Japan Market IT Services Outsourcing
Last updated: April 09, 2024 Read in fullscreen view
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In this article let's understand the overview of the global and Japanese domestic IT services market followed by details specific to the Japanese IT market.
With the speed of advances in digital transformation technologies, the need for faster response to customers’ IT service requests beside domestic constraints is becoming a challenge.
In this article we will focus on offshoring and global IT outsourcing to find out a few most often-asked questions like, how Japanese IT services market is? What are the existing challenges at hand? How to deliver quality to our customers? How is Vietnam as an offshoring and global outsourcing destination? etc.
Traditionally Japanese companies used to emphasize in-house development. The major attention continues towards quality over quantity. But with the advances in the software field, Japan could not adapt at pace like Western countries adapted. Now with technological advances like Digital Transformations, Big Data, Artificial Intelligence, Machine Learning and Cloud and demand from domestic and global customers, Japanese companies have started facing lack of skilled human power. So, the companies started looking for opportunities to outsource IT services work.
To accomplish global delivery, one needs to identify challenges, risks, complexities, nuances. Need to adopt a global mindset and bring agility to be successful in offshoring. A global delivery mindset brings multiple opportunities as well as trade-offs. Top management commitment and directions are vital parts for success of global delivery for any organization. The expectations from both parties, the Japanese prime company (who is outsourcing / offshoring) and the sub-contractor / offshore partner must be very transparent and clearly understood by both.
1. IT services market overview
"IT services refer to the application of business and technical expertise to enable organizations in the creation, management, and optimization of or access to information and business processes."
At high level segmentation of IT services market is as follows:
- IT consulting and implementation,
- IT Outsourcing,
- Business process outsourcing (i.e. Call Center),
- Other IT services and support
2. Japanese IT Services
In this process integration of cyberspace and physical space is being facilitated. Looking at the prospective movement from physical space to cyberspace, the government has started with multiple initiatives like "Society 5.0", "Beyond 5G promotion strategy" which drives the digital transformations.
3. Japan Market Map
The market is divided into professional services, products services in B2B and B2C/C2C. These are some of the key players in IT services in the Japan market. We can group professional services and B2B competing players in three categories: Domestic SI-ers, Foreign MNCs and Big4.
4. Project Formation
Subcontracting in multiple layers is quite common in Japan and you may easily see 3rd or 4th tier subcontracting happening. There are advantages as well as disadvantages for this kind of project formation. However, this is the way the Japanese IT services industry functions. It’s a complete eco-system established and way of business working in Japan. The prime vendor and sub-contractors are selected based on trust and for long term collaboration, partnership.
Prime Vendor (SI-er: System Integrators) acts as the channel or an arm of Japanese corporations for their all-IT related needs. Existence of Prime Vendors is a crucial part of Japanese corporations. Prime Vendor provides all advice and services required by corporates like IT strategies, software adoptions etc.
Overall outsourcing / offshoring model work as follows:
- Project Basis order: when corporates require an IT service/solution, they initiate a customized order to their affiliated SI-er. This is treated as project.
- Prime Vendors mostly have in-house capabilities to provide these IT services/solutions.
- Based on the complexity and external speciality requirement, decision to outsource to sub-contractors will be decided.
- Sub-Contractors based on their specific know-how in software development will take it further in-house/next level delegation.
- Subject to the complexity of the work, there may even be subsequent delegation to downward sub-contractors as outsourcing.
- This is the way the value chain is maintained, and kind of interdependency is established.
- Coherency as main responsibility of the Prime Vendor. They are mainly responsible for all communication, collaboration, coordination to deliver integrated functionally working, secured service/solution to the corporate.
5. Advantages and Disadvantages of Subcontracting
Advantages:
- Low Cost: lesser fixed costs to Prime Vendors.
- Flexibility: to ramp-up/ramp-down resources.
- Multiple Options: flexibility to have multiple options/rates/capabilities.
- Strategic Alliances: possibility to create strategic alliances with different partners.
- Risk Sharing: efficient risk-sharing mechanism.
Disadvantages:
- Consumes a lot of coordination/management/integration efforts.
- Compliance / governance is a challenge for Prime.
- Prime vendors need to comply with complicated sub-con laws.
- Sub-cons cannot grow much independently (leading to Kobanzame tendency)
6. IT Resources
- Structural problem: In Japan, young people population is declining due to the declining year on year due to decline in birth-rate and increase in aging population. Each industry continues to compete for excellent new graduates in the new graduate recruitment market.
- Economical boon vs shortage: Shortage situation is spurring mainly as the continuation of the "seller's market" in the booming economy. Expansion of IT needs and Japan specific structural issues widening this issue of skilled IT human resources.
- Attractiveness vs capability: With global and domestic demand growing, the "attractiveness" of working as an IT human resource in a Japanese company is mainstream. But the question is are the domestic excellent IT human members active enough to play a role at global level? Such capability problems can be behind the lack of "quality" in IT human resources.
7. Summary
In this article we tried to explain about the Japanese IT services market, business structure, challenges for offshoring or global sourcing. Customers are actively trying to find outsourcing opportunities. Global sourcing and global business expansion should be the centre of the strategies for offshoring.
FAQ - Understanding Subcontracting in IT projects
What is sub con?
Subcontracting refers to the practice of bringing in an outside company or individual to perform specific parts of a contract or project. In most cases, a company subcontracts another business to perform a task that cannot be handled internally.
What are the three types of sub contract?
When you are looking at supply chain procurement, there are three types of subcontractor:
- Domestic Subcontractors.
- Nominated Subcontractors.
- Named Subcontractors.
What is the difference between Subcontractor (sub con) and General Contractor (gen con)?
General contractors are individuals or organizations hired by owners to oversee the execution of a project (construction, IT...). Subcontractors are then hired by general contractors to work on specific areas of implementation.
What are the levels of subcontracting?
Subcontractors work at a variety of levels. The primary, or general, contractor works directly with the customer. The primary contractor hires first-tier contractors to perform work on the customer's project. The second-tier contractor is hired by the first-tier contractor to perform specific tasks.
What is the risk of subcontractor?
Financial risk: The subcontractor may experience financial difficulties during the project. Rising input costs and high interest rates have squeezed subcontractor margins. And, with growing uncertainty in the business environment, there is a high risk of subcontractor insolvency.
What is the difference between subcontracting and outsourcing?
Outsourcing is mainly a cost-cutting strategy wherein a business allocates out entire business functions within their firm to a third party on a permanent basis. Subcontracting is a process where a business hires an outside individual or organisation to perform a specialised task that cannot be completed internally.
What is software subcontractor?
A software subcontractor is a professional or a company who is hired by a primary contractor to perform specific tasks related to software development. These tasks can range from coding and testing to system design and project management.
What is the difference between a freelancer and a subcontractor?
Freelancer: a person who works with/for you as an assistant. They're under your supervision, doing what you'd otherwise do, possibly using your equipment. They're there to lighten your load. Subcontractor: a person who works with you doing something outside your area of expertise.
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