Report Reveals Changing Mindsets Towards Outsourcing in Japan

Asset managers in Japan are changing their mindset when it comes to outsourcing back- and middle-office functions, according to State Street.

In their latest Vision Focus paper, State Street examines Japan’s relatively nascent outsourcing market and sees signs that asset managers are overcoming their traditional resistance to outsourcing non-core operational back and middle-office functions. Japan’s asset management sector has remained static since 2008 and is currently sluggish, but State Street says the longer term is positive. State Street cites a Cerulli Quantitative Update that projects that the Japanese market will reach an estimated US$5 trillion by 2016.

State Street cites several challenges and three options to addressing those challenges. Traditionally, asset managers in Japan have operated their back and middle office functions in house to control the process and ensure operational and reputational excellence. But after more than two decades of recession, the global financial crisis and an aging population, asset managers are seeking greater efficiency. Additionally, greater complexity and increasing regulatory and operational requirements are challenging managers’ ability as well.

The Vision Focus paper offers three options for fund managers in light of those 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 that spoke with State Street agree that outsourcing offers an opportunity to redeploy staff more effectively by concentrating on the investment side of the business, and can enable them to cut costs and unlock resources to focus on core business.

“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.”