NEC's SI business shifting to "DX offering"--Ask Vice President Sakai-ZDNet Japan

　NEC is shifting its system integration (SI) business to a "DX offering" model. The idea is to break away from man-month man-hours and provide a high-value-added service that supports digitalization, including business reforms. Achieving the numerical targets of the medium-term management plan, such as net sales of 3.5 trillion yen and adjusted operating income of 300 billion yen in fiscal 2025, seems to be greatly influenced by how the SI service, which earns nearly half of the profits, should be. We asked Mr. Kazuhiro Sakai, Executive Vice President and Chief Digital Officer (CDO) who leads the company's SI business, about future developments.

--Why did NEC stop disclosing SI service sales and profits from 2012?

Mr. Sakai (same below): This is because we have organized by account such as enterprise and public sector. However, considering the business portfolio from the profit structure, it will not be possible to invest well unless it is assembled on an asset basis. Therefore, the other day (September 15, 2021), in the investor information (IR), we announced the results of the domestic IT business (consisting of products, SI, services, and maintenance). We are also thinking about the horizontal axis, including the responsibility system.

--Announced sales of the domestic IT business in FY2020 will be 1.33 trillion yen (estimate for FY2021 is 1.35 trillion yen), and the adjusted operating margin will be 8% (9% in the same period). Although the composition ratio of products (hardware) and SI, services, and maintenance by model was not disclosed, roughly 40% is products, and 60% (approximately 800 billion yen) is SI services (SI, services, and maintenance). It says.

　The average annual growth rate of the IT business is expected to be 2-3% (FY2025 target is sales of 1.6 trillion yen and an operating margin of 12.5%). However, in the IT business, hardware and man-hours will decrease, while common platforms such as cloud and consulting will grow. The problem is that there are many man-hour-based jobs where sales are proportional to the number of people. Since the unit price has barely risen, SI sales earned by system engineers (SEs) are limited to 400 billion to 500 billion yen.

--I heard that when you listened to the lecture, "Although the demand for IT will increase, cloud computing will make it unnecessary to create applications," you became aware of the problem of how SI services should be.

　In 2022, we will organize and clarify what will happen to value provision through hardware, cloud, maintenance, and SI. Then, simulate sales and Gross Operating Profit (GP) and consider human resources and investment. This is to increase productivity and increase sales and gross profit while the population is declining.

--When he took charge of the overall SI service in 2016, he said that he intentionally moved to the cloud. I hear that he is also working on digital human resource development such as artificial intelligence (AI) and security in order to break away from man-hours.

At the 2020 IR, we announced a shift to a proposal-type and value-providing type, and started preparations. Investment costs are high because it depends on the skills of each individual, but we thought that profits would increase if the number of DX offerings increased. DX offerings are similar to solutions, and there are common ones such as workplaces and office environments, as well as pre-prepared sets of products, SI, and support that support business transformation and innovation for each industry.

　In the past year, we have prepared about 40 kinds of menus. The actual content is the foundation (platform), applications (Software as a Service , etc.), delivery, etc., starting with consulting and proceeding with the project together with the customer.

--It is said that the problems of the SI business are also in the man-month business and the multiple subcontracting structure. Competing IT vendors are promoting in-house production by absorbing system subsidiaries into their main bodies, actively promoting the use of SaaS, and reviewing their relationships with partners. NEC's SE number is said to be 20,000 in the NEC Group (thousands of main units, 12,000 NEC Solution Innovators, etc.) and 25,000 in partners. What are you going to do next?

　Partners will help us with building infrastructure and apps. There is also the creation of assets such as biometric authentication systems, but the number of jobs involving people will decrease. The reason is that speed is required. Projects that used to take a year and a half have recently been shortened to three to nine months. This is because cloud computing advances and things that move are created. We will explain strategies such as DX offerings to partners, and prepare educational programs such as agile development, utilization of AI and cloud, and digital human resource development.

　Customers are also changing. The number of requests from the line of business (LoB) is increasing. LoB isn't interested in man-hours, they see value in speed. Such LoBs have a budget and are involved in projects to about 20% of the total, and it continues to grow. Our company also aims to buy the value we provide, not based on man-months.

--Isn't NEC's cloud infrastructure weakening? The handling of overseas clouds such as Amazon Web Services (AWS) is increasing.

In 2016, when I was in charge of SI services, I thought that NEC's cloud would decrease, but that was not the case. In addition to Kanagawa, which provides its own cloud, it has increased investment in data centers in Kobe, Nagoya, Chiba and Inzai, and is also compatible with the Security Assessment System for Government Information Systems (ISMAP). I never intend to relax.

　It is separated from public clouds such as AWS. I became an AWS Prime Partner in 2017, and have grown tremendously since then. The core system has also started to be moved to the cloud, and the list and shift are being promoted together. In particular, the focus is on finance, and it is spreading to industries such as manufacturing, distribution, and services.

--US IBM spun off SI services and other companies, but what about NEC?

NEC will become a manufacturer-affiliated SI with strengths in manufacturing. For example, edge products such as point-of-sale systems (POS) will become customer points of contact and value in the Internet age. We have turned to a solution-based approach that provides such products and SI together.

　Of course, it is not necessary to create everything in-house, but our strength is in putting it all together as a solution. I have no intention of splitting the company. It may sway to the account side, the product side, or the SI side, but we will strengthen vertical and horizontal cooperation (author's note: organization by business unit such as enterprise and organization by model). That's why we prepared the DX offering.