On June 22nd a rather unique if small outsourcing company, called Japan Third Party (JTP), listed on the JASDAQ. Although at first glance the business looks like a pretty standard operation, the company is special in that a full 95% of its business comes from foreign technology firms (not end users). The remaining 5% is with Japanese firms needing some form of assistance leveraged by JTP’s international operations. In a country where most SI firms are challenged to simply communicate with foreigners, JTP really shines.

According to MIC Research Institute Limited, the overall IT outsourcing market in Japan for 2005 was worth about JPY2.45trn (US$2bn), being split up roughly into the following categories: Data Centers at 40%, contracted data processing at 30%, and the remainder being in-house manpower and general IT services and support. The market has been stagnant since the implosion of the dotcom sector in 2001, an event that had repercussions on data centers in particular, and grew only 1.5% year-on-year to 2005. However, thanks to the recent economic improvement, things are looking up again, and MIC reckons that this year, 2006, the overall market will be worth JPY2.61trn (US$2.21bn), up 6.5%. As one could expect, the biggest area of growth is expected to be data centers, which are likely to expand by about 8.7% annually through 2010.

The largest player in the conventional third party outsourcing sector is IBM Japan. The company blew past its competition, both local and foreign, back in 1999, when it announced that it had signed a 10-year deal with auto maker Mazda Motor Corp., for a reported JPY55bn (US$480m) for the full period. The deal involved IBM Japan taking over the development, operation and maintenance of Mazda’s host computers, supercomputers, 10,000 personal computers, and most of its network links. While outsourcing deals had been hitting the news on a regular basis before this one, the Mazda contract was sufficiently massive and independent that it served as a wake-up call to IBM’s domestic SI competitors, and touched off what has since become an outsourcing war.

In the intervening 7 years since the Mazda deal, IBM’s competitors have been retaliating and putting together their own deals. Among these was a landmark JPY250bn (US$2.12bn) 10-year deal between Hitachi and UFJ Bank in 2002. The two companies in typical Japanese style formed a joint venture – an indication of how closely Japanese firms want to keep their outsourcing partners — and which is called UFJ-Hitachi systems.

Ironically, with the merger of UFJ into the Bank of Tokyo Mitsubishi at the beginning of this year, the final outsourcing victor over the next two years will actually be  IBM Japan, who in 2003 formed an outsourcing joint ventre with Bank of Tokyo-Mitsubishi. IBM is doing really well in the sector and is now rumored to be tying up with Resona t
supply a core banking system to Japan Post, the world’s largest savings bank.

Back to JTP, the company was started in 1987 by CEO Kazuaki Mori. He got into the outsourcing business, so the story goes, after attending a Rotarian conference in Austin, Texas in 1982. Mori worked in the Field Service division of Omron, and was trying to learn more about how to support Omron’s ATM business in the USA. As one of the few non-Americans in the room, he quickly struck up a conversation with the gentleman sitting next to him and mentioned how he was struggling with how to support his ATM business. The man asked him why Omron, an ATM maker, was trying to be a field service company. “Surely,” he said, “You would want someone with an already established third party service network to do the work?”

Mori was astonished. The solution seemed too easy, especially when compared to the millions of dollars being proposed internally for a purpose-built service network. The concept and the term “Third Party” stuck with Mori, and he decided to go check out several such vendors. He was impressed with their professional capabilities and yet their ability to control costs. Heading back to Japan, he floated the idea that Omron, too, should go into the third party maintenance business in Japan. The idea met with favor and a team was formed.

However, neither Mori nor Omron had counted on the revaluation of the Japanese yen in the mid-1980’s and the resulting loss of manufacturing competitiveness here in Japan. Omron decided to get out of the outsourcing business in 1987 and Mori, having decided that he had found his calling, resigned to start up Japan Third Party.

Fast forward 19 years, and today Mori’s company is doing about JPY5.08bn (US$43.05m) in sales, with an operating profit of JPY230m (US$1.949m). Modest numbers to be sure, but given that the company is growing in an environment where most of the world’s majors have failed, shows that its basic business proposition has legs. Right now most of JTP’s revenue comes from business-to-business (not end-user customers yet unfortunately) dealings with foreign firms already in Japan. It has a blue chip client list, which includes such companies as Sun Microsystems Japan, SAP, Symantec, Nokia, Acer, and Hewlett Packard Japan.

Analysts say that while the company may be doing well, its exposure with 40% of its business coming from just two customers, Sun Micro and HP Japan, means that it needs to expand and diversify. Indeed, that is exactly what Mori’s team is doing. JTP has been aggressively investing in a regional presence in such countries as China, Korea, and the USA — taking advantage of its bilingual and sometimes trilingual staff. In the USA in particular, Mori reckons that about 500 venture capital deals are done in Silicon Valley every year, and that about 10% of these companies are interested in setting up in Japan. His Santa Clara office is intended to tap in to this flow.

On the day of the IPO, JTP’s stock closed at a pretty good price of JPY360,000 per share, almost double the IPO price of JPY200,000. But once the day traders had taken their toll, the stock has settled down to around JPY190,000, and now looks relatively cheap. One reason we think the stock has come down is that the market doesn’t really understand the value of JTP’s foreign client base. His clients are multi-billion dollar companies with a commitment to Japan, and Mori keeps finding ways for them to do business with him. The latest is engineer training. JTP educated a surprisingly large 12,000 engineers last year, and in August 2006 inked deals with EMC, the storage maker, and Caplan, the Itochu-related temporary staffing company, to conduct training on the behalf of both companies.

There will be a full article on JTP in the December issue of Japan Inc. magazine. We’ll let readers know when it is due out.

Wrapping up today’s newsletter, and on a completely different note, we’d like to point out the two CEO positions featured in the Job Section below. These positions are with companies that Japan Inc.’s advisory consulting business is working with. The key point about these vacancies is that both companies are looking for Japanese-speaking foreigners to run their Japan operations. It is refreshing to see foreign firms who value  local foreign top staff. Interested parties should contact editors at terrie.com for more information.