In September 2018, Japan’s Ministry of Economy, Trade and Industry (METI) published a report on digital transformation, commonly referred to as the “DX Report”. Its key message was that Japan may suffer an economic loss of up to 12 trillion yen per year after 2025 (“2025 Digital Cliff”) if it is unable to leverage new digital technologies to develop innovative business models or modify existing ones in order to drive revenue growth and enhance competitiveness.
Japan’s information technology landscape is unique. Many companies completely outsource their IT to service providers, only retaining IT strategy and governance functions in-house. The principle of job rotation leads to the IT function being led by generalists, not IT specialists. In addition, the service providers, which often are subsidiaries, are used as the last career step for managers who cannot progress any further in the mother company. In a world that has increasingly recognized the leadership quality of IT in the definition of new business models, in Japan IT staff are rarely seen as being equal to their business users — specifications are compiled as “orders” in a traditional waterfall method and thrown over the proverbial wall for IT to execute. All this does not bode well for digital transformation.
METI recognizes in the DX Report that even those companies that have launched transformation efforts, for example through the establishment of a new department responsible for digital technologies, have faced difficulties in actually reforming their businesses, and the success of their implementations has been inconsistent. However, if no action is being taken, the overall situation will materially deteriorate by 2025:
- Today, 20% of mission-critical systems are older than 20 years; this will increase to 60% by 2025
- In 2015, there was a lack of 170,000 IT specialist for the country as a whole; by 2025, this gap will increase to 430,000 positions
- Over the coming years, significant systems will reach the end of their support period, including Windows 7 in 2020 and significant SAP deployments in 2025
- In parallel, key new technologies will enter the market, such as 5G mobile in 2020 and driverless cars, further contributing to the Digital Cliff
Legacy systems maintained by service providers are often a “black box” to the companies themselves, who do not understand the system structure and functions. The technology is ageing, and the systems have become bloated and complicated. Constructed in silos, access to data across a company is often obstructed. Modernizing the systems in-place will not be sufficient, in order to be ready for the “big data” age and the application of artificial intelligence (AI), a more radical re-platforming might be needed.
Japan Airlines is often quoted as a success story in applying AI today. However, this would not have been possible without a massive IT modernization effort, with an investment of 80 billion yen over a seven year period. The dilemma many companies face is that the maintenance of legacy systems is already eaten up such a large part of the IT budget that funds for new system development are scarce.
On the human resources side, many of the staff with the skills and knowledge to maintain the legacy systems are nearing retirement age. Service providers are challenged in attracting young graduates with relevant digital skills, since they do not want to join companies to work on legacy systems. Many find jobs within the increasingly thriving startup ecosystem to work on cutting edge technologies.
If you would like to dive deeper into this topic, you can find the English summary as well as the full set of Japanese documents on the METI website.
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