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TOKYO, Japan, August 23, 2011 View All Press Releases

Gartner Says Global Sourcing by Large Japanese Enterprises to Recover in 2011

Establishing a Structure to Support Japanese Companies' Overseas Expansion will Become a Key Initiative for IT Services Vendors

 Of large Japanese companies with annual sales of over 100 billion yen, 19.1 percent have used offshore IT services in 2011, a 3.9 percent increase compared to 2010, according to Gartner Japan Ltd.

Gartner surveyed 436 C-level executives, senior managers, and IT managers in Japan between February and March 2011 to understand the adoption of IT services within Japanese companies.

Gartner analysts said this utilization fell significantly between 2009 and 2010 due to frozen IT projects in the manufacturing and finance industries, and vendors focusing on domestic operations. The recovery was mainly due to an increase in demand for engineers by resuming IT projects and improvements in technical strength of offshore vendors from countries such as China and India.

Of Japanese enterprises using offshore services, 88 percent are outsourcing IT services to China, followed by India at 12 percent. There are Japanese companies that use locations such as Vietnam and the Philippines, but usage of each country remains less than 6 percent.

For IT services in China, the growing trend is to use new locations such as Xian, Jinan, and Tianjin, in addition to the originally popular locations such as Dalian, Beijing and Shanghai. In Gartner's analysis, vendors that establish offshore centers in China are moving their base location inland due to a rise in prices and human resource costs, and to stay one step ahead of the competition in acquiring capable personnel.

Until 2010, the manufacturing, securities, and insurance industries in Japan were more inclined to outsource their functions than other industries. However, Gartner’s survey shows that industries such as banking and logistics, which were cautious with global sourcing in the past, have increased their usage. An indirect approach where enterprises contract with Japan’s prime vendors, who outsource to sub-contractors or group subsidiaries outside Japan, was more common until recently. More companies have started seeking deals directly with offshore vendors.

“Japanese companies planning to expand their business in Asia, particularly China, are starting to explore global sourcing by looking at local partnerships,” said Yuko Adachi, research director for Sourcing at Gartner.

“Although enterprise use of global sourcing in Japan is close to 20 percent, the estimate for application development/system integration (SI) outsourcing remains at approximately 4 percent of the market,” Ms. Adachi said. “In addition, contracts and customs particular to Japan are an impediment, and few vendors, especially vendors of emerging countries, have been successful in entering the Japanese market. However, within Japanese companies using global sourcing domestically, and among Japanese companies that are dealing with overseas vendors such as the big Indian providers, the reputation of offshore vendors is growing steadily. However, the speed of development is slower than that of Europe and the U.S. The trend towards global sourcing in Japan will not stop, and we expect further expansion in this area.”

For Japanese domestic vendors anticipating these trends, offshore vendors in India and China, and for Japanese companies, Gartner recommends investing in developing human resources that will result in effective and higher quality global sourcing. Furthermore, with Japanese companies expanding in Asia, analysts also recommend that Japanese vendors consider building a global sourcing organization that includes new locations such as Singapore, Malaysia and the Philippines.

Additional information is is available in the Gartner research, “2011 IT Services User Survey:  Trend Analysis By Theme (PFST-J1-UW-1111).”

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