Relocating back office functions to offshore processing hubs has become common for large asset managers in Asia. Nicholas Pratt looks at some notable examples and the most popular offshore locations.
One of the most conspicuous campaigns in the Asian asset management industries in recent years has been the effort to increase the level of automation, especially in the processing of funds and back office functions.
For many years, the relatively low cost of labour has been cited as the main reason for the current reliance on manual processes and reticence to fully invest in automation.
However, labour costs have been steadily increasing. This is especially the case in fund centres such as Hong Kong and Singapore – where property prices have been increasing significantly but also in traditional offshoring centres such as India and parts of China.
This has led many asset managers to not only embrace the greater use of automaton, but to also consider offshoring their back-office processes to low cost locations.
Consequently, there are very few of the large asset managers in Hong Kong, especially those that have a distribution arm, which will perform any of their processing there.
Similarly, any of the asset managers that have outsourced their processing to an asset servicer will find that their outsourcing provider has also taken those functions to an offshore processing hub.
This trend has created an opportunity for a new type of domicile to establish themselves as regional processing hubs for the asset management industry.
The traditional offshoring centre in Asia was India, but increasingly asset managers are looking elsewhere. The capital of Philippines, Manila, has a relatively low cost of labour, but high technology expertise.
Dalian in northern China has developed a similar reputation for IT excellence, but without the high cost of labour evident in Shanghai or other parts of China.
It also has the benefit of Mandarin and Cantonese speakers, as well as Japanese language capability among locals for those investment managers with a high number of funds located in Japan.
Taipei in Taiwan also has the benefit of Mandarin and Cantonese speakers, with lower labour costs than China.
Another popular location is Cyberjaya in Malaysia. It is a key part of the Multimedia Super Corridor, a special economic zone in Malaysia that was launched in 1996.
|FIDELITY WORLDWIDE INVESTMENT – DALIAN, CHINA
Global asset manager Fidelity Worldwide Investment established its Dalian office in August 2007 in order to carry out back-office functions for the company.
Since then it has grown in terms of both people – from 15 to more than 400 – and to seven functions.
Systems development and support for Asia includes development and support of Asia’s content and transactional websites, web and mobile tools, processing tools for operations, client reporting and management reporting. Systems infrastructure support for Asia includes end-user support, service desk, IT asset management, IT security, release management, threat management and server as well as network support.
Investment services and fund accounting for Japan provides investment and fund accounting services for Japan business.
Retail operations for Fidelity Asia provides operations support to Japan, Korea, Singapore, Taiwan and
Finance accounting services for Fidelity Asia supports six regions – Australia, China, Hong Kong, Japan, Korea and Singapore – for the Asia Pacific’s accounts payable as well as travel and expenses functions. Investment research support for Fidelity Asia provides support to research analysts who are predominately working in the China, Japan and Korea.
Central management is a small team providing human resources, corporate services, business finance and oversight support to the entire Dalian office.
When explaining the choice of destination, the reasons given are familiar – not so much the relatively low cost of labour but the quality of the local resources available.
“Dalian is an attractive location for us due to its skilled workforce and good local infrastructure,” says Peter Yandle, head of corporate affairs at Fidelity Worldwide Investment.
“We feel well-supported by the local authorities.”
There are, however, no immediate plans to extend the service beyond the activities listed above, says Yandle.
“While our staff numbers and the range of activities that we undertake in Dalian have grown a lot over the last few years, we have no plans for significant additional expansion for the time being.”
The cost of processing is significantly lower in Cyberjaya, when compared with Singapore, and there is a high number of English and Chinese speakers.
RBC Investor Services has a processing hub in Cyberjaya, as does HSBC, which has set up its processing hub HSBC Electronic Data Processing (Malaysia) in
The increased trend for offshoring will create some issues in the future, though. As is the case in other industries, the practice of relocating jobs can be a highly sensitive issue.
|MANULIFE FINANCIAL – MANILA, PHILIPPINES
In April 2006, Canada-based Manulife Financial established a shared services operation in Manila that provides accounting, back-office and technical services to Manulife Financial subsidiaries worldwide, including its investment management operations. Manulife Business Processing Services operates 24 hours, every day.
The choice of Manila for the investment division focused on value beyond cost reduction through the labour arbitrage, says Ismail Gunes, head of investment division global operation, at Manulife Financial.
“The Asian location and its proximity to many Manulife entities in the region along with a highly qualified, English-speaking labour force were the key elements in preferring Manila over other countries in the region and the globe,” he says.
The group in Manila operates as an integrated part of the global model and provides full portfolio accounting services for all retail and institutional accounts for Manulife, says Gunes.
“In addition, we utilise our Manila operations for some specific functions for our mortgage administration, fund administration, derivatives, finance management, data management, compliance operations and product development and analysis.”
The cost benefits are clear and understood because of labour arbitrage, says Gunes. In addition, Manila provides Manulife the opportunity to create shared services throughout the division and business units in the company.
The group operates around the clock and allows them to serve not our operations in North America, but also in Asia.
And while the labour arbitrage is an obvious advantage, Gunes emphasises that the quality of the services provided by Manila operations is superior to that provided by the local offices used in the past, with close to 100% accuracy, delivering gains and turn-around time, and improvements in productivity and processes.
“We have our own key performance indicators and we measure exceptions and error rates and we have a very good record compared to the local offices of old,” he says.
Part of this, adds Gunes, is down to the fact that there is a dedicated team in Manila that is part of the investment division and part of the company’s global model. “This allows us to have better control of the process,” Gunes says. “We can centralise the operations and build shared services around that.”
There is also a greater level of automation that has helped to reduce errors and exceptions. Prior to the Manila operation, Manulife was operating in 15 different regional offices, all with their own technology platforms. Now the level of automation used for portfolio accounting, reconciliations and regulatory and client reporting has helped to elevate the quality of service, says Gunes.
It is a point overlooked by end-customers who assume that any offshoring projects are motivated purely by labour arbitrage.
“Offshoring does, of course, provide cost savings, but operating models are also changing and becoming much more global,” Gunes says. “Ultimately, it depends how you use offshoring.”
Some may use it purely for labour arbitrage and perform the same function in the same way, but with cheaper labour. That may be an important benefit, but it is only temporary because the labour arbitrage will disappear eventually.
“We have already seen the cost of labour rise in some of the traditional offshore centres in India and China,” Gunes adds.
Another challenge to offshoring has been the political and regulatory resistance in certain domiciles or jurisdictions. There is sensitivity about data leaving the domicile. In Manila, the authorities are more neutral than they are in other regions, such as Guangdong.
There is also a fear that by offshoring, jobs are being taken out of the region and authorities are reluctant to sanction the movement of employment to other rival regions, especially when there is so much competition among Asian regions to establish operating centres of excellence that can act as a hub for Asian operations and in other parts of the world.
“A big part of our offshoring strategy is not to move jobs but to move processes,” says Gunes. “It is not a shift of employment, it is a shift of functions.”
Manulife is expanding the use of its Manila operations to include other group functions in the investment division, although it will not extend to providing services to third parties, instead remaining focused on developing services for internal use.
“Client report production and web page design are two projects in our list today,” says Gunes. “And I am sure we will see more tasks or functions to be operated in the future from our Manila operations.”
Firstly, the firms involved have to manage the perception among their customers – in this case retail and institutional investors – that such a move can actually improve the quality of processes and is not merely an exercise in cost-cutting.
Secondly, there is a political pressure that has to be managed. Some Asian countries have regulation in place to ensure that funds promoted in the country cannot be processed outside of its borders or that funds-related data cannot be stored offshore.
This could be a particularly important issue in the future development of the much-vaunted mutual fund recognition agreement between Hong Kong and China, which is intended to strengthen Hong Kong’s position as the premier funds centre in Asia by making it the gateway to China’s investors.
If asset managers are forced to process their funds in Hong Kong or China, which is also increasingly expensive in terms of cost, then funds under the mutual fund recognition scheme will become high-cost products.
As one chief operating officer at a Hong Kong asset manager comments, to do everything just in Hong Kong “would be madness”.
©2014 funds global asia