Why Offshoring isn't Catchy in Japan

Author: cyberradical (Guest Blogger)

  So far offshore development (offshoring) trial in Japan market has not been successful. There are a couple of reasons why Japanese clients don't like offshoring. In this short article, at first I want to analyze this phenomena, and then discuss which areas of offshoring are feasible and effective.

  The following is the very interesting chart by "Nikkei Computer" (one of the major magazines on Japanese IT industry). Among the major system integrators in Japan, NEC, Fujitsu, Hitachi and NRI are the big four for utilizing offshoring. Compared to them, NTT Data, Hitachi-Soft, Unisys, TIS and even IBM Japan(!) are not yet successful in their utilization of offshoring.

(Click to enlarge)  * Source: "Nikkei Computer" 2006/07/10

  What makes the difference among these two parties?

  One clear reason is "embedded development (including hardware and software)". NEC, Fujitsu and Hitachi except NRI are all the provider of embedded device for cellular phones. On the other hand, NTT Data, Hitachi-Soft, Unisys, TIS and IBM Japan don't participate in this market at this point. We can think of embedded development as a highly standardized manufacturing method, which is similar to package-based development in the area of system integration.

  Another thing to point out is that they can use offshoring for their internal product development instead of providing services to external clients.

  On the other hand, the latter vendors (NTT Data, etc.) focus on system integration rather than embedded development, and their Japanese clients prefer custom development (highly customized development really) to package-based development. In Japan, you should remember that almost all the clients stick to custom development with eagerness. This put these vendors in difficult position to utilize offshoring.

  Custom development normally doesn't fit in offshoring well. It requires to set seats right next to a client (which ask you to cover expenses for Indian/Chinese bridge project managers and system engineers to come to a customer site for long term), understand their special requirements, develop customized system and test again and again until production release. This model is totally different from offshoring and it makes offshoring nonsense (no profit is expected). These are the major reasons why offshoring has not been successful in Japan market so far.

  However, there are still even more benefits offshoring can provide to clients, even to Japanese 'domestic' clients. The following is the estimated sales by major India-based offshore development companies. Total sales of top three players, Infosys, Wipro and Tata Consulting Services(TCS), are over 150M$ in 2005.

(Click to enlarge)   * same source

  Major Japanese clients for top three players are shown below. There are many international companies including Vodafone, GE Capital, Merrill Lynch, etc. Pure Japanese clients are Sony, Toshiba, Sanyo, Matsushita etc., all of which belongs to the manufacturing sector.

* same source

  In my opinion, there are some criteria that test whether offshoring option will meet your requirement or not.

1. Package-based approach
  The first criterion is whether your project can take advantage of package-based approach rather than custom development, like SAP, Oracle for instance.

2. High requirement of standardized documentation
  Second is whether your project requires to leave documentation through and after development. If your project needs standardized documents for maintenance, system extension and others, offshoring matches well. As you know, offshore vendors put weight on documenting with standard method represented by Rational.

3. Global operations
  The third criterion is whether your company is built on global operations, i.e., an international company. Major offshore development companies have branches all over the world to provide support globally. This is not available when you use a domestic integrator.

4. Profit-driven
  The last criterion may still need more validation, and current pricing model (time and material) need to be changed, but if your project seeks high profit, offshoring matches well because of its low cost service fee.

  So if your company meets these criteria, you'd better try out offshoring as a pilot project quickly. For offshore development vendors, they should primarily focus on clients which meet these criteria.

* This article is licensed under creative commons:

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