Consulting the Consultants
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Used to be, you needed a consultant to find a good consultant, and the resultant ballooning supply of "Japanese market experts" seemed never-ending. Now, in this era of Big Bang deregulation, how relevant is this service, and do you still need consultants to guide your company through the byzantine Japanese business arena?
By John Boyd For one thing, deregulation is only taking place in some industries--in telecom and banking, for instance," asserts John Linehan, a manager with Ernst & Young Consulting Japan, a subsidiary of one of the Big Five international consulting firms. "There are still a lot of regulatory obstacles to be found in IT and other industries." "On the surface, things have changed," maintains Hidetaka Kai, associate director of Arthur D. Little Japan (ADL) the Japanese arm of another member of the Big Five global consulting companies. "But even though certain legal barriers have fallen away over the years--under pressure from the US government--foreign firms need to understand the characteristics of the market here, which change with each industry segment." Kai reels off a list of such characteristics that can easily assume the status of barriers to doing business, if they are not properly understood: multi-tiered distribution channels, closed dealer practices, government standards and safety requirements, the need for localization of products and services, finding good local staff, and the lingering keiretsu (industrial cliques) issue. To this list, Linehan tacks on less obvious obstacles that can turn into pitfalls for the uninitiated. "Take a foreign software company coming into the Unix market, as an example," says Linehan. "It may look the same (as the Unix market in the US) but the Solaris (Sun Microsystems' Unix operating system) from Fujitsu and Toshiba may be just a little bit different, and could cause problems." It's the same, he says, with NEC and Hitachi using Hewlett-Packard's HP-UX Unix on their systems, or the Hitachi mainframes that are compatible with IBM mainframes. "Each company has put their hand in a little bit, and changed things, and everything is just a little out of synch. There's a lot of stuff like this that people don't understand." If all this negative talk appears to be highlighting potential hazards in order to justify self-preservation, John Stern, founder and president of Tokyo-based Japan Market Engineering (JME) goes straight to the nitty-gritty by proffering the most realistic of reasons for hiring consultants; they can save you money. "Most foreign-capital companies spend too much to achieve a given objective in the Japan market, because neither the typical Japanese, nor the typical foreign staff person is aware of cost-saving alternatives," says Stern. "A seasoned consultant, particularly one who has run operations with tight budgets, can be invaluable." Stern was vice president of the American Electronics Association's Asian operations from 1984-1995, and he set up AEA offices in Tokyo and Beijing, before establishing JME three years ago. He has uncovered a number of ways to cut clients' costs, though he is not about to broadcast them for competitors to see. But when it comes to finding talented IT staff, or reliable technology companies that won't bust the budget, for instance, he turns to the Internet to search out non-North American IT people and Asian third-party IT services and software developers, which are typically not as expensive as bringing over, or locally hiring, US expat engineers and technical people. "Sometimes it's a case of having to back track the work online you like," Stern says, referring, for example, to exceptional Web-page design he's come across on the Internet. "The people responsible may not advertise; they may not have an address in Marunouchi (Tokyo's high-rent business area). Yet, they can be competent and reasonably priced. They need to be interviewed carefully, of course, but they can turn out to be more committed to your company, than some ´20-million-a-month (expat hire)." In some cases a foreign IT company may already have a presence here, but requires help in expanding its operations. A good example from the PC industry was ADL's efforts in helping Apple Japan crack the Japanese market in the late '80s and early '90s. The Cupertino, California-based company had established a subsidiary in Tokyo in 1983, but had put the marketing of its Apple II and Macintosh computers entirely in the hands of Canon Sales. "Business wasn't working out as well as they expected," says Kai. "PCs weren't Canon's single business. So Apple asked us to help establish sales channels, service support and marketing campaigns. As you know, in 1992 and 1993, Apple Japan became something of a treasure for Apple Computer, even though it had no (previous direct) market presence in Japan." The way Kai describes it, establishing sales channels and finding dealers can be a particularly daunting undertaking for foreign IT companies. "The structure is very complicated, with different levels of wholesalers," Kai says. "You need to know that customers perceive each channel as being different. Each manufacturer also has its own keiretsu (of outlets) so there is no way you can do business with them. And you can't visit each store, one by one (to find all this out)." It's at this point that some IT newcomers can make the mistake of rushing into unsuitable relationships with local companies, though they may be eager to assist. "Trading companies will offer to help, but they want to see cash flow (profit) for their services," says Kai. "Their main business, though, is not channel expertise. So they don't have a good track record --outside of telecommunications and the satellite business." There again, going the traditional channel route may not necessarily be the best road to travel. "The retail market is difficult to penetrate," agrees Linehan. "And given the low margins, it might not be worth your while to work to get into the stores in Akihabara." Naturally, it depends on the product and the market a client is selling into, "but there are alternatives like direct sales, call centers, outsourcing possibilities, or perhaps establishing a direct sales force to go after the corporate market," Linehan says. One way of learning about the Japanese market and its potential, without immediately making a full commitment, is to engage a consultant to set up and run a company for you, until it's possible to determine what size of operation can be profitable. "A company that doesn't yet know how much the costs of setting up an organization are going to be, and doesn't yet know how to go about things, will not want to be hiring people," points out JME's Stern. "So we can establish and operate a turnkey operation for them, and help them learn these things. Then after they get a better feel for the market, they can hire when they feel confident." But the simplest and most direct way of getting established in Japan, according to Christopher Grafton, with the Tokyo arm of the UK-based PA Consulting Group, an executive search company, is to start off by hiring the right person to lead your new subsidiary, so he can build from the ground up. "Hire your own president and have him establish a stand-alone operation, rather than pay out enormous (business) consulting fees," says Grafton. "Then give him the responsibility to run with it." There are good people available, says Grafton, who have "reached a glass ceiling in their own company, and who are looking for a challenge. But these people are not looking in the newspaper for a new job; they have to be wooed into a better career." Yet, even this approach carries risks for the unwary. Grafton warns of the dangers of hiring the apparently dynamic executive-type who speaks fluent English, appears to know all the ropes, but after some background investigation, is found to have made a career out of managing foreign companies that never seem to come to anything. "These people always ask for a lot of cash," says Grafton. "And they might impress foreign executives, but not necessarily the Japanese. What could be best is a caricature of the Japanese executive, who will be admired by the Japanese." Another area consultants can make a difference in is dealing with, and getting round, any differences and problems concerning Japan's basic IT infrastructure. Stern notes that technologies are moving so fast in the US, while telecommunications and financial service markets are "far ahead in terms of liberalization in the US, and to some extent in Canada and the UK." The result is that the infrastructure that enables a particularly advanced technology to be implemented smoothly in those countries may not yet be in place in Japan. "So a new-to-market company can have the same problem (in Japan) as someone jumping off a train: He hits the ground standing still, and has to adjust very quickly, or fall flat on his face," says Stern. Though infrastructure and costs are improving, Stern asserts there are still big differences, for instance, in what you pay for telecommunications charges and in bulk-mail rates in Japan, compared to the US. Linehan is in general agreement. "It doesn't pay to use lease lines or frame relay here, but you can work round that with, say, a virtual private network (using a carrier's telecom backbone)." And don't, he warns, ask for a fraction of a T-3 Line service, or you will end up with "four T-1 Lines, then you will have to multiplex." Linehan describes one company that came over to Japan and began by renting a building for office space, only to discover that the electrical current provisions were inadequate for its needs by a huge factor. "It cost them one million dollars to get it up to the level they needed," he says. "So if you are willing to pay, you can always get things done." Given Japan's liberalizing attitude of late, and the low cost of yen, mergers and acquisitions are increasingly becoming an acceptable way for foreign IT companies to get a quick foothold in Japan. Intuit, the creator of the popular personal financial software package, Quicken, recently took the M&A route to get established quickly in Japan when it bought out two local accounting software companies. Similarly, PSINet, an international Internet Service Provider, has just acquired several local firms, including the pioneering TWICS ISP, to extend its operations in Japan. Here, too, consultants can play an important role during the various stages of the merger. Notes Arthur D. Little's Kai, "Mergers and acquisitions often fail because Japanese companies are run on unwritten rules. If you force US management style on top of this, it can be a disaster." "The success of the new entity will depend on the smooth integration of the two companies," says Linehan. And he's not just speaking about the nuts and bolts of systems and network integration. "There are different employee compensation programs to consider, changes in job description and titles can cause trouble, reseller programs need to be renegotiated."
It is also vital that post-merger integration be done quickly. "If the company waits three months to announce its plans for employees, the best people will have left already," points out Linehan. "You can't keep them hanging on, when rumors are flying."
Given all these factors, Linehan asks rhetorically, "Is it cost effective for a company to learn how to do all this themselves?"
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