Business and Other Risks

Issues to Address

We will work to tackle the following issues requiring our attention. Despite the following issues are jointly applicable to each business segment, ii. and iv. are particularly relevant to the R&D Outsourcing Business and Construction Management Outsourcing Business, whereas v. is mainly related to the R&D Outsourcing Business, Construction Management Outsourcing Business, and Other Businesses in Japan.

i. Responding to changes in the external environment

It remains unclear how the COVID-19 pandemic, the global inflationary trend, and the sharp depreciation of the yen will impact the economy. The Group’s businesses are centered on major customers across diverse industries, spanning a wide range of technological fields; therefore, we recognize that these are highly durable and resilient to economic downturns. Furthermore, we have established an operational structure that places the highest priority on ensuring the employment, health, and safety of our employees during the COVID-19 pandemic by implementing both a permanent telecommuting system and a health management system, as well as thorough KPI management, lean operations, and guaranteed financial reserves. Moving forward, as we shift from quantity to quality, we will continue to invest in the training of engineers who are mainly focused on the high-demand field of digital technology, while also making investments that support medium- to long-term growth and take into account financial soundness, advanced performance management, and other factors.

ii. Improvement of base charge

  FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022
Sales per engineer (thousands of yen per month) 622 626 630 630 630 634 658

(Note)Calculated based on the total sales of TechnoPro, Inc. and TechnoPro Construction, Inc. through the fiscal year ended June 2021, and the total sales / Σ [number of engineers working at the end of each month] for all domestic subsidiaries from the fiscal year ended June 2022 onward .

The Group's unit sales per engineer has remained flat through the fiscal year ended June 30, 2020, due to factors such as a reduction in overtime hours resulting from laws related to work style reform and the hiring of many new graduate engineers. From the fiscal year ended June 30, 2021, the Company has curbed the hiring of low-skilled engineers, including engineers who graduated during the COVID-19 pandemic, which has led to a unit sales price hike that reflects an increase in the base charge for existing engineers that exceeds downside factors. Considering medium- and long-term trends in the supply and demand of engineers and the level of other companies in the industry, we believe that there is room for improvement in per-engineer sales going forward. In addition to increasing added value through the expansion of the Solution Business and enhancement of education and training for engineers, as outlined in Evolution 2026, the Group is also working to increase base charges by promoting strategic shift-up (i.e., not assigning engineers to the same project for a long period of time, but assigning them to projects at appropriate price levels according to the improvement in their skill levels).

iii. Securing and training High Value-Added Engineers

A cornerstone of the Group’s growth is securing human resources, and one important management issue is the question of how to acquire as many high value-added engineers as possible and/or how to improve the skills of existing engineers. The hiring market for engineers has become tighter in recent years; accordingly, to promote the acquisition of high value-added engineers, we will leverage not only web and other media, which have traditionally been our mainstay channels, but also a variety of channels for recruitment channels, such as word of mouth introductions and professional recruitment agencies. Furthermore, we intend to expand the employment of foreign engineers with advanced technical skills. In addition, we will leverage the Group’s education and training infrastructure and strategic alliances to accelerate the fostering of engineers in targeted elemental technology domains (AI/data science, cloud, cyber security, IoT, 5G, etc.), mainly digital technologies where demand is expected to grow over the medium- to long-term. This is done with the aim of fostering higher value-add for our engineers, thereby promoting the retention of engineers in conjunction with enhancement of personnel systems for the same.

iv. Leveraging IT and Building a Platform

In our engineering dispatch business, there are a number of core processes, including the formation of recruitment interest groups, screening and employment, matching, retention, training, development and workforce planning. With the advancement of IT, we are promoting a platform which visualizes information of engineers in each of these processes, and utilizes them in an integrated manner. By utilizing data science and AI to further enhance the gathering, accumulation, and analysis of engineer information in this platform, we implement effective measures for strengthening our core processes, including efficient recruitment, effective human resource development, and appropriate matching of engineers (increasing base charges). In the medium- to long-term, we will also utilize the knowledge gained from these processes and data analyses in our Engineer Training Business as well as in initiatives aimed at further commercialization (DX Promotion Business)

v. Business Process Improvements

The Group sees further room for efficiency improvement in back-office work at the Group’s head office and business offices by promoting standardization of processes, rules, and forms. We aim to create a unified system and strengthen shared IT infrastructure by radically reviewing our core systems in sales, human resources, and accounting. Along with upgrading our core systems by investing in information technology, we will leverage the tools of our internal controls to promote standardization and greater efficiency of back-office work as well as strengthen back-office functions to improve operating leverage as the business expands and evolves.

vi. Promoting investment for the evolution of Core Businesses

The Group considers that the upfront investments such as human resource acquisition, IT investments, and M&A investments are essential in order to grow the Solutions Business, Engineer Training Business, and DX Promotion Business faster. The key to the Group’s medium- to long-term growth and value creation will be to evolve our Core Business through these upfront investments, leveraging the assets and capabilities we have developed in the domestic engineer staffing business.

Business and Other Risks

The Group’s Enterprise Risk Management (ERM) system recognizes risks as the events that may affect the achievement of our strategies and business objectives, and we have created structures and processes to appropriately manage our organization as a whole. We identify all risks based on a clear understanding of the Group’s approach to the amount of acceptable risk (risk tolerance). We conduct qualitative and quantitative assessments of risks in terms of impact, foreseeability, and probability of occurrence, and consider countermeasures in terms of avoidance, mitigation, transfer, acceptance, etc.

The following is a list of risks that we consider to be of high importance in each risk category. This includes items with low foreseeability and a low probability of occurrence. Investors should mainly take the following matters into consideration prior to making a decision regarding investment in TechnoPro Holdings stock. Further, statements regarding future matters reflect information available at the time of the publication of this document and judgments deemed rational by the Group. In addition, the following does not necessarily include all potential risks that may arise within the Group and all major risks that may have a significant impact on investment decisions of the investors.

-Politics/Economy-

(1) Economic Trends in Customer Industries

As of June 30, 2022, the Group employs 22,048 engineers in Japan, 91.0 percent (20,057) of whom are permanent employees. If the industries to which our customers belong experience downturns, the Group may experience shortened work hours, less-advantageous contractual terms, or cancellation of labor dispatch contracts in progress. As the Group employs significant numbers of permanent employed engineers, the burden of personnel costs for standby employees could increase during phases of economic downturn, which may affect the Group’s business performance and financial position. The Group is strengthening education and training to increase engineer value addition and is working to maintain a stable utilization rate. In addition, by doing business with a broad range of industries and customers, we are able to diversify risk by not being significantly affected by the business conditions of any particular industry or customer. The share of revenue of the Group’s top 10 customers was 11.3% (for the fiscal year under review).

(2) Long-Term Trends in the Global Economy

Demand for Group services linked firmly to R&D and IT systems development at our customers. Major Japanese companies, many of which are main customers of the Group, continue to invest in R&D to maintain global competitiveness. This is a factor in the Group’s growth.
However, if the recent global return to protectionism and restriction on liberal economies continues into the future, or new infectious diseases spread regularly on a global scale, many Japanese companies may become reluctant to invest in R&D. This could lead to a decrease in the demand for technical personnel, which in turn could have an impact on the Group’s business operations and earnings.
The Group has established its ability to respond to economic fluctuations by ensuring financial soundness, promoting greater efficiency in administrative operations, strengthening the monitoring of economic and demand trends in Japan and the countries in which it operates, and implementing forward-looking KPI management.

-Technology Trend-

(3) Response to Technological Innovations

The pace of technological change is accelerating in today’s world, and the Group must respond to technological innovation in a timely and appropriate manner. Risks associated with technological innovation include the following. Failure to address these risks may affect the Group’s business operations and performance.

  • The risk that the Group fails to predict or recognize the direction of technological changes correctly, or the risk that the Group cannot improve the technical skills of engineers in response to recognized technological changes, resulting in an obsolete skill set
  • The risk that the Group experiences an excess of personnel due to a decrease in demand for technical staffing stemming from new technologies that cause a major reduction in the number of work hours required for R&D and IT systems development
  • The risk of incurring major expenses to secure or train engineers capable of responding to new technologies

The Group strives to improve the capital efficiency of education and training by providing various educational and training opportunities to support the advancement of our engineers’ abilities and skills, as well as their familiarity with new technologies. Furthermore, in order to achieve sustainable growth, the Group has established a Center of Intelligence (COI), which analyzes future technological trends, identifies specific elemental technologies and solutions to focus on, secures and trains engineers to work in these areas, and develops Centers of Excellence (COE).

-Work Environment-

(4) Securing Engineers

The trend of tight supply and high demand for engineers in Japan will continue, and in the medium- to long- term, there is a risk that the Group may have difficulty in securing engineering personnel. In particular, the acquisition of engineers in the digital technology field continues to be difficult due to increasing demand. If we are unable to secure sufficient supply to meet demand, the Group’s business operations and earnings could be affected.
Our recruitment capability is one of the Group’s strengths, and acquisition of superior engineers is a driving force for our growth. The Group is diversifying its recruitment channels to include the use of professional recruitment agencies and referrals from acquaintances, and is also promoting the acquisition of foreign national engineers in an effort to strengthen recruitment with an emphasis on the quality needed to expand the Solution Business.
In the fiscal year ended June 30, 2021, the number of hires decreased significantly from the previous fiscal year as a result of restrained hiring in response to the uncertainties in the business environment caused by the spread of the COVID-19 pandemic. In the fiscal year ended June 30, 2022, however, the number of hires for both new graduates and mid-career workers recovered due to the resumption of hiring activities, with the total number of engineers on the payroll reaching a record high as of June 30, 2022.

  FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022
Number of newly recruited engineers 2,541 2,684 4,151 4,512 4,398 1,405 3,830
Number of engineers employed 13,127 14,346 16,797 19,293 21,264 20,330 22,048

(Note)The number of engineers hired (including those acquired through M&A) and the total number of engineers are both limited to those in Japan, and the total number of engineers is as of the end of the fiscal year. In terms of securing engineers in Japan, we conduct an employee satisfaction survey every year, and based on the results, we are working to reduce the turnover rate by implementing measures such as improving compensation, and others.

(5) Changing Demographic in Japan

The majority of our Group’s business is conducted in Japan. However, a continued decline is expected in both the total population and the number of engineers in Japan, and if the market in which our Group operates shrinks or competition for new graduates and mid-career hires further intensifies, our Group’s business operations and earnings could be impacted.
At the same time, the Group could develop new opportunities for growth if demand for technical human resources in Japan continues to rise as expected and if the Group can meet the technical development needs of our customers by recruiting global human resources and improving efficiency of technological development.

(6) Changes in Employment Practices and Work Styles

One reason behind the strong demand for technology development services in Japan is employment practices that encounter difficulty in adjusting quickly to direct employment needs. R&D and IT systems development projects sometimes have difficulty in securing human resources in a timely and appropriate manner. However, employment practices in Japan have been gradually changing in recent years, and the spread of HR tech, remote work, and the gig economy, including freelance workers, may lead to further job mobility and diversification of work styles in the future. If it becomes common practice for customers to directly secure the personnel needed for their development projects, the demand for outsourcing of human resources will decrease, which may affect our Group’s business operations and performance.
While these changes in employment practices and work styles pose a risk to our Group, they can also present opportunities, such as providing new sources of talented personnel. Instead of being bound by the traditional business model, we will utilize freelancers, expand offshoring development, and introduce a more flexible personnel system, evolving the way we do business.

(7) Finding Qualified Candidates to Expand Into New Business Areas

In order to accelerate the evolution of the Group’s core business, it is essential to secure management and business personnel from beyond the framework of the domestic temporary engineer business. Although the Group is competitive when it comes to recruiting engineers, it faces stiff competition for management and business personnel from businesses who recruit across various industries in a tight labor market. We plan to acquire personnel through recruitment agencies and M&A, however, if those efforts do not progress as planned, the evolution of our core business may slow down, and this may affect our Group's business operations and earnings.
In addition to hiring domestic personnel, the Group is working to further strengthen human resource development and promote the use of highly skilled foreign personnel in order to expand the human resource pool that will be responsible for the evolution of the core business.

-Strategy/Market, Competitor, Operation-

(8) Progress of Globalization

In recent years, major Japanese companies, many of which are main customers of the Group, have pursued globalization in R&D and IT systems development. This movement is only expected to accelerate further in the future. In addition, due to the improvement of technological capabilities in emerging countries, offshoring development tends to be selected for both cost and technology reasons, even for important development projects in the U.S. and Europe. If our Group is unable to establish a global solution provision system, we may not be able to respond to these changes in the demand for technology development services in Japan, which may affect our Group’s business operations and performance.
The Group has positioned M&As as one of the pillars of its growth strategy. Offshoring development (especially in the digital domain) for Japanese companies is still less prevalent than in Europe and the U.S. We see M&A as creating an opportunity to be a leader in Japan by bringing in service delivery capabilities, technological expertise, and human resources cultivated in the U.S. and European markets.

(9) Changes in Customer Demand

In recent years, the range of technological fields required by clients has expanded due to the progress of digitalization and software development. Client demand has gone beyond the mere provision of services, with a strong tendency to seek deliverables and even problem discovery and resolution. Failure to respond appropriately to these changes in demand could result in missed growth opportunities, which could affect the Group’s business operations and earnings.
Being fully aware of the need for the Group’s services to evolve beyond the provision of services into solution-providing services, the Group is making investments to acquire capabilities and innovate its organization and operations, while continuing to consider the balance with the domestic engineer staffing business.

(10) Achievement of the Medium-term Management Plan

The Group has formulated a five-year medium-term management plan, Evolution 2026, with the fiscal year ending June 30, 2022 as its first year, and is implementing its medium-term business strategy accordingly. However, if we misread the changes in the external environment or fail to keep up with the speed of such changes, or if we are unable to “evolve” our Group’s capabilities as expected, and as a result are unable to achieve growth and progress in the Core Business, our Group’s business operations and performance may be affected.
Our Group has created a five-year roadmap that outlines detailed policies and timelines for each business strategy, and has also established detailed KPIs tied to each policy in order to strengthen the system for promoting and managing the progress of medium-term business strategies. If there are delays in strategy implementation or revisions are necessary, we will strive to increase the probability of strategy realization and achievement of target figures by proactively investing in management resources and strengthening the organizational structure.

-M&A/Alliances, Country Risks, Accounting&Finance-

(11) Mergers and Acquisitions (M&A)

As part of its growth strategy, the Group is pursuing mergers and acquisitions in Japan and overseas. In the event of an M&A, we conduct detailed due diligence on the target company and make every effort to avoid risks. However, if contingent liabilities or other liabilities are discovered after the acquisition, if the target company is unable to achieve its initially projected earnings plan, or if a situation arises that interferes with the target company’s business operations, this could have an impact on the Group’s business performance and financial position.
The Group’s basic principles for M&A include consistency with the medium-term business strategy, transparency in the acquisition process, strong financial discipline, and post-acquisition integration (PMI) and governance policies. In particular, with regard to financial discipline, we have positioned return on invested capital (ROIC) above cost of capital as one of the key management indicators for value creation.

(12) Adoption of Impairment Accounting

As of June 30, 2022, the Group had a total of 51,005 million yen in goodwill and intangible assets on our consolidated statement of financial position. They account for 35.9% of total assets, with the majority of goodwill found in fields related to machinery, electricity and electronics (14,651 million yen), Robosoft Group (9,187 million yen), and fields related to embedded control and IT infrastructure (7,969 million yen). Goodwill and intangible assets have increased as a result of our active pursuit of M&A in Japan and overseas. However, a recognizable decline in Group profitability may require the Group to determine whether goodwill or intangible assets have been impaired. Impairment losses related to goodwill or intangible assets may affect the Group’s business performance and financial position. Further, the goodwill is a non-amortized asset.
In connection with M&A and equity investment, the Group may take action to avoid downside risk by reducing the potential amount of impairment loss by reducing initial investment or ownership ratio, or by granting put options to minority shareholders to act as an incentive to the founders (sellers) of the investee company to reduce management risk associated with the investment. If the performance of an investee business diverges significantly from originally forecast revenue plans, the Group must determine whether a change in the fair value of related options has occurred. Such changes may affect the Group’s business performance and financial position.
When engaging in M&A, the Group forms a team consisting of business unit and PMI representatives beginning at the due diligence stage, creating a post-investment plan in advance. Plans are executed promptly after the conclusion of an investment as we strive to improve the management of the investee company and secure expected synergies between the investee company and Group affiliates.

-Legal, Regulatory and Information Systems-

(13) Changes in Related Laws and Regulations

The Group conducts labor dispatch business under the provisions of the Worker Dispatching Act, Standards on the Classification between Dispatching Businesses and Subcontracting Businesses (Ministry of Health, Labor and Welfare Notice No.37, 1986), and other relevant laws and regulations. Any conflict with said laws and regulations could result in the cancellation of permission to engage in the labor dispatch business, suspension of business, etc. Any act in violation of the Worker Dispatching Act or other laws and regulations may affect the Group’s business operations and performance.
The Group has established and operates a strict system of legal compliance, including organizational considerations, internal rules, and training for officers and employees.
The Worker Dispatching Act and other related laws and regulations are revised on a continuous basis in response to changes in the economic and social environments. If revisions occur in the future that are significantly disadvantageous to the Group’s business model, such revisions may affect the Group’s business operations and performance. Besides revisions to the Worker Dispatching Act, other changes have been introduced in recent years, including overtime hour work limits, seasonal specifications for annual paid leave, fair treatment in employment (regardless of employment terms), and measures ensuring employment of senior-age workers. The Group has adopted a variety of measures to respond to these changes. However, changes in the future could require responses resulting in significant costs to the Group. At the same time, stricter regulations could result in the weeding out of small- and medium-sized staffing businesses, increasing demand for Group services and allowing the Group to seize larger market share.
The Group will strengthen its resilience to the revision of laws and regulations by developing various systems that provide attractive work styles and benefits, etc. to employees ahead of said revisions, and by expanding both its overseas Solution Business and the Engineer Training Business. The grounds for business abolition, revocation of permission, or business suspension with respect to the Group’s permission to operate a labor dispatch business and a paid placement service are stipulated in Article 14 of the Worker Dispatching Act and Article 32 of the Employment Security Act. As of the date of submission of this document, TechnoPro Holdings is not aware of any facts or indications that the Group has become subject to grounds for business abolition, revocation of permission, or business suspension.

(14) Personal Information Protection

The Group retains a significant amount of personal information related to engineers and other employees, as well as information on job applicants. An external leak of personal information may result in the loss of social trust in the Group and may affect the Group’s business operations.
The Group recognizes that proper management of personal information is extremely important. We instill the proper handling of personal information through ongoing education and training for officers and employees. In addition, we have designated the general manager of the CSR Promotion Department responsible for personal information protection. We have also structured other security measures related to personal information, including the development and operation of personal information protection rules and information systems.

(15) Information Security

In the course of their duties, Group engineers may become aware of confidential information, including customer research and development. If an external leakage of customer confidential information by Group engineers results in a demand of reparation for damages, such may affect the Group’s business performance and financial position. In addition, data loss or leakage from the Group’s information systems may interfere with the Group’s business operations.
The Group has developed and operates various rules related to information security. We also instill the proper handling of information and information equipment through education and training of officers and employees. The Group works to address data loss or leakage from the Group’s information systems by strengthening network security and taking other measures.

-Labor Management-

(16)Labor Management

The Group employs approximately 25,000 people and hires a large number of new employees each year. Therefore, disputes with employees regarding occupational health and safety, employment relationships, and other issues may affect the Group’s business operations and earnings.
The Group has adopted the following Our Values as part of the TechnoPro Group’s Philosophy Framework:

  • Providing the conditions and programs to encourage learning and skill development.
  • Creating opportunities to not only hone their expertise but also to switch or acquire new skills.
  • Supporting our talent through technology evolutions and environmental changes to stay active.

Under this policy, we are implementing initiatives to ensure the quality of human resources at the time of hiring, enhance the management of engineers—including labor management with an emphasis on compliance, strengthen the education and training system, and improve employee satisfaction.

-Disaster, ESG, Climate Change-

(17) Response to Infectious Diseases

With the advance of globalization of people, goods, money, and information, there is a steady increase in risk from infectious diseases. This risk has become apparent with COVID-19, an as-yet unresolved situation that spread worldwide in 2020. With infectious diseases, there is a unique factor of restricting physical contact between people. As it pertains to the Group’s business operation, the initial impacts are on the supply-side: requests for employee (e.g. engineer) remote work, limitations on engineer movement between regions, and restrictions on face-to-face sales and recruitment activities. Furthermore, this will lead to deterioration in business performance of client companies, though this will vary in depth and length depending on country and industry. As a result, there will also be demand-side impact for our services in the form of reducing engineer demand and shrinking and postponed R&D projects. In general, infectious disease risks can spill over into other risks, such as political and economic, as well as risks associated with technological trends, and the labor environment. The emergence and increase of various infectious disease risks, not limited to the novel coronavirus, could affect the Group’s business operations and earnings.
The Group practices a business management system that prioritizes the health and safety of employees amid the spread of infectious diseases. This includes building and operating information technology and personnel systems that support telecommuting, promoting remote customer development, and more. In addition, the dramatic increase in infectious disease risk awareness driven by COVID-19 is certain to promote the penetration of digital technologies in social and corporate activities. The Group considers this as an opportunity to enhance our engineers and solutions supporting digital technologies, expanding our business.

(18) Natural Disasters and Accidents

The Group operates more than 200 business locations throughout Japan and Group engineers work at more than 2,300 customers in this country. Accordingly, if a natural disaster such as earthquake or flooding occurs, or if an unforeseen accident occurs, such events may affect the Group’s business operations and performance.
The Group has established business continuity plans and corporate crisis countermeasure regulations in the event of natural disasters or accidents. Measures include utilizing a data recovery center in the event of information system failure.

(19) Climate Change

The Group has confirmed through scenario analysis that the direct impact of climate change will be negligible because the Group does not need to own any sites or production facilities for its business operations. However, the introduction of a carbon tax, the implementation of the government's renewable energy policy, or advances in low-carbon or next-generation environmental technologies will affect the technologies required by customers. If our engineers and solutions are unable to respond to these changes in customer demand, our Group’s performance could be severely affected. If the Group’s efforts to address climate change are inadequate, or customers and investors do not understand these measures, we may encounter problems establishing smooth business relationships with customers and attracting long-term stable shareholders.
The TechnoPro Group has determined that addressing climate change is one of the priority environmental areas in the TechnoPro Group Environmental Policy. We will respond to changes in customer demand by strengthening our engineer training system and providing solutions related to environmental technologies such as low-carbon and decarbonization, utilizing the research and analysis functions of our specialized department in charge of research and analysis of industry and technology trends, etc. In June 2022, we expressed our support for the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and joined the TCFD Consortium. In the future, we will promote information disclosure based on the TCFD framework (Governance, Strategy, Rsk Management, Metrics and Targets) in order to communicate even more effectively with a wide range of stakeholders, including shareholders and investors. At the same time, we will analyze risks from a long-term perspective and take measures to address climate change. For more information, please visit our website.(https://www.technoproholdings.com/en/csr/guideline/tcfd.html)

-Reputation-

(20) Compliance and Industry Image

Engineer staffing, which is our Group’s main business, is a business that entails a great deal of social responsibility, employing a large number of personnel. If any of our Group’s executives or employees conduct themselves in a manner that violates social ethics by disregarding compliance, or acting in a manner that tarnishes social trust or our corporate image, our business operations and business performance may be affected by the need to pay compensation for damages suffered by society or our customers, as well as by damage to our reputation, etc.
The engineer staffing market is subdivided across a large number of business operators. If an act that violates social ethics in disregard of compliance is committed by the Group or by any other company engaged in similar business, such act may harm the reputation of the entire industry and may affect the Group’s business operations.
The Group’s Compliance Committee, chaired by the President, Representative Director and CEO and composed of the general managers of each division of the Company, identifies compliance risks that should be taken seriously and places priority on managing them. In practical terms, we strive to prevent major compliance violations by establishing a cross-Group compliance department, ensuring consistent escalation of arising issues, implementation and of internal audits and corrective action, and dissemination of the internal reporting system.

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