Enter the Web Consultants: But Are They Needed Yet?

Back to Contents of Issue: February 2001

Sure, they ease the pain of building complicated e-commerce and m-commerce sites, but with Japan's under-reconstruction economy and corporate indifference, they may be too early to the party.

by Daniel Scuka

illustrationIF THERE'S ANY LINGERING doubt that Japan's Internet finally matters, look no further than the number of Web consultants now doing business here. The past 24 months have seen well-known wired Web consultancies (Netyear, Razorfish, Scient), traditional management and business consulting giants (Andersen, AT Kearney), and startups large and small (docomo.com, Eupholink, MetaBit) jockeying for position in Japan's e-consulting race, and while the market may be Japanese, the players are international in origin, and no one can claim a monopoly on understanding the vagaries of e-commerce in the land of the rising sun. They are attracted by the opportunities that arise as Japanese businesses of all stripes increasingly turn to the Internet to boost their revenues while controlling costs, precisely what most Web consultancies say they can help achieve.

To what extent has Japan Inc. moved to the Net? In August last year, Shokochukin Bank surveyed 5,321 unlisted client companies, mostly small and medium enterprises, and found that Internet usage among them had jumped from 49.9 to 69.2 percent over the previous year, with some 40 percent of the Net-using firms conducting e-commerce on their Web sites (see Statistics, January 2001). These businesses, and others like them, are helping build Japan's B2C e-commerce market -- one that could reach $66 billion in 2004, according to some estimates.

Net consulting in Japan, however, is an entirely different proposition than in the well-established European and US markets. While Japan's Internet may have reached critical mass (Net penetration reached 30.6 percent in August 2000 and the number of surfers online could surpass 26 million by the end of this year), the need for significant (some say radical) corporate restructuring in Japan continues to stymie made-for-overseas Net strategies and seriously limit the consultants who would help animate an e-business transformation. Combined with the continuing downturn in global share values for most dot-coms (consultancies included), it's hard to be overly optimistic for Japan's Net gurus, who are faced with a problem -- moving Japanese companies onto the Net -- that is fundamentally social in nature.

Nevertheless, as Japan's Internet evolves in its own unique fashion, the consultancies here are pushing hard to understand the peculiarities of the Japanese surfer, and how to apply the lessons learned to helping implement corporate Web strategies. Compared to the West, Japan's Internet is more service oriented and consumer focused, and many individual consultants assert that understanding wireless is one of the keys to success. "Japan is the first mobile market -- that's why Adcore opened its first overseas office in Japan, not the US," says David Gabrielson, founder and COO of Stockholm-based Adcore's new Tokyo office. Adcore Tokyo's president Kristian Liljefors says that the best opportunities for e-commerce on Japan's mobile Net in 2001 will relate to secure Internet payments, gaming, and entertainment.

Yoshiaki Tanaka, managing director of local joint venture intervision-razorfish, echoes the importance of the mobile Internet's consumer focus, and states that many intervision-razorfish clients are specifically asking for help with doing business on the wireless Net. "i-mode is very much about B2C, not B2B. The small screen is the future, not the PC. Japan is focused on wireless, and clients are thinking about [reaching] customers who don't even own a PC," says Tanaka (see sidebar "Report From the e-Trenches," page 26).

Comments like these from many consultants here underscore the importance of wireless in formulating any Web strategy. In September last year, Jupiter Research estimated that total mobile e-commerce (or m-commerce) revenues for 2000 would reach $10 and $15 million in the US and Europe, respectively, but the same figure for Japan would be $400 million -- a huge difference. By 2003, the same report predicts, Japan will be even further ahead, with m-commerce revenues topping out at $3.5 billion versus $600 million and $1.7 billion in laggards US and Europe, respectively.

Keep in mind, however, that to date, "mobile e-commerce" has largely meant paying money to NTT DoCoMo and other wireless network operators for packet fees and access to wireless sites; very few independent wireless site operators are making any real money on sales or services, and there's almost no B2B e-commerce happening. Even in mobile's killer app -- entertainment -- only a few big names (Bandai, notably) are raking in the profits, although this is changing.

Nonetheless, wireless is clearly the future in Japan, and one of the more interesting wireless-focused consultants is startup Cybird, founded by Kazutomo Robert Hori in September 1998. If anyone can claim to be the razorfish of the wireless Web, it's Cybird, a firm that has evolved into a major mobile consulting and services hub that helps clients build and operate mobile Web sites as well as operating its own for-profit sites.

As the mobile networks expand, there are opportunities for third-party consultants like Cybird to help clients mobilize their content and deal with the network operators, all of whom maintain tight control on what type of content providers are permitted into their semi-walled garden service offerings (see "Wireless Walls," October 2000). "We help with all aspects of mobile sites," says Hori, "including negotiations with the operators." In a first for any of the home-grown Japanese mobile Web consultants, Cybird is actively planning to expand overseas. Cybird's Korea office was opened in August 2000, and with an eye on Europe, Hori recently hired an ex-Ericsson Japan mobile product manager (it's no coincidence that Europe is also one of DoCoMo's prime overseas targets).

Hori thinks Japan's wireless Web is unique for focusing not on business first, as in Europe, but on consumers: "If you focus on technology, then the B2B solution providers make all the money. If you focus on the end user, then the B2C providers will make money, and that's a much larger market." Cybird, who counts NTT, KDDI, J-Phone, and DDI Pocket as major clients, is one Net consultant having no problem with generating revenue, perhaps because Hori and his staff are predominantly Japanese working on their own turf and they appear to understand wireless.

But what about strategy for the foreign e-business builders? Japan, it's widely acknowledged, is a tough market to enter. One strategy is to initially target the same national or multinational clients here that they do at home; those firms at least will understand what the consultant can do for them, the thinking goes, and the presence of a familiar brand can be a significant lever for getting the revenue flow started. Adcore, with several big name clients back in Sweden who likewise operate here, is hoping to take just this tack. "We'll target the international firms located here in Tokyo to start," says Gabrielson. Adcore is not alone. Cambridge, Massachusetts--based Basis Technology, which began focusing on technology consulting -- especially localization -- in 1999, built the Amazon.co.jp Web site, which launched in November. The firm already counted Amazon.com among its clients in the US, so it was a natural transfer of an existing relationship to Basis Technology's new Tokyo office. Likewise, Jim Hunter, principal at startup tech consultant Exstra, says his firm will target global corporations and domestic Japanese firms in an 80/20 ratio, at least for the first 18 to 24 months.

These strategies speak volumes on the differences between domestic Japanese clients, who are still, some say bluntly, behind the times, and international clients that have already started the transformation to New Economy e-businesses overseas and want to continue that process here. By and large, the Net gurus coming to Japan in the past two years expected to see the same US Net explosion for the second time, but it hasn't turned out that way at all. "The differentiating factors have been wireless and the failure of e-commerce fulfillment. The solutions have been uniquely Japanese -- like distribution through the convenience stores," says Ben Ward, lead engineer at Sapient Japan. Net consultants arriving from Europe or the US have to be willing to adopt entirely new methods, he says, adding: "There's got to be a willingness to change business practices. For example, system integrators here traditionally handle support for software packages, not the software maker. If you don't bend, you'll break." Exstra's Hunter agrees, and he explains that the key benefit offered by the Net is the ability to reach outside of a company's immediate ring of connections to link electronically with suppliers, customers, and partners. This changes business relationships into "e-relationships," something that Western companies have no trouble with, culturally speaking. "But for the Japanese, for whom all relationships are personal relationships, this is tough." Nonetheless, Hunter predicts that the turnaround will come within two years. "The boom's already started. Japanese companies are under tremendous pressure to go global, and this means they have to adopt global e-business practices," he says.

The demanding Japanese market hasn't been kind to all foreign Net consultants, and rumors that Atlanta, Georgia-based iXL, for one, was having trouble were confirmed by the company in a November press release. The firm announced a strategic reorganization predicated on "serving its largest clients and targeting specific industry segments for growth," and said it would close or sell seven offices (Tokyo included, which had opened in March 2000) and reduce its workforce by approximately 850 employees -- one of the largest dot-com shakeouts to date -- in order to reach profitability by early 2001. What went wrong for iXL in Japan? Insiders said the firm found Japan was too difficult to crack, and charged that management had a cavalier approach entering the country. "Their biggest failure was they went in with the wrong attitude, that of 'We will work with our existing multinational companies and clients.' It was a way of minimizing risk, but ultimately I think they shot themselves in the foot because they didn't make a name for themselves [in the Japanese community]. This is something you settle for [at the beginning], not something you work towards," said one ex-staffer, requesting anonymity. If there's a lesson to be learned from iXL's failure here, it's that there's got to be buy-in from the highest levels; a company's Japan effort has to be a priority. "If there's a lack of commitment to the Japan effort from head office, it'll reflect all the way down. People will never be certain how much the company cares about the expansion," said the source, now happily employed at another foreign Net consultant.

Consulting here is fundamentally different than anywhere else due to the predominantly wireless nature of Japan's Net, combined with factors like corporate and societal culture, and the traditional primacy of direct human relationships in all aspects of business. Firms are finding it necessary to learn what the Japanese want, and to commit to the market for the long term, even though profits -- as iXL found -- may initially be hard to find. Asked about defining a Japan-specific approach for Internet consultants, Adcore's Gabrielson answers: "It's a tough question -- there are no real guarantees on what works."

Bruce Parker, executive vice president at US e-business builder Sapient*, predicts that the industry here will see a shakeout, especially among foreign firms -- like iXL -- who are feeling shareholder heat from back home. He points out that the barriers to entry are still high, and it's still expensive to open an office and hire people. "They are having a tough time," he says, referring to the foreign houses now here. "More may have to close, especially the public ones." But he's bullish on Japan overall, adding, "Japan is a primordial soup waiting for lightening. You've got NTT being pulled apart, a lot of restructuring starting, advanced Net capabilities -- there's lots of potential."

Another strong endorsement comes from Karim Bibawi, representative director at Sapient Japan's new Tokyo office. "We did tremendous due diligence on the Asian market, and we think Japan is still the No. 1 market." But like colleague Parker, Bibawi thinks Japan is a challenge. "You need strategic partnerships and local knowledge to succeed here," he says. Sapient, when looking for partners, went right to the top and tied-up with Tokyo-based Dream Incubator, founded by one of Japan's most famous business gurus, Koichi "K2" Hori, long-time principal at The Boston Consulting Group (see People item, page 12).


Note*: Originally misstated as Scient in the print version of this story.

For those who are toughing it out, problems continue. "The two biggest issues," says Simon Laight, managing director of Web Connection Japan, "are finding staff, and economics." Laight explains that in Japan, Net consultants are just not going to land the same kind of contracts that they find overseas. "Profit margins are low," he says. "It's not like in North America." "We saw the staffing problem from the start," says Adcore's Gabrielson. "It's a challenge, but so far, we've been OK. The biggest problem is finding consultants." Boutique tech consultancy MetaBit's Alex Paulusberger says language is a problem. He explains that few Japanese consultants are really up to date, and of the foreign ones who are, not many can speak Japanese. One general manager at a newly founded consultancy here said, if he had to do it all over again, he wouldn't hire a single creative (designer, programmer). Instead, he'd launch with only experienced corporate consulting people -- precisely the ones that are the toughest to find. Scient's Bibawi has seen the same problem: "I agree -- it's a challenge to find the right skills." Among other remedies, Scient will rely on its imported-from-the-US brand name equity to attract good talent, an approach that may just work for many dot-com-phile Web techies here.

But don't make the mistake of underestimating Japan's ability to learn from and catch up to overseas firms' expertise. There are Japanese Net consultants who can compete with the best that Silicon Alley can offer, and then some, and as Japan continues its transformation to e-business, individuals with the requisite experience and skills will only increase. Netyear's Sonny Koike, fluently bilingual and experienced on both US coasts, and Cprod's Shigeo Kobayashi, who came up through Recruit, Softbank, Yahoo Japan, and Andersen Consulting, are two change agents helping Japan's Web go global. There's also Kinotrope, a successful Tokyo-based Net consultant that's been helping clients plan their sites from the early stages of the Internet. Founded in 1993 by Masahiro Ikuta, in its early days the firm helped design and program sites for BMW Japan, Rover Japan, and others. One of its major achievements recently was the 7Dream.com site, the e-commerce destination of 7-Eleven.

Also, the longtime corporate consultants -- who have been quietly building their presence here and working to understand how Japan's Net is different -- continue to bear watching. Deloitte Tohmatsu, for example, has gathered several hundred technology consultants, analysts, and researchers into a powerhouse team that is behind some of Japan's most solid e-business initiatives to date.

illustrationTHE MOST SALIENT QUESTION for now, however, is whether Japan has an e-business market sufficiently developed to require any Net consulting, and this question speaks to the single most significant roadblock facing the e-consultants in Japan: not only is the wired Internet itself still several years behind the US or Europe, but corporate Japan -- cultural differences aside -- is nowhere near being able to move to the Web in the same way that US or European companies have. Japanese companies are still spectacularly mired in the old economy, and are being dragged down by entrenched inefficiencies in manufacturing and distribution, massively excess employment, gentrified senior management (many of whom still do not use PCs), and stifling government and bureaucratic over-regulation. Many firms still do not have a one-PC-per-person policy, much less an e-strategy.

Excess employment, one key metric of the old economy, is particularly high in Japan. The 2000 White Paper from the Japan Institute of Labor (JIL) reports that, despite signs of some improvement in the economy, many Japanese firms still feel that they have excess labor -- and only some are implementing any kind of restructuring, usually by reducing hiring rather than by laying workers off. According to a survey conducted by the Management and Coordination Agency in August 1999 (the most recent figures available), among firms in the manufacturing, wholesaling, retailing, and service sectors in Japan, there were 15 percent more reporting too many employees than too few, up five points from the previous quarter.

In addition, senior managers at Japanese enterprises are unlikely to be familiar with what the Internet is about. Even the much-touted easy-to-use phones are a challenge for some. Staring ruefully at his shiny new i-mode mobile phone, a senior, mid-50s sales manager at a large steel manufacturer says, "My secretary gave this to me from the company, but I just use it for calling. I really don't know how to use the Internet."

And if the typical large Japanese client doesn't get the Web, it means that the marketing challenge faced by the Net consultants is that much greater. "Clients have bright people," says Kurt Brunner, coufounder of Net consultancy MetaBit, "but their business development people and managers don't see it. Until last year, even large companies looked at the Web as a PR vehicle. If any application development was involved, they costed it against a particular product's sales."

In other words, going to the Web is still not seen as a core strategic move by Japanese companies. The MetaBit founders relate the story of one brokerage client who had a Web-accessible, fully functional trading game. "The client asked us if we could turn it into a live trading site, and we said yes," explains Brunner. "But they came back and said, 'We think not all of our customers have Web access, so the system would be unfair to those who don't.' They cancelled the project and instituted a postcard-based trading system instead," he says, with some exasperation. (Of course, this being Japan, some may argue that MetaBit's client was simply being customer service--savvy, rather than Net unsavvy.)

In addition to head-in-the-sand clients, Net consultants also have to deal with a technology lag. "Customers want to connect their Web site to a database or an e-commerce engine, but the technology here is still behind. There are good opportunities for US companies to enter Japan," says Fujio Ishiguro, president and CEO of Netyear. She adds that although many clients have a general understanding of e-commerce and what they want to do, few clients in Japan understand the Net or technology, and Netyear has to work hard to educate them.

As a result of these and other factors, Net consultancies here are emphasizing practical, technical solutions rather than higher-level strategic or Web integration services. MetaBit, founded in May of last year, specializes in Web site development and programming for the financial industry. Paulusberger and Brunner, both long experienced as engineers and network planners for Tokyo's financial houses, find that most of their clients come from financial industry firms wanting to connect intranet Web sites to their existing databases so that traders, analysts, and major clients can access and update financial data in real-time -- a need that requires great programming skills but very little strategic advice. "The financial industry needs to use the Net to go forward. It's a bottleneck right now," says Brunner. The large foreign-capital financial houses appear to be helping the situation, as gaiatsu (foreign pressure) slowly works on the Japanese banks and brokerages. "Japan is catching up. The foreign players are forcing Japanese companies to webify," says Paulusberger.

But the ignorance isn't all one-sided. Vincent Luna, principal at Tokyo-based mobile marketing consultant Japon.net, says one of his biggest problems is getting foreign clients to understand the peculiarities of Japan's Web, where wireless is a new and unfamiliar phenomenon. He explains that there is a lot of misunderstanding about DoCoMo and i-mode, and that potential foreign clients bring with them a lot of baggage and preconceived notions about what can and cannot be done on the wireless Web. "They think, 'WAP was not successful at home, and i-mode is just Japan's version of WAP,' so they conclude i-mode can't possibly be successful" says Luna, with more than a hint of frustration. He adds: "When it comes to DoCoMo, it's the FUD [fear, uncertainty, and doubt] factor all over again, just like with Microsoft."

But the gloom hasn't stopped new players from jumping into the consultancy game, and last fall saw several major names hang out their Web consulting shingles. NTT DoCoMo, for one, established a wholly owned subsidiary called docomo.com to help content owners and service providers package their offerings for the wireless Web. The mobile carrier clearly sees the possibility for profits, and rushed to set up the new consultancy prior to checking if the domain name "docomo.com" was even available (it wasn't).

In June last year, DoCoMo also launched a wireless advertising joint venture with industry giant Dentsu, named D2 Communications Inc., which will focus on production and management of advertising on i-mode. The move came as no surprise; click-through rates on the mobile Net are some 10 to 50 times higher than on the wired Net. DENTSUmarchFIRST is another Net ad-related consulting venture, between Dentsu and US-based marchFIRST, and was launched last October. The two companies will invest a combined sum of ¥3 billion, making this the largest JV between a US Net consultant and a Japanese communications firm, according to the two. The new JV expects to reap sales of ¥3.23 billion by 2002. In August, Dentsu also announced the July 2001 launch of a new company, B2i Inc., which will offer e-business customer relationship management (CRM) consulting for the Dentsu Group. In May 2000, Mitsubishi Corp. announced that it will launch a targeted email advertising service for i-mode and other mobile Internet access services. The new firm was looking to earn ¥1 billion in first-year revenues. ValueClick Japan and online ad agency Giao have also announced i-mode advertising services.

Likewise, in a bid clearly aimed at shaking up those gentrified old economy companies who still don't "get" the Net, another new Japanese player launched late last year. The new firm, a joint venture between Softbank and Mitsubishi, is taking its cue from leading global e-business consultants like iFormation, who have latched onto the fact that Internet consulting in Japan and Asia comprises a large measure of good old-fashioned corporate reengineering and management consulting. The Softbank-Mitsubishi venture, named (somewhat cryptically) Eupholink, will provide consulting services and capital contributions covering electronic commerce and other online business operations, targeting 100 consulting clients and 30 investee companies by 2003.

CEO Masaki Yamano explains that Mitsubishi had been looking for partners, but didn't find the right one. "There was a lot of discussion with CMGI and ICG, but no results. Then in May, Softbank contacted us. We thought the combination of Mitsubishi's trading ability and technology with Softbank's holding company model and VC expertise would work well." Eupholink is configuring itself as a "business incubator," helping with the high-level IT integration planning, and then, hopefully, responding to the subsequent RFP to implement the plan. Eupholink will also invest (that's where Softbank comes in), primarily targeting medium to large enterprises -- precisely the players most ailing in their attempt to restructure and ramp up to the Net. Yamano, perhaps overoptimistically, thinks that restructuring may not actually be the problem that many think it is, and that Japanese enterprises are starting to become competitive. "Lots of staff are taking early retirement. The companies really need help with partnering and business model definition," he says.

iFormation is a joint venture between the Boston Consulting Group, General Atlantic Partners, and Goldman Sachs, and the firm has said it is looking at the Japan market. Like Eupholink, iFormation could bring a significant boost to Japan if it can combine solid off-line management and restructuring consulting with e-business strategy planning and equity tie-ups. Further, the inclusion of venture capital heavyweight Goldman Sachs, which already has a significant Japan presence, allows the firm to take a capital equity stake in consultees, precisely the type of ongoing relationship that ailing, old economy Japanese companies may respond to the best.

Tokyo startup consultant Building2 is also following the Eupholink and iFormation path, though it's much smaller. Partners Mark Ferris and Ian Lintault explain that the firm offers strategic consulting and capital investment, giving it an intimate interest in the success of its portfolio companies. Ironically, Building2's "strategic-level" consulting is, in many cases, little more than good, old fashioned management consulting, looking at a startup's target market, products and services, and business rationale, and trying to bring a rational approach to considerations like profits and losses. "There is so little discipline, especially in Net ventures," says Lintault. While Building2's approach may not be flashy, it appears to be working, and the company claims, unlike other Net consultants here, to be profitable on every client to date (on the consulting side; equity investments have yet to mature).

Whatever transpires in Japan's Net consulting scene, industry watchers are certain that the recent growing pace of development, new ventures, joint ventures, and alliances will only continue, especially with regards to wireless. If so, it will become even more vital for foreign Net consultants to open shop here. Could this lead to a renaissance of Japan's Net and new opportunities for entire industries to rebuild themselves on a digital foundation? Adcore's Gabrielson says, "Before anyone can succeed, the industry here has to be validated -- lots of clients still don't grasp what a Net consultant can do."

For a list of Net consultants in Japan, click here.

Illustration by Andrew Pothecary, with apologies to manga artists everywhere

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