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Tech Industry

Services firms tackle Asia-Pacific

Cultural differences, economics, and government corruption contribute to market obstacles, IT services say.

Like Europe a decade ago, Asia-Pacific is the next tough nut to crack for global information technology services.

Cultural differences, economic troubles, backward infrastructure, government corruption, and tough laws all contribute to the challenge of opening up the market.

Of the global services companies, IBM, which has had a presence in Japan since 1937, has made the largest inroads within Asia, inking about a dozen outsourcing deals in the last year. And yesterday, IBM Global Services, moved forward with a tentative $350 million, ten-year outsourcing deal with Japan-based Mitsubishi Trust & Banking.

The deal is one of about a dozen IBM has inked in Asia throughout the last 12 months, proving that the company is one of the few multinational services company with an outsourcing pulse in the region.

Asia-Pacific, which spends about a third of what U.S. companies invest in information technology overall, remains an untapped goldmine, analysts say. However, the region is still reeling from the 1997 financial market crash, blamed on bad loans, corruption, foreign borrowings, poor government supervision of business, and overspending.

Industry observers say the region will take at least three to five years to rebound, though it remains uncertain what role global computer services companies will play in areas where skills gaps are glaring and technology lagging.

To date, services and consulting giants including Computer Sciences, Andersen Consulting, and Unisys have pinned most of their profits on North America and Europe, where outsourcing services typically include running a company's data center, network operations, desktops, application services, and help desks. But unlike traditional hardware manufacturers, these companies have yet to need to tap markets overseas for new business.

"The demand for IT services in the U.S. remains so great and the market size so large that most public IT services companies haven't had to point their canons across the Pacific," said Karl Keirstead, analyst at Lehman Brothers. To date, EDS has focused its information technology services efforts on Australia, Singapore, and Hong Kong, while rival CSC concentrates on Australia.

Hugh Smith, vice president of business development for Computer Sciences in the Asia-Pacific region, equates the outsourcing landscape there that of Europe 10 to 12 years ago. He cited cultural issues such as the threat outsourcing poses to the strong bond between employees and employers in the region, where his company is targeting the telecommunications market in particular.

"When you make it clear that the deal has to be controlled by the [IT services] company they back off," Smith said. "Outsourcing is one of those things they have seen as an anathema to their culture...One is reminded of the U.K. and Europe 10 to 12 years ago, and now they're outsourcing like crazy."

Overall, recent growth in computer services in the Asia-Pacific region, excluding Japan, has only limped along. The market grew just 2 percent last year, to $9.6 billion, according to Framingham, Massachusetts-based International Data Corporation.

IDC expects the market to reach $16.6 billion by 2002--an overall value that is still less than Electronic Data Systems' 1998 revenues of $16.9 billion. Last year, Keirstead said, EDS, CSC, and Andersen Consulting reaped between 5 and 10 percent of overall revenues from doing business in the Pacific, mostly in Australia, New Zealand, Singapore, and Hong Kong.

In Japan, IBM signed a billion-dollar-plus outsourcing contract with Daiwa Bank. Other recent contracts included last fall's outsourcing pact with Korean Airlines, deals with microelectronics company Omron, Prudential Insurance, and Cable & Wireless Optus.

But Asia-Pacific has been slow to embrace outsourcing. For one, it's not the way business has been traditionally done in these countries. Typically, analysts say, employees expect to work for a company, often for a lifetime, and businesses are leery of outsiders coming in and taking control.

IBM Global gets around this, says Fred Amoroso, Asia-Pacific general manager for IBM Global Services, because IBM Japan is considered a Japanese company. The company employs 26,000 employees at IBM Japan and has 1,500 employees in South Korea, another hot spot for their services business. To date, IBM has landed about 50 outsourcing deals in the region.

"Our customers view us as they do Fujitsu and Hitachi in the market, and we compete with them all the time," Amoroso said during a recent interview. IBM's contract with Korean Airlines was its first in excess of $100 million in the region, opening doors for business in the traditionally conservative airline industry.

Amoroso said the same economic pressures IT executives face in the United States are causing the Japanese to consider outsourcing as a way to control costs, manage their supply chain better, and compete globally.

For example, in March 1998, Osaka-based Daiwa Bank hired IBM to help the company restructure its business operations, take over their data center, and prepare the company to refocus on competing solely in Japan after the bank retreated from doing business overseas. Daiwa, along with its competitors, are scrambling to develop computer support for new financial products--such as 401k offerings- to compete within the country's deregulated financial environment.

Mark Lewis, who is heading up the Daiwa project for IBM, said there was apprehension among Daiwa employees when the deal was announced. "In the beginning they were very, very quiet," said Lewis, general manager for the finance and insurance sectors for IBM Asia-Pacific. "They didn't say a lot."

The deal represented a quandary for the bank, which wanted to show that it was loyal to its employees but also trying to save money.

"On the one hand, the Daiwa execs wanted to say to the marketplace and the Ministry of Finance that they had restructured and reduced the number of people in their organization," Lewis said. "But they didn't want to let those people go. There was a real dilemma that they wanted contradictory things."

So Daiwa and IBM worked out an agreement that called for 260 people from Daiwa and 40 people from IBM Japan went to work for a joint company owned by the two partners. Through the deal, Daiwa got the accounting advantage of removing the employees from its books, yet kept them on staff at the same time through the partner company. In the end, not a lot changed for employees, Lewis said.

Despite deals such as Daiwa, CSC's Smith said he expects little services and outsourcing growth in Asia for the next year or so, and "true elevation out of the current situation will take three to five years," though the company does see opportunities, particularly within telecommunications.

But to understand the challenge of doing business in Asia Pacific is to understand disparity.

Singapore, for example, is one of the world's most computer-literate countries and is leading the pack in exploiting high technology. CSC now works with 30 clients in financial services alone in the nation-state.

Thailand, on the other hand, lacks basic telecommunications infrastructure. Other countries share a lack of laws governing use of intellectual property and limited awareness of what computer technology can do for a business.

Yet the outsourcing trend will be pushed by multinational corporations moving into Asia that are more nimble than their local counterparts that support huge internal IT organizations, Smith said.

The myth of the tiger economies "has been exploded," he said. "A global economy is a truism."