The New Workplace: Outsourcing In Japan

By The Outsourcing Institute

Growth. Change. Challenge. Today Japanese companies are increasingly making the same strategic decisions as the U.S. and Europe - they are using outsourcing for their business solutions and to meet their business needs faster, cheaper and smarter.

The changing business landscape is propelling the need for outsourcing, says Paul E. Linthorst, BPO Partner for Japan, at PricewaterhouseCoopers (PwC). Japanese businesses are under increasing pressure from new domestic and international competitors. There is a flourishing market for IT outsourcing and in design and production, but the pressure on management to reduce costs for all areas of business operations are increasing dramatically. "Outsourcing is being driven by a strong need and desire among companies to improve performance after a nine year long slump, especially cash flow, and to handle people decently while doing it," says Linthorst.

The economic recession in Japan is forcing companies to find a way to cut spending, especially in IT services, says Masami Kashwagi, senior analyst, Japan Services Research, at research firm International Data Corp. (IDC). Today, these are large firms mostly in the banking and insurance sectors, but Kashwagi says in the future the demand shift to small and medium size companies. "They are also under the pressure of deploying new technologies, all without stopping their current operations. Some of them have begun to find outsourcing as a way to release them from the hassles of managing complex new technology and to improve cost structure," she says.

New Technologies Open Door

In fact, it is the new technologies that have opened up the door for outsourcing in Japan. "The impact of the network economy and the phenomenal Internet growth means that companies are much more open," says Ali Farhoomand, an associate professor at Hong Kong University's School of Business, in a recent article entitled "A Rolling Stone Gathers No Boss," in "Asian Business" (November 1999). "Where Asian businesses have traditionally thrived on a very distinct hierarchy, the new workplace is based less on management divisions than on a solid telecommunications infrastructure," he says in the article.

The workplace's dependence on information has increased the use of outsourcing, he adds. "Because information is so specialized now, companies find that they can no longer do everything they need to do, so they have to go outside to another source," he says.

Traditional Japanese Outsourcing

Outsourcing in Japan is not really a new phenomenon, says Malcolm Norquoy, Asia Business Development Director for Computer Sciences Corp. (CSC). Historically Japanese organizations in all industries and markets have aligned themselves with usually one, but sometimes more, Japanese information technology (IT) providers. "The scope of services delivered by the IT providers ranges from proprietary hardware, operating systems and middleware, to application development, and the operation and management of that infrastructure and application base," he explains.

But Norquoy notes that traditional Japanese outsourcing is not interpreted quite the same as outsourcing elsewhere in the world. "Historically Japanese organizations in all industries and markets have aligned themselves with usually one Japanese provider," he says. But this picture has begun to change and Japan is moving towards a more traditional outsourcing model, which he defines as:

• The outsourcer as a single point of responsibility for all service delivery
• Transfer of assets to outsourcer
• Transfer of people to outsourcer
• End-to-end services with associated service level agreements
• Multi-year contract

In recent years outsourcing services have started to expand dramatically in Japan, observes Norquoy. For example, Japanese IT providers have purchased complementary companies from around the world as well as creating global subsidiaries such as Hitachi Data Systems, Amdahl and ICL. Additionally, technology and consultant companies have started to expand including IBM, CSC, SAP, PWC and others.

Expansion and Growth Trends

Although the current outsourcing market in Japan is about one-quarter the size as the U.S. in terms of buyers, according to a recent survey on Asia/Pacific market trends, it is on a growth curve and there is a great potential, says Kashiwagi. IDC estimates a 10 percent annual growth rate during the next five years. Kashiwagi attributes the rise in outsourcing to industry consolidation and deregulation in Japan.

Today the outsourcing picture is made up mostly of large companies in the banking and insurance industries, she says. The major areas of focus for outsourcing in Japan are a mixture of services that include asset procurement and management, data center management, computer operations and technical support, LAN and WAN services and application development and maintenance.

But as with elsewhere in the world, the areas of e-commerce and Internet are featured heavily in business plans. So the newer and developing outsourcing services, such as Web design, Internet Service providers, Internet content and Web hosting are coming into play

This is driving the current growth trend of outsourcing in Japan. "Right now it is really difficult to retain skilled staff who can manage the new Internet and Web-based technologies," says Kashiwagi. "Competition is forcing Japanese businesses to look for a way to establish more cost-efficient, faster and better systems in order to support their business and operations on a daily basis," she adds.

Kashiwagi further believes that outsourcing will soon be expanding into many other industries, including distribution and network outsourcing, and to small and medium size businesses. "Businesses will begin to realize the benefits of outsourcing, especially as they shift towards more online services in terms of fulfillment and procurement and need to acquire the technology faster and more cost efficiently," she says.

Relationship Challenges

Experts advise that there are a host of challenges in developing a beneficial relationship with Japanese companies. These include:

1. Human Resource issues. This is a great challenge in Japan because of the heritage of "lifetime employment." This long-standing tradition is beginning to break down in the face of increasing economic pressures and the need for better, faster and cheaper systems.
2. Cultural factors. The Japanese have operated with the idea of Keiretsu-a grouping or "family" of affiliated companies and are only beginning to look to partnerships and suppliers outside this company group.
3. Japanese Attitude towards Outsourcing. Outsourcing is viewed skeptically in Japan. The idea of handing control of end-to-end services to an external organization, and the idea of employees changing companies as part of an outsourcing transition are ones that are very new to Japan and are perceived with fear for both the businesses and the affected employees.
4. Changing Population for Talent. It is suggested that Japanese companies will soon face a number of problems including a shortage of young workers and a surplus of middle-level and senior workers who have based their careers on the idea of lifetime employment. Inevitably, Japanese firms will have to work harder to attract young people and to bring women into the labor market. That means offering payment and promotion on merit, more temporary and part-time work, and better child care, maternity leave and job prospects for female staff. Plus, younger workers have a different attitude towards the workplace. As companies begin to let go of lifetime employment, so are younger workers releasing some amount of loyalty to their employer. They are creating a more market-driven talent economy.

Globalization and Technology

Perhaps the greatest challenge of all, for Japan as well as the rest of the world, is that of competing in the global market. Globalization and the use of technology to link supply chain partners have begun to erase geographically boundaries in business. "The end is near for companies that hope to retain their traditional dominance by relying on inertia in their domestic market," says the "Asian Business" article. "The opportunity for local companies in local markets to stay strong and have a long-term future is getting smaller and smaller, other than in particular niches. If they are going to be significant players, there is no way to avoid the global game," it added.

With ever-increasing globalization, the ability for Japanese businesses to be flexible and agile in their approach to business, and have the ability to respond quickly to market opportunities and challenges will prove to be a key measure of success or failure, says Norquoy. "Time to market is reducing quickly," he adds.

The primary questions facing companies in a global marketplace today are how to operate in a global economy versus a local economy, how to retain balance between local and global demands, and how to open up the organization to become more "virtual." The more an outsourcing provider can react to these issues and manage them, the more successful they will be.

Experts agree that Japanese companies are not likely to outsource in quite the same way as their U.S. associates. First, the word outsourcing is not as appealing as the idea of developing joint ventures or alliances. Second, the Japanese model for outsourcing will not be as "aggressive," says Kashiwagi. "They need to secure human resource issues and will probably start with selective outsourcing," she says.

Another important element to dealing globally is embracing shareholder value, which Linthorst notes is still a new concept in Japan and not yet accepted as a strong driver of top executives. "This is changing slowly. The new Internet-based parts of the economy are growing quickly and are in some cases innovative," he says.

"The challenge will be to get companies to try new, innovative approaches to improving business performance, employment practices and to take advantage of the new economy to create new jobs," he adds.

Elements of Success

There have been some notable outsourcing transactions in Japan over the last few years such as deals between Daiwa Bank and IBM Japan for the banks' IT operations to be run by a joint venture. This, combined with international companies extending their existing outsourcing relationships and agreements into Japan, has begun allay the fears, address the challenges and open the doors to outsourcing. Norquoy points out that successful outsourcers will be able to balance these two elements:

• Infusing and implementing best practices and methodologies, with unit cost savings, truly value-added services and guaranteed service-level commitments;
• Culture, language, relationship and empathy.

All in all the challenges in the Japanese outsourcing market are great, but so is the potential. IDC expects the Asia/Pacific computer services arena alone to reach $16.6 billion by 2002, from $9.6 billion in 1999. With this powerful and demanding market, it is essential to address the entire change head on. That includes trying innovative approaches to improving business performance and employment practices; employing new technologies and new approaches to business; creating better, faster and cheaper systems; and shortening business cycles and the decision-making process.

It is also essential to come to the business table with principles of partnership, customer-service, flexibility, accuracy and speed, operational continuity and protection of privacy. These, along with addressing the technical, process, people and cultural issues, will all factor into the burgeoning market for outsourcing services in Japan. "The winners will be the Japanese customers," Norquoy concludes.