The New Workplace: Outsourcing In Japan
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,"
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
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
- 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.
Experts advise that there are a host of challenges
in developing a beneficial relationship with Japanese companies.
- 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.
- 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.
- 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.
- 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
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
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,"
"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
- 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.