. “These
services have fundamentally changed the operating
model of our Japanese subsidiary,” said one client.5
Increased competition is encouraging Japan-based
firms to align with global best practices, reinvigorating
the market for outsourcing.
Japan’s asset management industry faces a number
of challenges that are compelling asset managers
to consider outsourcing as a way of enabling them
to refocus on their core investment business to stay
competitive. Many of these challenges are shared
by asset managers in other Asia Pacific markets and
around the world.
The domestic Japanese economy hovered on the edge
of recession throughout the 1990s and early 2000s
before showing signs of recovery around 2005, then
slipping back into recession mode. Meanwhile, an aging
population is resulting in higher pension payouts that
are eroding pension fund assets. These pressures were
exacerbated by the 2008 global financial crisis and
subsequent global economic turmoil. These challenges
have reinforced the need for asset managers operating in
Japan to attain greater operational efficiencies and have
made them more receptive to outsourcing as a solution.
Many of the current Japanese financial conglomerates
were created through earlier industry consolidation in
the 1990s. As a result, inefficiencies exist in their asset
manager operations, with some institutions having
multiple domestic asset manager affiliates, in some
cases operating independently of each other. They
increasingly recognize outsourcing to a third party as a
potential solution.
Regulatory developments are also impacting outsourcing
in Japan as new reporting and operational requirements
encourage asset managers to consider outsourcing.
The rules around outsourcing are, however, typically
perceived by some observers as vaguely worded and
requiring more clear definition, which has discouraged
some asset managers from outsourcing.
In addition, in 2012 the industry was hit by the scandal
in which AIJ Investment Advisors Co., a relatively small
asset manager, is alleged to have presented false NAVs
to hide poor investment performance and fraudulently
collect a massive amount of client assets, partly via an
offshore entity. In follow-up investigations, Japanese
regulator the Financial Services Agency (FSA) found that
less than one half of the 265 asset managers it surveyed
had commissioned outside auditors to check their
accounts, leading to calls for tighter controls in some
areas of the industry.6 Tighter rules will place greater
obligations on Japan’s asset managers and outsourcing
providers, thereby making the choice of outsourcing
provider increasingly critical.
Regulatory environment
As noted, one of the most significant factors affecting
the potential use of outsourcing services in Japan is the
domestic regulatory environment. In the early 2000s,
outsourcing by financial institutions was scrutinized
by the FSA and quite often resulted in administrative
action being taken against financial institutions for lack
of written documents, appropriate oversight and/or due
diligence. The general principles and business practice
around outsourcing were established by the mid-2000s,
and in 2007 the FSA incorporated the requirements of
outsourcing for deposit-taking institutions into the FSA
inspection manual for deposit-taking institutions.
4 • VISION FOCUS
Challenges for Japan’s Asset Management Sector
6 “Shades of Madoff in pension fund scandal,” Nikkei Weekly, March 26, 2012; “Law enforcers urged to probe misappropriation of AIJ’s pension funds,” The Mainichi, June 20, 2012.
7 UCITS Notices: “Undertakings for Collective Investment in Transferable Securities authorized under European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011,” December 2011.
8 APRA. “Draft Prudential Practice Guide - SPG 231 – Outsourcing”, December 2012.
However, while it is generally understood that
responsibility for outsourced activities remains with
the outsourcing asset manager, a key concern facing
any manager considering outsourcing is the level of
oversight over outsourced activities and due diligence
that will be required. Because of this, some asset
managers not familiar with outsourcing have considered
the outsourcing of back- and middle-operations to
be impractical. Another factor that may have stalled
acceptance of outsourcing is that, prior to the global
financial crisis of 2008–2009, there was no player in
Japan able to offer full services in the area of back- and
middle-office operations. As a consequence, until the
extended global downturn in the asset management
business over the past few years, asset managers in
Japan had little incentive to challenge the status quo
and proactively initiate outsourcing, even as their global
competitors embraced the concept.
The requirements in the FSA inspection manual are
in principle similar to those in other major financial
markets in the world, where outsourcing is an accepted
and regulated practice, and governed by specific
rules and frameworks. For example, in Europe, there
are strict definitions as to how outsourcing can be
implemented. For collective investment schemes (CIS)
in Ireland, regulations governing Undertakings for
Collective Investment in Transferable Securities (UCITS)
stipulate that the ultimate responsibility for the proper
management of the risks associated with outsourcing
lies with the administration firm’s senior management,
and that outsourcing arrangements can never result in
the delegation of senior management’s responsibility.
The outsourcing of core management functions —
such as setting the risk strategy, the risk policy and,
accordingly, the risk-bearing capacity of the firm —
and the final responsibility toward clients and the Irish
Central Bank must not be outsourced.7
Another example is the Australian Prudential Regulation
Authority (APRA), which that has issued a prudential
standard and a draft prudential practice guide on
outsourcing for superannuation or pension scheme
service providers related to outsourcing. The outsourced
activities include administration, custody arrangements,
investment management functions, business continuity
planning arrangements, marketing and arrangements
with financial planners and fund promoters, and the
internal audit function. The standard requires that,
among other things, consideration be given to the
adequacy of resources of a service provider, business
continuity management arrangements and oversight.8
There has been discussion of possible changes to
Japanese regulations to make it easier to outsource
operations. Some industry participants recommend
clarification of the scope of activities permissible for
outsourcing by asset managers. However, in discussions
at the Investment Trust Management Working Group
(ITMWG) of the Financial System Council, the FSA
made it clear that outsourcing is permissible by ITM
companies under the current regulations.
The ITMWG notes that both the Financial Instruments
and Exchange Act (FIEA) and the Act on Investment
Trusts and Investment Corporations (ITM Act) prescribe
the scope of investment management that ITM
companies can delegate to third parties. But it also
recognizes that there is no regulation under FIEA with
respect to the outsourcing of other activities by ITM
companies to third parties, and therefore, some industry
participants still argue that it is unclear whether or not
ITM companies can outsource such activities. According
to the FSA, the fact that there is no specific regulation
under the FIEA or ITM Act means that ITM companies
can outsource such activities. The working group asked
that it be made clear that outsourcing activities other
than investment management was permissible.
Notwithstanding this, Japanese and foreign-owned
investment managers have been outsourcing limited
administrative functions for a decade or more, NAV
calculation being one example, and more recently there
has been quite extensive outsourcing, particularly by
foreign-owned asset managers in Japan.
THE TREND TOWARD OUTSOURCING: A CASE STUDY OF JAPAN • 5
Outsourcing services firms have had to address a
number of challenges in the Japanese market, including
an established tradition of keeping back- and middle-
office operations under in-house control, stemming from
fears that outsourcing will result in a lack of end-to-end
control that may cause reputational damage.
But there is now clear evidence of a changing mindset on
the part of Japan’s asset managers. As the market responds
to the impact of the recent global economic challenges,
domestic asset managers have become more receptive
to outsourcing. Some asset managers are proactively
looking ahead at a continuing tough environment and
are investigating outsourcing as a way to support their
business in the event of a prolonged downturn. They are
seeking alternatives to devoting significant staff and costly
technology investment to upgrading and integrating back-
and middle-office services.
Big domestic asset managers that are looking to
respond to current market pressures through further
consolidation and scaling up of operations are beginning
to realize the difficulties and costs involved in trying
to integrate their multiple back and middle offices. In
addition, many stand-alone domestic asset managers
also recognize the need to invest significantly in systems
and staff to remain competitive, and are questioning if
these investments are the best value for money in the
current environment. As noted earlier, Japanese asset
managers are now pursuing opportunities overseas,
and can benefit from the scale and local knowledge of
outsourcing providers to support these ambitions.
While outsourcing does not necessarily represent an
overnight reduction in costs, it can deliver significant
long-term benefits by removing the need for ongoing
investment in technology and staff over the long term.
International firms helping drive change
The drivers toward outsourcing and the pressures to
consider outsourcing are the same among all managers,
whether they are affiliated with major Japanese or
international institutions. However, growth in the use
of outsourcing has initially come from investment
management firms with affiliations both inside and
outside Japan. During difficult economic conditions,
these organizations have been the first to feel the
pressure to achieve greater economies of scale when
operating in Japan.
They have also experienced in other markets the
operational efficiencies that outsourcing can offer.
In turn, their experience is helping fuel a changed
approach on the part of domestic asset managers.
One example of how the environment is responding is
the inroads made by outsourcing companies in meeting
back-office needs such as NAV pricing. These needs
have traditionally been met in-house, by Japanese
trust banks or by a small group of local research/IT
players that have provided this service in a data entry
capacity. International outsourcing providers initially
offered trustee services to Japanese pension funds, but
have evolved into such areas as providing ITM fund
valuation services, and a variety of operational and
reporting outsourcing services.
Service providers are now providing specialized reporting
and governance packages, and intraday, daily, monthly
and quarterly critical management reporting. In some
6 • VISION FOCUS
Changing Mindset
9 State Street Japan Client Interviews, November 2012.10 “Japan’s Asset Management Business 2011–12.” Nomura Research Institute Ltd., December 2011.11 State Street Japan Client Interviews, November 2012.12 “Japan’s Asset Management Business 2011–12.” Nomura Research Institute Ltd., December 2011.
areas they can offer an improvement on the services
that have traditionally been available in the market. The
major Japanese domestic asset managers are aware that
the market has been transformed over the past five years
and are conscious that some competitor international
companies operating in Japan are outsourcing their
back- and middle-office operations.
Clients interviewed by State Street in Japan referred
to the “huge impact” that the entry of foreign
outsourcing suppliers has had on the market.
According to one Japan-based asset manager, their
services and products have “significantly lowered
the hurdle of using outsourcing service providers for
Japanese financial institutions, and especially asset
management companies.”
Asset managers are recognizing that outsourcing firms
are making it easier for them to realize significant
operational efficiencies. In addition, clients noted that
Japan’s outsourcing industry was becoming more
competitive, with some domestic firms seeking to
expand the scope of their services. One respondent
noted that foreign service providers were more solutions-
oriented than domestic outsourcing firms, which in turn
was having an impact on the market.9
Incentives to outsource
Japan’s asset managers realize they face three options
in addressing their current challenges:
• Continue to fight for share in a domestic market that
shows no signs of immediate improvement or growth
• Look for ways of increasing operational efficiencies
and reinvigorate their focus on their core business of
investment management
• Diversify into other markets and asset classes
Each of these options provides an incentive to examine
the benefits of outsourcing. Addressing the overall cost
base is a major driver. Staffing costs are a key element
for Japan’s asset managers, especially in a market that
traditionally followed a policy of lifetime employment,
resulting in large headcounts. Personnel costs are
the biggest expense for Japan’s asset managers and
personnel cost containment has become a major theme
for Japanese management.10
Outsourcing offers the potential to redeploy staff more
effectively by concentrating personnel on the investment
side of the business, while back- and middle-office
functions are increasingly outsourced. “Outsourcing these
functions enables us to cut relative costs and to achieve
partial conversion of fixed costs to variable costs, as well
as remove an impact on the quality maintenance due
to the change of staff and systems,” observed one asset
manager.11 In a recent survey, Japan’s asset managers
predicted headcount decreases across all organizational
functions, with the exception of overseas operations.12
Thus, as a result of the recent market challenges,
Japan’s asset managers are increasingly beginning to
reach out to outsourcing providers, to provide both back-
and middle-office services for Japanese operations.
However, subsidiaries of international asset managers
are not the only ones leading the way; some Japanese
companies have also been early adopters. For example,
Nikko Asset Management, a large domestic player
previously controlled by Citigroup and now owned by
Sumitomo Mitsui Trust Group, was one of the first major
Japanese companies to opt for significant outsourcing.
Significantly, some asset managers are now looking
for service providers that can manage their back- and
middle-office functions, and free up resources that
can be focused on their core business of investment
management. And, 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.
THE TREND TOWARD OUTSOURCING: A CASE STUDY OF JAPAN • 7
13 State Street Japan Client Interviews, November 2012.14 “BPO utilization expands amid changes in Western asset managers middle office operations.” Nomura Research Institute, 2011.
8 • VISION FOCUS
Japan’s asset managers cite a number of recent drivers
of change in the industry, including increasingly fierce
competition for customized operations due to diverse
client needs and operational schemes. They also
note the need for more flexible structures to provide
services because reporting and disclosure have become
increasingly important.13
The flipside is that it is not enough for outsourcing
providers to offer breadth of capability, flexibility and
global best practices in Japan. This approach must be
offered in the context of a service that meets local market
standards around accuracy, timeliness and quality. For
example, State Street operates its outsourcing services
through a local trust bank structure in Japan that enables
it to provide appropriate accountability for the firm and
confidence for the client in this market.
Japan’s asset managers who have begun to use
outsourcing services report a number of advantages,
including the ability to cut internal fixed costs, improve
speed and accuracy, reduce the requirement to
continually update supporting technology infrastructure,
and free up resources to focus on core asset management
activities and improve scalability — both up and down —
in response to market trends.
Through more widespread adoption of outsourcing,
the Japanese asset management industry can poten-
tially access global best practices to enable funds to
become more efficient and competitive. This would make
Japanese firms more competitive locally and overseas.
Here, the choice of servicing partner is a critical one (see
sidebar, page 9).
Japan’s outsourcing market has few barriers to entry,
in that no specific license is required and any company
can offer outsourcing services. A number of domestic
Japanese firms that are essentially focused around data
services, investment research and IT services provide
partial solutions in the outsourcing space, offering only
limited business process outsourcing services as a
corollary to their systems provision.
However, the asset management industry requires a
significant and continuing level of investment. Thus
some Japanese asset managers have come to the
conclusion that they are better off using an outsourcing
service provider’s optimal, up-to-date infrastructure, while
retaining and redeploying their own human resources
more effectively.14
The Way Forward
THE TREND TOWARD OUTSOURCING: A CASE STUDY OF JAPAN • 9
Japan’s outsourcing market has begun its evolution
from a domestic-focused service to one that is more
aligned with global best practices, and this trend
can be expected to continue. 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.
Japan’s asset managers can facilitate growth by reducing
their ongoing investment in infrastructure, freeing
up resources to develop new product offerings, and
expanding into new international markets. Importantly,
outsourcing offers asset managers the capabilities to
deliver greater administrative complexity and achieve
enhanced insights into their investment performance
and exposures. Outsourcing is set to play an increasingly
large role in a Japanese market that offers strong
growth potential.
Asset managers seeking to outsource key back- and middle-office functions should consider
whether a service provider offers the following:
• Strong operational qualities including accuracy, efficiency and quick-response capabilities
when regulations are changed or new products are developed
• Strong monitoring, supervision and risk management procedures
• Proven track record, financial strength, substantive global resources and commitment to
building long-term relationships based on a client-focused partnership model and cultural
fit, and strong industry knowledge
• Local cost advantages based on global scale, with transparent cost structures featuring
competitively priced solutions that can be easily modeled out for forecasting purposes
• Demonstrated commitment to technology investment in scalable, flexible and risk-sensitive
platforms, with expertise in managing operations across multiple systems, available to asset
managers at a competitive cost
• Access to technologies, best practices and expertise proven across a wide client base
• Client service characterized by proactive and cost-effective problem-solving, clear
accountability, and a stable account management team strongly oriented to client needs
• Strong disaster recovery systems utilizing multiple offices and virtual desktop infrastructure
Best Practices for Outsourcing Services
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Contact Information
If you have questions regarding State Street’s outsourcing services
for asset managers in Japan, please contact:
Richard Fogarty
+81 3 4530 7204
Akiko Terada
+81 3 4530 7320