Offshore IT Outsourcing: The Japanese Perspective

1. Offshore IT Outsourcing: The Japanese Perspective WITSA Public Policy Meeting Hanoi, Vietnam November 26, 2003

2. Trends in Japanese Offshore Outsourcing Japan is increasing its offshore efforts: • Sustained competitive pressure from international companies continues to drive outsourcing efforts • Our most significant outsource destinations remain China, Korea and India • The bulk of work being outsourced is made up of labor intense downstream design and coding for software development projects • We still have yet to see significant offshore outsourcing of back office functions

3. The Main Challenges Although the market for offshore outsourcing is continuing to expand, several main issues impede its pace: • Japan is hampered by a shortage of experienced CIO-level professionals, especially in government. Many projects start without appropriate prior consultation work, leading to specifications changing during the course of the project. • Linguistic problems often arise, and translation adds additional costs and complications. • Differences in business culture, especially surrounding contract interpretation. • Difficulties in foreign engineers obtaining work visas.

4. Government and Industry Response Though facing many challenges, both government and industry are strongly behind efforts to increase offshore outsourcing: • Driven by the desire to decrease infrastructure TCO in high-priced Japan, industry groups are pushing hard to systemize their efforts and bring economies of scale to utilize foreign outsourcing resources. • Smaller domestic IT services companies continue to be unable to take advantage of the cost savings from offshore outsourcing, so still must team up with larger companies, adding a layer of cost. • Led by METI, the Japanese government is taking steps to increase the overall IT educational infrastructure, particularly in project management, to provide the skills in Japan necessary to take advantage of increased outsourcing. • Due to the high demand for bilingual engineers in offshore countries, many companies have to deal with a high rate of employee attrition. Besides the obvious disruptions this causes to projects, theft of intellectual property also becomes a concern.

5. Future Vision Japan feels that preserving a free and unfettered atmosphere for offshore outsourcing is essential for strengthening both the domestic and regional ICT industry. • In order to strengthen competitiveness and reduce costs, offshore outsourcing will continue to increase in importance. Gradual utilization of both foreign professionals for high-level consultation and peripheral service BPO will undoubtedly increase. • Outsourcing to less developed countries will help speed skills transfer and strengthen the Asian region as a whole. • Building upon our experiences in offshore outsourcing of manufacturing, Japan feels that the overall benefits increased offshore outsourcing for our economy will outweigh any temporary need for workforce restructuring.

6. Thank you for your time Mark Schikowsky Manager, International Argo 21 Corporation mark.s@argo21.co.jp