TT-640 -- Groundshifts in Systems Integration Sector, ebiz news from Japan

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, November 27, 2011, Issue No. 640


- What's New -- Groundshifts in Systems Integration Sector
- News -- Possible first in Japan-US custody dispute
- Candidate Roundup/Vacancies
- Upcoming Events
- Corrections/Feedback
- News Credits

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Japan has long been a market where clients have demanded
that software companies customize their products to do
exactly what they want, or they won't buy them. Coming out
of the mainframe era, Fujitsu, IBM, SAP, and Oracle
facilitated this trend by offering reduced hardware costs
and refocusing clients' budgets on the software, and all
was good. But the sticker shock for software created
significant resistance lower down the food chain, and as a
result most of the customized solutions stayed at the top
tier exporting companies. There are a few thousand of these
types of companies in Japan and as their needs have become
saturated, the ability to sell more software has severely
tailed off.

The response by the traditional Systems Integrators
(SI'ers) has been two-fold, firstly they have tried to go
down market, offering mildly lower cost solutions with
less functionality and customization. This has been
met with a big yawn and most second-tier companies
have simply put their IT development plans on hold.
Secondly, SI firms have slashed internal costs by
either off-shoring their workforces, or simply by paying
less to their developers. We think this is why today
you can get a software developer in Japan for not
much more than a similar person in Bangalore -- maybe just
a 30% price difference, but without the language problems.
Unfortunately, cutting salaries also has the effect of driving
quality and innovation out of the sector.

[Continued below...]

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[...Article continues]

Against the long-term saturation trend, you also have two
pivotal events that have hastened the pace of change in the
Japanese software market. The first, which has affected the
rest of the world as well, has been the Lehman Shock. Banks
and manufacturers are the traditional havens for SAP/Oracle
type solutions and these sectors are under huge pressure to
reduce IT costs. Mostly they have gone abroad, for Japan
this has typically meant relocating back office operations
in Dalian, China or software in Bangalore, India. Either
way, it has meant less work for Systems Integration (SI)
companies back home.

Going abroad has been difficult for most SI firms, with
companies like Hitachi putting hundreds of engineers into
places like India but so far with not much to show for
their efforts. However, some, such as Fujitsu and more
recently NTT Data and NTT Communications have met with
greater success. It's been amazing to watch both NTT
subsidiaries expand globally through strategic
acquisitions. They have learned from the Verio debacle to
go after hard core foreign SI companies, and to leave the
fashionable targets alone. We would consider NTT
Communications' acquisition of South Africa-based Dimension
Data as a "hard core" purchase.

Likewise, NTT Data's late 2010 purchase of US-based Keane
Systems was gutsy and far-sighted. Keane was a full 1/3 of
the size of NTT Data and had/has a global reach in systems
development and integration. Then in March of this year,
NTT Data also bought US-based but India-leveraged
Intelligroup, a consulting and services business. Now,
suddenly, with these and several other acquisitions, NTT
Data has gone from being a nobody to becoming the 9th
largest software company globally, with revenues of over

The other pivotal event has been the earthquake.

What the earthquake has done is to make companies aware of
two things: one, the importance of redundancy, be it for
data storage or business continuity. And two, the fact that
the domestic economy is not just in a temporary funk but
instead is terminally shrinking. Why it has taken an
earthquake to illuminate corporate minds is hard to
say, but clearly there has been a psychological wake-up
call that is now gaining momentum, with most Japanese SI
firms looking at going abroad in some shape or form.

Continuity and international business rendered in the form
of IT services, are not price-compatible with the big domestic
software customizations and locally-hosted server farms of
the past. Instead, they are best addressed by centralized
best-of-breed cloud services, especially when you throw in
mobile devices, web commerce, and other major shifts in
consumer and corporate buying patterns. Thus it is that
there appears to be a recent (last 6 months) resurgence in
interest in Japan of foreign cloud applications companies,
and in data centers. Whether the software is customizable
or not is becoming a secondary issue compared to price and

Our sister company, Japan Inc. Holdings
(, which represents the State of Ohio and
which is involved in market entry and backoffice support
for start-ups, is seeing a strong increase in inquiries
from firms all over the world. We can't say which companies
JIH is speaking to, but none of them would surprise you.
They are leaders in games, data delivery, classic consumer
portals, cell phone applications, social media data
synthesis, medical information, online security,
cloud-based classic B2B applications, online learning, and
others. Perhaps what is surprising is that most of them,
even before getting to Japan, already have Japanese
clients and are coming over because they are being asked
to. Uniformly these foreign cloud companies offer low-cost
subscription-based services, which their clients are
learning to love. If you're a 1,000-person company,
you can't compare JPY3,000 per user per month with
the previous option of JPY100m plus annual
maintenance charges of 20%, plus servers, plus

This sudden change in the SI landscape is leaving those
firms who are overly domestic looking very flat-footed, and
they are suffering as a result. Just last month (October),
IDC Japan lowered its 2011 growth forecast for the SI
market for the second time this year, saying that it would
contract even more than the 2.1% to JPY4.8trn that it was
forecasting. This number is actually the third straight
year of IT spending contraction, down about 7%, or
JPY390bn, from 2008. An example of flat-footedness can be
seen in NEC, which announced on Friday that it was raising
JPY89bn of syndicated loans from same-keiritsu bank
Sumitomo-Mitsui. They mumbled something in the press about
trying to move their debt to long-term loans, but the
reality is that they are losing lots of money and are in

What do these massive changes in the SI landscape mean for
the rest of us?

Firstly, we are seeing a turning point in how the Japanese
view and buy software. Non-customizable but templated cloud
solutions are going to see extraordinary growth over the
next 5 years. Japan has wonderful infrastructure and mobile
devices are now sufficiently intelligent that desktop PCs
as we know them will disappear. So this is a prime market
for cloud-based firms. Secondly, the clock is ticking for
Japan's approximately 30,000 domestic SI firms, most of
whom are not geared up to go international. They know that
they are at a disadvantage, and as a result they are
interested in tying up with foreign cloud software
companies looking for a partner here in Japan. We think
there will be a boom in foreign firms returning to Japan in
2012, and that this will have beneficial trickle-down
effects in those sectors that support such companies --
recruiting, data centers, and real estate being just a few
that come to mind.


Lastly, our final Entrepreneur Business Handbook seminar
for 2011 is on this coming Saturday. We still have a couple
of seats available for last-minute sign-ups. More details
in the Events section below.

...The information janitors/


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+++ NEWS

- Possible first in Japan-US custody dispute
- "Not quite Matsuzaka beef" served to Chinese tourists
- TSE lags in bourse speed game
- Most single eligible men have no girlfriend
- Corporate governance laws to change

-> Possible first in Japan-US custody dispute

Although it took a absent-minded trip to Hawaii and a
subsequent arrest and US court hearing to make it happen,
it appears that the first ever successful
court-mandated repatriation of a mixed-nationality child
from Japan to the USA will take place soon. A Kobe-based
43-year old Japanese women, who abducted her 6-year old
daughter back to Japan after the US-based husband won
custody of the girl, has apparently agreed to allow the
child to return to her father in return for her (the woman)
being allowed to retain US residency rights. ***Ed: A taste of
things to come? Well, it's not really a test of the
Japanese court system, but rather the desires of a quirky
mom determining this case, so we're not viewing this as a
changing of old attitudes. Currently Japan is still a major
haven for child abduction by Japanese spouses in an
unwanted international marriage.** (Source: TT commentary
from, Nov 22, 2011)

-> "Not quite Matsuzaka beef" served to Chinese tourists

The quote from a restaurant owner caught serving
mislabeled beef to Chinese tourists tells it all. He
apparently said, "It was almost comparable to that of
Matsusaka beef, so I thought it would be all right." What
he doesn't share is that he also charged the full wagyu
price for the inferior product, ripping off 20-30 Chinese
tourists a month for 4-5 years. ***Ed: This is the kind of
behavior that will taint Japan's image quicker than
anything. This guy needs to have the book thrown at him.**
(Source: TT commentary from, Nov 27, 2011)

-> TSE lags in bourse speed game

Interesting article in the Nikkei earlier this week about
the comparative speeds of trade execution of the Tokyo
Stock Exchange, Osaka Stock Exchange, and exchanges abroad
such as the LSE, NYSE, and NASDAQ. According to the
article, the TSE's 18-month old Arrowhead system is already
out of date, rendering trades in about 2ms. While this is
certainly much quicker than the OSE's doddering 100ms, it's
still 15 TIMES slower than the London Stock Exchange, which
can execute trades in just 125uS. Why is speed important?
To be able to handle program trading by large funds and to
keep investors focused on Japanese stocks versus moving
somewhere else. ***Ed: Interesting that the article doesn't
address at all the issue of the trader-side systems, which
also have to be blazing fast to take advantage of the
exchange speeds. Right here in Tokyo we have one of the
world's leading players in trading systems, in the form of
Fusion Systems' Raptor product. There will be an interview
with one of the Raptor principals in December's ACCJ
Journal.** (Source: TT commentary from, Nov
26, 2011)

-> Most single eligible men have no girlfriend

This news item is already all over the web, but we couldn't
pass it up... According to a think tank related to the
Health Ministry, 61.4% of eligible men aged 18-34 have no
girlfriend, while for single women 49.5% have no boyfriend.
The numbers come from a once-in-5-years poll done in June
2010. Apparently the number of non-dating single men rose
9.2% over the previous 2005 survey. ***Ed: OK, why are all
these guys single and not interested in dating? Shy? Poor?
Ugly? Apparently it's because they're busy with work or
study, or are simply really picky. Sounds lame to us. We
wonder why they don't do a study on married people who have
a girlfriend or boyfriend? Maybe that's where all the
single girls and guys are hanging out? Clearly they're not
going to report that they are doing so...** (Source: TT
commentary from, Nov 26, 3011)

-> Corporate governance laws to change

In the wake of the Olympus affair, an advisory panel at the
Ministry of Justice is working on a draft to change the
corporations law, including changes to corporate
governance. The draft, which has been underway for over 12
months and which will be ready for submission to the Diet
next month, apparently recommends that all listed firms have
non-executive external directors. ***Ed: This won't achieve
much. As anyone who has been running a company here already
knows. Currently there is a requirement for all companies
to have a "statutory auditor" which is someone who fills
the same type of role that an external director would in a
larger firm. However, given that this person can be your
wife or best friend, and simply rubber stamps the tax
filings, it's a meaningless effort. This of course is the
point that Woodford kept making about Olympus. Everyone,
including the external directors, were in Kikukawa's
pocket.** (Source: TT commentary from, Nov 26,

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.



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Entrepreneur's Handbook Seminar 3rd of December, 2011

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