Nikko AM targets risk with outsourcing drive
After a period of crisis a decade ago, the chief architect of Nikko Asset Management’s outsourcing push says the restructuring has had a major impact on the firm's operations.
Aside from reducing the Japanese firm’s headcount, chief operating officer Frederick Reidenbach told AsianInvestor that the biggest driver has been risk mitigation.
Reidenbach joined Nikko AM in 2004 as chief finance officer, shortly after Tim McCarthy was named chairman and CEO and Bill Wilder president and CIO. Within six months Reidenbach was put in charge of operations. He now holds the joint role of CFO and COO.
When the trio started the firm was in crisis. Nikko AM had seen its assets plunge by more than half – an investor reaction to a Nikko Securities’ money-market fund that saw its shares fall below face value after investing in Enron short-term paper.
The subsequent overhaul of the organisation between 2004-2006 saw a restructuring of the staff and the start of the process of outsourcing its middle and back office functions.
While some asset managers have multiple back-end service providers, now Nikko AM has just two, one in Japan and one for Asia, which Reidenbach declined to name.
In Japan it outsources everything from after-matching of trades to production of most reports. An acquisitive house, Nikko AM has also been able to migrate its recent industry purchases – DBS Asset Management in Singapore and Tyndall in Australia/New Zealand – on to its single platform.
Simplifying its structure has enabled it to centralise data management across countries, a real problem area for managers using multiple service providers.
“The more systems you have at the back-end, the harder it is to accumulate everything to allow you to do performance and risk reporting and attribution analysis,” said Reidenbach.
Using only two service providers, Nikko AM has been able to accumulate data through a central storage point to make it consistent across applications.
Another advantage of outsourcing has been doing away with the need for operations that have to keep on top of regulations, which need to be coded into internal systems. That is now handled by the service providers, which can also draw on knowledge from their various customer relationships.
However, Reidenbach concedes there can drawbacks to outsourcing, such as slowing down the time it takes to bring a product to market. Launching a new product can take just days if a firm uses its own processing systems, whereas relying on a third-party can change this to months to make sure all the necessary interfaces are functioning properly, noted Reidenbach.
Nikko AM is also required to take responsibility over the functions it outsources. This means the firm has to ensure it has an internal structure to monitor what the service providers are doing, otherwise it could be exposing itself to risks that outweigh the costs it is saving by outsourcing in the first place.
Reidenbach said the big driver for outsourcing had been risk mitigation – the risk of losing clients because of a mistake being made in the middle or back office.
“To the extent possible you want to make the grey area [middle and back office] as small as possible and have clear lines of responsibility,” said Reidenbach.“We are really into outsourcing, which allows us to keep headcount relatively tight in operations and IT.”
Nikko Asset Management has seen its AUM rise to $170 billion, while it has reduced staff in operations and finance and stayed flat in accounting.
Read the full interview with Frederick Reidenbach in the February issue of AsianInvestor magazine.