IT and Management
August 04 (Friday) 2006
The IT revolution has been recognized internationally for some time. The IT revolution is also known as the “Third Industrial Revolution”. The first was the motive energy revolution which was brought about by the steam engine. The second was the rise of the automobile industry which was driven by fossil fuels developments. The IT revolution, which began at the end of the 20th century, is similarly changing the world's industries as well as the very state of human existence. The pervasion of IT is expected to dramatically improve industrial productivity; in terms of lifestyle, it promises to greatly enhance everyday convenience. Particularly in the U.S. - where the IT revolution began relatively early and on a large scale - the service sector saw a rise in productivity in the 90's. It is said that this rise buttressed the economic growth of the same decade. Similar changes are underway in Japan, but, as a result of sluggish productivity in the service industry, improvements in the overall productivity of the Japanese economy have been nominal.
It is predicted that Japan will face a labor force shortage in the near future. According to estimates released by governmental research organizations, the Japanese population will peak at 128 million in 2006, but will then start to decline and by 2050 moderate estimates have the population at roughly 100 million while lower estimates have it at 90 million. As a result, the labor force will experience a dramatic decrease within a half-century.
In response to the decline in fertility rates, child-rearing assistance has been offered primarily from the government and industrial sector. These policies, however, have so far been ineffective. Even if they eventually bear fruit, it will be 30 years before the effects will be felt in the labor force.
In other words, child-rearing assistance is not a viable solution to the labor force shortage dilemma that Japan will soon face. There have been calls for an increase in foreign labor, but it will not be easy to adequately provide basic human rights for these workers. If these rights are not provided, serious discrimination problems will follow. Furthermore, realistically speaking there will likely be a limit on the number of foreign laborers allowed into the country. If this is the case, foreign labor intake cannot be a fundamental answer to the issue of labor shortage.
The best solution for labor shortage is an improvement in productivity. If structural reforms that will substantially improve productivity in low-productivity sectors are implemented, the problem can be overcome. “Low-productivity sectors” specifically refer to the service sector (17 million labor force), the distribution/retail sector (12 million), the agriculture, forestry and fisheries sector (4 million), and the architecture/construction sector (7 million). Among developed countries, Japan's productivity in these sectors is remarkably poor. At the root of the problem is inefficient and outdated management. If these sectors were to undergo drastic managerial and structural reforms and become more efficient, it would not be unreasonable to expect a two-fold increase in productivity. If this were accomplished, the labor shortage dilemma would be solved. This is easier said than done, but it is clear that a basic policy of increasing productivity would offer a solution to the labor shortage dilemma.
Increased productivity among sectors such as service and distribution will require effective utilization of IT. In Japan, IT does not function adequately as a means of improving efficiency in the service sector. Let us examine the reasons for this.
Low-productivity in Japan's service sector is rooted in the fact that corporations - large and small and regardless of the line of business - are not utilizing IT effectively.
In particular, small enterprises occupy a majority of the low-productivity sector, which itself represents a large proportion of Japanese industries. There are many different kinds of small enterprises - construction and retail shops, the transport industry, even barber shops and etc. - and generally speaking they all tend to experience difficulties when IT is introduced as a means of improving efficiency. The problem, however, has less to do with IT itself and more to do with management. For example, whether it is the flow of capital and goods or how personnel are integrated into production activities, it is apparent that management generally does not have a firm grip on company issues. Companies simply do not have areas such as accounting, production management, and customer management in good order. In other words, management does not have a firm grasp of company information, the management situation itself is uncertain, and the company suffers from lack of direction. In this situation, even if there is a movement to introduce IT it is unlikely to succeed. There are many cases where small enterprises are not producing sound accounting statements (which are the foundation for tax payments), or do not have certified tax accountants under payroll. To put it differently, executives lack the ABCs of management. The introduction of IT must be prefaced by personnel and financial transparency.
A similar problem is latent in large corporations (financial, retail, medical and etc.).
Every summer, Fujitsu invites certain clients to a seminar held in Karuizawa. It is a forum for clients and Fujitsu executives to exchange thoughts and opinions. As Chairman of Fujitsu Research Institute I participate in this event, and this year was another opportunity for revealing discussion.
There is a firm recognition among Fujitsu's executives that a prerequisite to effective implementation of IT is sound management. I would like to report on some of the helpful discussion on this topic between management executives and clients.
For example, an executive from a regional bank expressed these thoughts: “We have ordered system integration from Fujitsu and the cost is quite steep. We do not get the sense, however, that this measure has led to an increase in productivity and subsequent company profit”.
Given the state of management, this outcome was probably inevitable. Regional banks generally operate under the philosophy of “relational banking”; this philosophy is expressed in the maxim, “The basics of business are face-to-face”. Operating under this premise, system integration would likely help to make management systems more transparent, but would have little effect on improving overall bank productivity and company profit. The traditional practice of “face-to-face” business requires individual attention and consequently leads to high personnel costs; introducing IT to companies that maintain this practice, therefore, would not translate into increased profit. The real issue is the necessity to make this kind of business practice more efficient with the introduction of IT. For example, in a situation where customers are allowed to place orders online, the more efficient the online system the more productive the company. In fact, the number of financial institutions working in this direction is increasing. The online securities corporations Shinsei Bank and Matsui Securities are two such examples.
President Matsui of Matsui Securities was the first in the securities industry to recognize inefficiencies in business practice and slash personnel. Mr. Matsui used to work at NYK Line (Nippon Yusen Kabushiki Kaisha). When he entered the securities industry, he was puzzled as to why individual personnel had to be inserted between the customer and company. He decided to embark on a policy of personnel reductions. As a result, efficiency was enhanced and profits increased.
The introduction of IT is effective and improves transparency. To improve the effectiveness of introducing IT, however, it is imperative to establish a management business model before the IT itself. Efficiency depends on whether management understands this concept or not.
Recently, the problem of regulating “grey zone interest rates” in consumer finance has surfaced. Traditional financial institutions such as banks tend to deal only with low-risk customers, and as a result high-risk customers have no choice but to turn to consumer finance institutions to raise capital. The consumer finance industry, however, is not well-equipped to evaluate and analyze a customer's capacity for repayment. Customers are consequently forced to pay high-interest rates commensurate to the high degree of risk.
Debate has begun to push the industry in the direction of putting a limit on the high-interest rates, but this would necessarily exclude high-risk customers from the customer finance industry and impel them to turn to black market financing instead. Financial regulations intended to benefit consumers would, in this scenario, have the opposite effect (particularly with regards to consumers with low repayment capacities).
Increasing the volume and enhancing the precision of data-analysis would allow companies to accurately evaluate individual risk. IT, if properly utilized, could accurately analyze each customer's degree of instability, as well as their financial history, and make a sound judgment. The reality of Japan's financial industry, however, is that its capacity to screen customers is poor, which complicates the problem.
Even medical institutions such as hospitals are, to a certain extent, recognizing the necessity to adopt IT. Advances in IT, however, come with added cost and subsequent managerial headaches. This represents a difficult dilemma. In many medical day-to-day operations, there are an abundance of areas - such as medical charts and placing orders - that stand to benefit from the introduction of IT. However, here we come across another problem: the general thinking of medical practice and the language of medical practice are not unified.
The establishment of system integration in this situation is bound to be complicated and difficult to manage, not to mention costly. If doctors were to collaborate and promote the unification and standardization of basic areas such as language and evaluation standards, then operations would become easier. Again, the problem is not to do with IT itself; rather, the inherent issue lies in the state of decision-making and information-sharing within the institution.
In conclusion, in order to improve economic efficiency through the utilization of IT, it is essential that managers' ways of thinking, their management style, and how they plan and operate administrative organizations be reformed. In addition, it is important that management as a whole become more transparent and systematic.