NTT Data, Japan's largest independent IT systems integrator, and Capgemini have agreed to work together as preferred partners in the US, Europe and Japan.
The planned global alliance highlights the pressures facing the sector as well as the difficulty western companies have in penetrating the Japanese market for IT services.
Under the agreement, NTT Data will also acquire 95 per cent of the shares of Capgemini's Japanese subsidiary for an undisclosed sum. The French group, which had sales of Y3.1bn ($27.5m) in Japan last year and employs 150 people, will retain a seat on the board.
The deal is expected to help NTT Data expand its presence among foreign companies building IT systems in Japan and to help Capgemini win contracts with NTT Data's clients in the west.
However, the alliance is not exclusive and does not preclude either group from working with other partners.
The deal underscores the pressures on IT services groups as weak economic activity and fierce global competition have taken their toll.
Capgemini, Europe's largest IT services group, has faced a particularly difficult period and is cutting 1,500 jobs on top of 8,000 shed since 2001.
In January, its credit rating was lowered to junk status by Standard & Poor's.
Earlier this year, Capgemini sold its North American health practice to Accenture for $175m as part of an asset disposal programme aimed at reversing three years of losses.
The sale of its Japanese unit, which is in line with that programme, comes as competition in Japan has intensified amid a lack of major projects.
“During the first IT boom, companies shifted people to the software business, and the Year 2000 problem followed by Japan's bank mergers triggered huge demand for IT services. But there are no longer projects of that scale, so competition has become fierce,” says Yoshiharu Izumi, electronics analyst at JPMorgan in Tokyo.
NTT Data, which is 54 per cent owned by NTT, the telecoms group, has reported falls in operating profits for the past two years, from Y61.5bn in the year ended March 2003 to Y39.2bn in March 2005.
It forecasts a recovery in operating profits to Y45bn this year on sales of Y880bn.
But even before the slowdown, foreign companies struggled to win business in Japan in competition with the dominant players, which are hardware manufacturers including Fujitsu, Hitachi and NEC.
“Japan is the only country where IBM is not dominant [in IT services],” says Mr Izumi.