(FORTUNE Magazine) – WALK INTO A FACTORY of one of Japan's industrial giants and what do you see? Workers in starched uniforms go about their tasks without wasted motion. The equipment is the best available, workspaces are as orderly as a dentist's examination room, and every activity is choreographed and measured to the second. As you would expect, quality and efficiency improve like clockwork. But step into the office of the same company -- or any other -- and you'll find something else. Groups of salarymen (and a few salarywomen) scrunch around tiny desks wedged into long, cramped rows. Only a few have personal computers or word processors, and it is not unusual for four or five people to share a phone. Most desks are heaped with drifts of important-looking papers. During especially busy times, the workers look like a bunch of adults playing musical chairs. At no time, however, is there the sense of order that pervades the factory floor. Japan has the world's most efficient manufacturing plants -- and some of the most inefficient offices anywhere. The factories are largely the legacy of the late W. Edwards Deming, the American quality guru. But corporate Japan's bloated bureaucracies are the result of home-grown labor and management policies that Japan sometimes brags about -- lifetime employment, consensus decision-making, and hierarchical organizations based on seniority. The bureaucracies also reflect Japan's cultural obsession with the role of human relations in business. That's why Japanese managers -- even CEOs -- are expected to drop everything to attend the funeral of an employee's parent. And where else do executives feel they have to deliver monthly bills to their main customers and subcontractors in person? During the go-go 1980s, front-office flab wasn't so noticeable. Besides, the system produced lots of experienced and loyal managers who could take up the reins at new divisions and lines of business that were sprouting in all industries. By 1990 white-collar workers accounted for 56% of all manufacturing company employees, up from 47% in 1980. Japanese white-collar productivity has improved over the years, but it hasn't matched the gains in the factories. As a result, even though overall costs have gone down since 1989, the portion attributed to sales and general administrative expenses at most big companies has steadily increased, eroding profit margins by at least half a percentage point more each year. That really hurts when margins of industrial companies have dropped to 1.6%. Now that many of Japan's industrial companies are reporting declining sales and outright losses, top managers have begun to realize that no amount of economizing in the factories can make up for overstaffed offices. Management consultant Proudfoot Ltd. estimates that Japan's big public corporations have 12% too many middle managers, and for some the number is closer to 20%. Suddenly ''reengineering'' has replaced ''restructuring'' as the hottest boardroom buzz-word. Consultants are in demand, as are reengineering seminars sponsored by the American Management Association. None of these efforts, though, begin to address the deeper problems confronting Japan Inc. Says Koichi Hori, a director of the Boston Consulting Group in Tokyo: ''The traditional Japanese management style of lifetime employment, consensus decision-making, and seniority works only if you can count on a minimum annual growth of 5%. That's not in the cards for the rest of this decade, so ultimately we will have to throw away that old system.'' After a thoughtful pause, he adds: ''It's like opening the rice market -- it seemed culturally impossible, but it was inevitable.'' Kenneth Courtis, senior economist of Deutsche Bank Capital Markets in Tokyo, puts it more philosophically: ''The white-collar problem is an existential question for corporate Japan. With the technology available today, companies have the ability to collect and analyze data and make decisions so rapidly that traditional, vertical management structures just get in the way. If Japanese companies insist on staying with the old hierarchical ways, it won't matter how good their factories are.'' Lifetime employment, which emerged from the ashes after World War II, is at the root of most of today's management problems. Article 27 of the Japanese Constitution, written in 1946, set the precedent, stipulating that ''all people shall have the right and obligation to work.'' While smaller companies don't interpret this terse provision to mean that employees must stay until retirement, big ones always have. When new employees are recruited fresh out of college and can look forward to working for the same company for 40 years, it changes the gestalt of management. Rookie white-collar employees know they face a circuitous, 15- or , 20-year route through at least a dozen jobs before landing a position of real responsibility, so they are more patient and seemingly less ambitious than their Western counterparts. They also feel tremendous pressure to conform to the company mold. Further muddling Japanese-style management -- and attempts at reform -- is the fact that even though most large companies have a profusion of titles, few positions have formal job descriptions or specific performance requirements. As a result, white-collar worker productivity is hard to measure. Notes Nobuhiko Kawamoto, president of Honda Motor Co.: ''In times of growth that's good, because there is always too much for everyone to do. It's only when growth slows that you ask who does what.'' Corporate Japan has resisted revamping white-collar jobs for a lot of reasons. For one thing, until very recently top managers have not felt much pressure from shareholders to cut costs or to trim payrolls. The bulk of the shares of most large companies is tied up in elaborate cross-holdings among members of Japanese keiretsu, or corporate groups. Traditionally the shares have been held for years with little or no regard for performance. Also, much of corporate Japan was counting on demographics to solve its labor problems, especially in the front office. The country's population is aging rapidly, and economists have been predicting a labor shortage -- both in factories and in offices -- later this decade. Many companies have been simply trying to ride out the slump in hopes that a wave of retirements eventually will take care of things. As the current slump grinds on, however, companies have begun to realize they can't afford to wait. Most economists are predicting that Japan's annual GDP growth won't exceed 3% in the foreseeable future. Traditional markets both at home and abroad are getting more competitive than ever. In addition, as Japan's manufacturers have moved up the technology ladder to more advanced products, they are finding that unit price is no longer the main competitive yardstick.

Japanese companies also may soon hear more complaints from shareholders to improve profitability. That's because many of Japan's keiretsu are planning to reduce their cross-holdings in sister companies in the next year or so. Insurance companies within the groups are growing tired of low returns and would like to switch some of their investments into more dynamic markets abroad or into growth companies in Japan. And some industrial companies want to cash in their shares to fatten operating profits in what probably will be the worst year for profits yet. Says Masaru Yoshitomi, former chief economist of the Japanese government: ''Japanese corporations will finally feel compelled to make cyclical adjustments in the short term to improve profits.'' JAPANESE corporate planners know they have to do something to counter the white-collar blues. So far, their methods range not from A to Z but more like A to F or G. For example, just about every company has reduced hiring of college graduates. ''They've closed the front door and opened the back door,'' says James Abegglen, chairman of Gemini Consulting in Japan and the dean of Tokyo's gaijin (foreigner) management consultants. He contends that as a reengineering strategy, attrition isn't as lame as it sounds. ''You can lose 3% to 5% of your work force a year without machine-gunning anybody,'' he says. ''And that adds up over a few years. The question is, how long can a company hold its breath?'' Some companies are using the carrot-and-stick approach. Last year Honda Motor Co. introduced the Honda Job Concept program, in which senior managers, including President Kawamoto, are asked to set their own performance goals. To earn a raise and bonus, managers have to meet their personal targets. Kawamoto, who concedes he won't win his full bonus this fiscal year, says some of the older managers are confused by the new policy but that younger managers like it. Other corporations are rearranging the office furniture -- namely, reassigning managers, especially less productive ones, to other roles. Since the start of last year, Mazda Motor has assigned 930 management trainees to the factory for three-month stints to help assemble cars and minivans. Recently NEC Corp. converted 1,200 of its mid-level managers into ''consultants'' with no subordinates. A few big companies are trying to be more sweeping in their reengineering efforts. Matsushita Electric Industrial Co., the maker of Panasonic and National consumer electronics products, is eliminating an entire layer of senior management between the president's office and the product divisions. It is rationalizing dozens of vaguely defined product operations into ten basic lines of business, each with more autonomy than in the past, and consolidating the company's 27 research labs into two. The company is also pouring more resources into promising new businesses, such as multimedia software and network engineering, in hopes that they can absorb many of the displaced white-collar workers. TOYOTA IS TRYING to shock its white-collar workers en masse into being more productive. Each administrative department has been asked to give up 20% of its employees to task forces that will identify new business opportunities, or explore ways to improve white-collar productivity. Takeharu Inuzuka, 33, an assistant planning manager for Toyota's Europe and Africa divisions, was dismayed when he was assigned to one, until he learned that the company was supposedly tapping the brightest and best. Back in a real job after six months, he says he's now more apt to question whether he's always productive in the use of his time. Says he: ''In the factory you can see that business is difficult because you are making fewer cars. In the office it's harder to feel the slowdown, and we needed the shock.'' Despite these varied efforts, corporate Japan is hamstrung by the lack of fluidity in its labor market. Furloughed managers face a next-to-impossible task in trying to land another job. The Tokyo Talent Bank, which helps unemployed managers look for new positions, said that only 2.5% -- 60 out of 2,330 -- of its applicants could find jobs during the first 11 months of 1993. Still, the Japanese industrial giants are nothing if not pragmatic. They are beginning to recognize that they aren't as competitive as they once were and that inefficient white-collar workers and slow-footed management are every bit as much to blame as the soaring yen and a sluggish economy. Japanese corporations also are born followers. So you can bet that if one of them demonstrates that a new, leaner, more individualistic management model works, the rest of them will follow.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCES: DAIWA INSTITUTE OF RESEARCH, FUJITSU RESEARCH CAPTION: MORE WORKERS. . . ARE DOING LESS. . . AND COSTING MORE