A report recently published by Okta, called Business At Work, looks into how organizations and people work today and the apps they use in the workplace. One of the interesting findings in that report was that, regardless of size and number of employees, most companies are now using between 11 and 16 off-the-shelf SaaS applications. However, what draws the attention of those interested in global market dynamics and opportunities for international expansion, is the surge in cloud adoption in Asia Pacific. According to Okta’s data, Asia Pacific is now tied with North America in terms of the average number of SaaS applications offered to employees per organization at 15 – a significant milestone for a market that has long been considered a couple of years behind the curve when it comes to cloud adoption.
The Japanese SaaS Opportunity
Taking a closer look at Asia Pacific, it becomes clear that Japan is very much leading the region when it comes to SaaS. According to Forrester, Japan accounts for approximately 40% of the region’s $6.5bn SaaS spend and, with a predicted CAGR of 34.6% over the next five years outstripping its regional neighbors by some margin, the land of the rising SaaS will soon account for more than half of APAC’s burgeoning SaaS market.
The entrepreneurial among you are probably already thinking about how you can take advantage of the huge growth potential in this market, and you wouldn’t be the first SaaS companies to have the same idea. NetSuite, for example, launched an assault on the market in recent years but have struggled to gain a significant foothold. Unfortunately, it takes a lot more than a localized version of your software and a Japanese-based sales and marketing presence to make it in this market, and there is a strong tendency for Japanese customers to opt for home-grown solutions
Indigenous products fair best
As Daisuke Sasaki, CEO and Co-Founder of Freee, Japan’s leading accounting and payroll SaaS, puts it: “A lot of global SaaS companies find it really hard to enter Japan, actually. The one who is doing the best might be Salesforce or Google Apps for Work.” Freee just raised a $30m Series C round at a valuation of $250m owing to its 38% share of Japan’s cloud accounting market which Sasaki claims to have a potential value of $2bn. Its biggest trailing competitor, with 28% market share is not a Sage, or a Xero, or a FreshBooks, but another indigenous player named Yayoi. Granted, accounting and payroll is a function so market-specific that it can be more difficult to enter than in other product categories, but the same trends can be seen in CRM, storage, with local providers often preferred as their offerings are better tailored to the needs of Japan’s relatively demanding tech users.
Barriers to entering the market
Many of the barriers to entry to the Japanese market are cultural. The behaviors, preferences, and requirements of Japanese customers can often be so dissimilar to those of customers in western markets that western companies often struggle to produce a successful localized offering that hasn’t been built by and for the Japanese from the ground up. Secondly, Japan is the world’s third largest economy and accounts for 10% of global GDP. Establishing a significant presence in Japan is a big bet, requires significant investment, and it is often a case of win big or lose big. eBay found this out the hard way. Sales and marketing methods, contracts, payment methods, support requirements, and countless other facets of a SaaS business also tend to be vastly different from what western providers are accustomed to. The fact that Japan was never a western colony is a further contributing factor to its cultural distance from the west relative to some of its regional neighbors. So, as compelling as the size of the market opportunity may be, the effort required to take a piece of that pie should not be underestimated.
Find a local partner
Some notable SaaS companies have not been deterred by the difficulties associated with entering Japan but have taken a more cautious and, perhaps, well-advised approach by partnering with a local provider. Zendesk and Tokyo-based Cybozu entered a mutually-beneficial strategic partnership that saw the companies agree to market each other’s products in their respective home markets and to establish strong product integrations. Centrify entered Japan in conjunction with ITOCHU TECHNO-Solutions Corporation, one of Japan’s most trusted sources for IT infrastructure. While Sugar CRM approached the market alongside CareBrains Inc., a Japan-based provider of open source software application consulting, training, implementation and support. This kind of joint venture has a number of advantages in that it leverages the local knowledge, reputation, and cultural awareness of the Japanese partner as well as the benefit of an established in-market customer base and sales and marketing operations.
Succeed where others have failed
Nonetheless, such arrangements can be difficult to manage from a legal, organizational, and cultural integration perspective and more east-west JVs of this nature fail than succeed. Choosing a team with the requisite cultural intelligence to manage the JV and market expansion is vital. That said, SaaS companies have shown themselves time and again to be a resourceful bunch – leading the charge in new, innovative processes for sales, marketing, HR, finance, and other functional areas. In order succeed in Japan, North American and European SaaS providers will need to bring their proven agility, innovative thinking, and ability to disrupt to bear on a new geographical market in the same way they have done in traditional industry sectors. If they do so, western SaaS companies may well succeed where the previous generations of tech companies have failed and make it big in Japan.
By Michael Cullen @michaelcullen87