Q&A – Shinichi Yamada, NTT Data

Rightly or wrongly, the outsourcing industry (particularly offshore outsourcing) in Japan has tended to be viewed as markedly less developed than equivalent industries in North America and Europe. A variety of contributing factors can be seen as behind this state of affairs, but as the global economy continues to drift through troubled waters, even traditionally foreign-averse Japanese institutions must reassess their prospects.

We recently spoke with Shinichi Yamada of NTT Data Corp., Japan’s largest software services company and an organization considered by many to be one of the country’s leading offshoring advocates. With twenty years of experience at NTT Data, Yamada is now executive vice president and chief technology officer of the company, and played a key role in its acquisition of Pune, India-based Vertex Software, a move that NTT Data hopes will increase its own competitiveness and enhance its credentials as a provider of outsourced services to Japanese, American and European companies.

Q: NTT Data has a reputation as a pioneer of offshoring in Japan. Can you tell us a bit about the company’s relocation strategy and how it has developed in recent years?

A: As a measure of our cost reduction, we have organized an Offshore Development Promotion Office since 2003 to encourage organizations throughout the company to promote offshoring. Beijing NTT Data (a 100% subsidiary), which was originally a company specializing in the Chinese domestic market, has changed its policy to focus on offshore business. Meanwhile, we have been actively investing in foreign Chinese companies and have drawn up a plan to promote offshoring not only in our company but also in our business partners. Our overseas order cost will be more than 7 billion yen (US$64.5 million) in 2008 and we expect it to reach 10 billion yen (US$92.2 million) by 2009.

Q: Your initial forays abroad were in China, but you recently invested heavily in India, particularly in your Vertex subsidiary. Why is this?

A: Although our offshoring has been growing as expected, the degree of dependency (offshoring rates divided by country) on China in 2006 was over 95%. To avoid country risk (i.e. currency, laws, disasters) in China, we investigated other offshoring destinations, such as India and Vietnam, and determined that Vertex had the ability to take over part of the Japanese overseas, so we invested capital in the company. With 250 employees, Vertex takes on projects from Japan and the US – 50-50. A development team for Japan can do Japanese specifications, coding, and communications through its own special Japanese studio system, and has high-quality technology that has been developed by American companies.

Q: What do you think are the main differences between China and India as places to do business?

A: Compared to China, which is very close to Japan and has a time difference of only one hour, the distance to India is a considerable wall for us to work with them. The inconvenience of flying to India (because there are few direct flights from Japan) makes us feel that India is far away. In fact, some project managers in our company are sometimes hesitant to ship their orders because of that barrier. In addition, a time difference halfway – 3 hours and a half – can be annoying when we set up an audio conference with them.

Q: What are the biggest challenges and biggest advantages for a Japanese company moving to China? And India?

A: For Chinese:

Advantages Challenges Because we both use kanji (Chinese characters), Japanese design drawings can often be used without translation.

The Chinese and the Japanese look alike because we belong to the same ethnic group, but our sense of values ​​seems to be very different. Especially, it is quite difficult, and takes time, to make the Chinese understand our obsession with the highest quality in detail.

It is easy and fast to get to China from Japan, so we can save time to solve problems. Because the Chinese government has great power, government policy changes tend to easily influence our business. The law in China is also complicated and difficult to understand (there is also a gap in practical use).

And for India:

Advantages Challenges India has many human resources in technologies, and many of them are good at logical thinking. Since companies in India are mainly focused on business with European and American companies, they are not familiar with business style in Japan (ie Japanese development style, Japanese language)

The process is usually well managed. (ie CMMI certification) It is not easy to go back and forth between Japan and India (because there are few direct flights), so it takes a lot of time and energy to fix the specifications.

The infrastructure in India has not yet been provided, so we must bear the cost of promoting its infrastructure.

Q: What will be the next big offshoring destination for NTT?

A: Vietnam and Brazil would be the next candidates, but each NTT Data subcontractor will independently select their offshoring destination from now on.

Q: And for Japan in general?

A: Considering your understanding of Japan and personal expenses, Vietnam would be a good choice. Many Japanese companies have already started moving there or have considered moving there.

Q: NTT is looking through Vertex to attract sourcing from Europe, North America and the Japanese domestic market. Do you think these three regions have very different outsourcing philosophies and, if so, how do you plan to successfully deliver all three through the same vendor?

A: In general, North America and Europe have similar outsourcing philosophies, except their languages ​​and contract forms, but these are very different from Japan. In the West, they fix the specifications completely and then entrust the development, while in Japan the specifications can be changed even during development. It is the crucial difference between them. vertex has [different] development teams for the US and Japan, respectively. Their advantage is that they can get the job done by understanding the different forms of development. Since NTT Data has subsidiaries in Europe (Itelligence) and the US (Revere), Vertex can be used to outsource those subsidiaries in India.

Q: Japanese companies in general are not recognized as particularly active subcontractors. Do you think this reputation is justified and why, or why not?

A: A few years ago, Japanese companies were not as active in outsourcing. The principle of providing all functions by your own company or group companies has become deeply ingrained in many Japanese companies. Also, in companies that embrace lifetime employment, outsourcing involving organizations and human resources is not that easy. Q: And do you think this situation is changing?

A: Yes. I think it is changing rapidly, especially in the field of IT outsourcing.

Q: What are the factors driving this change?

A: Intensifying economic pressure; a high degree of development, maintenance and management, with a rapid complication of IT infrastructures; and the high speed change of the environment that surrounds companies

Q: On a broader level, how robust is Japan’s ICT sector, and more broadly Japan’s economy, in the current global economic climate?

A: The Japanese ICT sector, which has established its special development style to a certain extent, can be considered robust in a certain sense. However, most of the basic IT technologies are now dependent on foreigners. We are concerned about the deterioration of the Japanese technology in the IT sector and the outflow of capital. I think it is necessary to discuss, as a whole IT sector, how to ensure Japanese competitiveness and develop global business with Japan-oriented technology.

Q: Do you see any major threats to that strength emerging from China or India today?

A: It is definitely a threat to Japanese IT companies if China and India continue to grow and come to understand Japanese business customs and the relationship between Japanese companies and IT. My concern is that it might be possible in the near future for Chinese or Indian companies to acquire mid-sized Japanese IT companies and actively enter the Japanese market.

Q: Finally, a contributor to our network recently said that in just a couple of years there will be no “outsourcing,” “offshoring,” or “close sourcing”: there will only be global contracting where every company competes with every other company for the resources regardless of their national origin. To what extent do you agree with this statement?

A: I agree with that. As I mentioned earlier, we considered the possibilities of offshoring to Vietnam after China and India as a way to cut costs, but the situation is slowly changing with each country’s currency rising. In the future, as you say, it will become ‘global sourcing’. The key will be: what are the strengths of the companies’ business fields, including their ability to propose, and the qualities of their technologies, regardless of their national origin. However, we have a difficult situation in Japan at the moment. We have to reform the Japanese development method first, which means that we need to reform the mentality of our customers. Changing the opinion of customers is not easy, so this will not happen for another five years. On the condition that we can’t fix the specs before we start development, it’s still necessary to talk face-to-face. Therefore, the proximity to the coast can last for a few years in Japan.