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. Response to the Spread of COVID-19 and Prolonged Economic Downturn

The impact of the spread of COVID-19 on the Group depends on the depth and length of the economic downturn in Japan and overseas. 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 under ordinary circumstances. If the impact from the spread of COVID-19 were to extend into the future, the average domestic utilization ratio may decrease compared to the previous year. However, we are charged with a social responsibility to safeguard the employment of our regular engineer employees and secure employment opportunities. In addition, maintaining engineer resources in the Group will accelerate the pace of re-growth in the demand recovery phase. and in turn contributing to the rate of regrowth during the recovery phase of demand. In order to maintain employment, in the fiscal year ending June 2021, we worked to construct a telecommuting system, implement thorough intensive KPI management, realize lean operations, secure financial capacity, and more. Further, we continued establishing a rigorous management system with the highest priority placed on ensuring the health and safety of employees during the COVID-19 pandemic. Moving forward, we will decisively make investments for medium- to long-term growth at an appropriate time based on financial soundness, advanced performance management, and other factors. This will happen concurrently with our ongoing investments in the fostering of engineers focused in the digital technology field, where demand is growing amid the new normal, and with our shift from quantity to quality.

ii. Price Improvement

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

(Note)Calculated as the total net sales of TechnoPro, Inc. and TechnoPro Construction, Inc., divided by the total of utilized engineers at the end of the month.

The Group’s sales per engineer have been nearly flat since the fiscal year ended June 2018. This is due to factors such as the reduction of overtime hours due to the influence of the Work Style Reform Bill and the hiring of many new graduate engineers. On the other hand, in consideration of the medium to long-term trends in the supply and demand of engineers and the levels seen in industry peer companies, we have determined that there is still much room for improvement in the Group's sales per engineer. In addition to increasing added value by taking action such as enhancing education and training for engineers, the Group is promoting team dispatching and a strategic shift-up (in which engineers are not tied to the same project at the same price for a long period of time, and are matched to projects at an appropriate price level in keeping with improvements), consequently we aim to raise base charges on an ongoing basis. In particular, by supporting technological development in Japan going forward, expanding the pool of engineers who are capable of handling elemental technologies and solutions in the digital domain where demand is expected to grow, ands, we further advance price improvement.

iii. Securing and Fostering High-Quality 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-quality 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-quality 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. 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 implemnt effective measures for strengthening our core processes, including efficent recruitment, effective human resource development, and appropriate matching of engineers (increasing base charges). We will also work to commercialize these systems and the insights gained from data analysis for the medium- to long-term (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 critical factor for the medium- to long-term growth and value creation of the Group in the future will be how we utilize the assets and capabilities cultivated in the domestic engineer dispatching business in these evolutionary businesses, and how we systematically function the synergy between the evolutionary businesses and the Core Businesses.

Business and Other Risks

The Group’s Enterprise Risk Management (ERM) system recognizes risks as events (both positive and negative) 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, reduction, 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/Economics-

(1) Economic Trends in Customer Industries

  Description Measures
Negatives If the industries to which our customers belong experience downturns, the Group may experience shortened work hours, less-advantageous contractual terms and conditions, or mid-cancellation of labor dispatch contracts in progress.
  • The Group is strengthening education and training to increase value added by engineers and is working hard to maintain a stable engineer utilization rate.
  • By conducting business with a variety of industries and customers, the Group avoids the potential impact of relying on specific industries or specific customers, engaging in risk diversification of our business operations (the top 10 customers account for 13.1% of total revenue).

(2) Long-Term Trends in the Global Economy

  Description Measures
Negatives In the event that the recent return to protectionism around the world, continued restrictions on the free economy in the future, or the shift to regular global spread of new infectious diseases causes a pivot among many Japanese companies to pas- sive investment in R&D, such events could reduce demand for engineering talents in Japan. By promoting further globalization, we will enhance over- seas delivery sites and build an offshore development model for Japan that will serve as a scheme for meeting customer demand locally, as well as in Europe and the United States.
Positives Continued proactive R&D investment by major Japanese companies to maintain international competitiveness. Maintain a system that allows us to take the initiative in hiring and proposing solutions by staying abreast of corporate trends and government policies.

-Technology Trend-

(3) Response to Technology Advancement

  Description Measures
Negatives The Group may fail to predict or recognize the direction of technological changes correctly, and may not be able to improve or convert the technical skills of engineers in response to recognized technological changes, resulting in an obsolete skill set.
  • Provide various educational and training opportunities to support the advancement of our engineers’ abilities and skills, as well as their familiarity with new technologies, and strive to improve the efficiency of such investments.
  • Analyze future technology trends, identify specific elemental technologies and solutions to focus on, secure and train engineers who will play a key role in these areas, and develop Centers of Excellence (COE).
The Group may experience an excess of person- nel due to a decrease in demand for engineering resources stemming from new technologies that cause a major reduction in the work hours required for R&D and IT systems development.
The Group may incur major expenses to secure or train engineers capable of adapting to new technologies.

-Work Environment-

(4) Securing Engineers

  Description Measures
Negatives Due to the continuance of the trend towards a critical shortage of engineers, there is a risk that the Group will face difficulties in securing engineering personnel, and that we will be unable to secure sufficient supply to meet the demand.
  • Diversify recruitment channels to utilize recruitment agencies and acquaintance referrals. Additionally, promote the hiring of foreign engineers, and strive to strengthen recruiting capability: placing an emphasis on quality in order to expand our solution business.
  • As an initiative for engineer retention in Japan, conduct annual employee satisfaction surveys and use the results of these surveys to implement measures for improved treatment.

 

In the fiscal year ended June 30, 2021, we curtailed our recruitment in response to the uncertainty in the business environment caused by the spread of the COVID-19 pandemic. As a result, there was a significant decrease in the number of employees compared to the fiscal year ending June 30, 2020, as shown below.

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

(Note)The number of engineers hired, including those who joined us as a result of M&A, and the total number of engineers employed are both limited to Japan. The total number of engineers is as of the end of the fiscal year.

The Group conducts, as an initiative for engineer retention in Japan, annual employee satisfaction surveys and uses the results of these surveys to implement measures for improved treatment. In this way, we strive to strengthen recruitment competitiveness and maintain higher retention.

(5) Changing Demography in Japan

  Description Measures
Negatives The total population and the number of engineers are expected to continue to decline in Japan, leading to contraction of the market and increasing competition for new graduates and mid-career recruits. Hire globally diversified technical talent and improve the efficiency of our technological development and delivery.
Positives Demand for engineers in Japan remaining high going forward.

(6) Changes in Employment Practices and Work Styles

  Description Measures
Negatives With the spread of HR technology, remote work, and the gig economy, such as freelancing, further increases in employment mobility and the diversification of work styles in the future could lead customers to directly secure the necessary personnel for development projects, causing the demand for outsourced personnel to decrease. Implement flexible measures without being bound by traditional business models.
Positives Securing new sources of engineers by taking advantage of changes in employment practices and work styles. Review the HR system to match the times.

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

  Description Measures
Negatives When it comes to hiring management and operating leaders, in the event that recruitment does not progress as planned, the evolution of the Core Business may slow down. Seek to hire personnel through recruitment agencies and M&A.

-Strategy/Market, Competitor-

(8) Progress of Globalization

  Description Measures
Negatives As globalization in R&D and IT systems development progresses, if the Group is unable to establish a system that can deliver global solutions, it may not be able to respond to changes in demand for technology development services. Promote globalization by using M&A as part of our growth strategy.
Positives The offshore delivery solutions for Japanese companies (especially in the digital domain) has not yet permeated the market. If we can quickly in- corporate competitive capabilities from overseas through M&A, we see this as an opportunity to become a first mover in Japan.

(9) Changes in Customer Demand

  Description Measures
Negatives The range of technological domains required by customers has been expanding due to the prog- ress of digitalization and software. In addition, customer demand is going beyond the engineer deployment and is increasingly seeking deliverables, as well as the identification and resolution of issues. The Group may not be able to respond to these changes in demand trends. To evolve into a solutions provider rather than a mere engi- neer provider, invest in acquiring capabilities and reforming our organization and operations, while maintaining a balance with our engineer staffing business in Japan.

-Operation-

(10) Achievement of the Medium-Term Management Plan

  Description Measures
Negatives The Group may misread changes in the external environment, fail to keep up with the speed of such changes, or be unable to “evolve” our capabilities as expected, and as a result, may be unable to achieve growth or evolution in our Core Business as laid out in our medium-term management plan, “Evolution 2026.”
  • Create a five-year roadmap that outlines detailed policies and timelines for each business strategy, while also establishing detailed KPIs tied to each policy to strengthen our system for promoting and managing the progress of our medium-term business strategies.
  • If there is a delay in the execution of these strategies, or if they need to be revised, invest management resources and strengthen the organizational structure. By doing so, promote the realization of our strategies and achievement of our target figures.

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

(11) Mergers and Acquisitions (M&A)

  Description Measures
Negatives The Group may be affected by contingent liabilities, etc., that arise after the acquisition, the target company being unable to achieve its initially envisioned earnings plan, or a situation arising that interferes with the business operations of the target company.
  • Conduct detailed due diligence on target companies in the process of M&A.
  • Clarify the following as basic principles for M&A: consistency with medium-term business strategy, transparency of the acquisition process, strong financial discipline, and post-merger integration (PMI) and governance policies.
  • In particular, in terms of financial discipline, emphasize return on invested capital (ROIC) in excess of the cost of capital.

(12) Adoption of Impairment Accounting

  Description Measures
Negatives A notable decline in the Group’s profitability may result in impairment losses related to goodwill or intangible assets. Form a team consisting of business unit and PMI representatives beginning at the due diligence stage, creating a post-investment plan in advance. Execute plans promptly after the closing as we improve operation and secure expected synergies between the investee company and the Group.
If the performance of an investee business diverges significantly from originally forecasted plans, there may be a change in the fair value of put options granted to minority shareholders.

-Laws/Regulations, Information Systems-

(13) Changes in Related Laws and Regulations

  Description Measures
Negatives Any act in violation of the Worker Dispatch Act or other related laws and regulations could result in the cancellation of permission to engage in the labor dispatch business, suspension of business, etc. Establish and operate a strict system of legal compliance, including organizational structure, internal rules, and training for executives and employees.
Revisions to related laws and regulations could be significantly disadvantageous to the Group’s business model. Strengthen resilience to legal revisions by expanding the solution business and commercializing the engineer training business and DX promotion business.
Positives Stricter regulations could result in weeding out small- and medium-sized staffing companies, increasing demand for the Group’s services and allowing the Group to seize larger market share. As a leading company in the engineering professional services industry, we will further improve our operations, work styles, and various systems to make them more attractive to job seekers.

(14) Personal Information Protection

  Description Measures
Negatives An external leak of personal information may result in the loss of social trust in the Group.
  • Instill the proper handling of personal information through ongoing education and training for executives and employees.
  • Designate a CSR Promotion Officer responsible for personal information protection, and promote other security measures related to personal information, including the development and operation of personal information protection rules and information systems.

(15) Information Security

  Description Measures
Negatives An external leakage of customer confidential infor- mation by the Group’s engineers may result in a demand of indemnity for damages.
  • Develop and operate various rules related to information security, and instill the proper handling of information and information equipment through education and training of executives and employees.
  • Address data loss or leakage from information systems by strengthening network security and taking other measures.
Data loss or leakage from the Group’s information systems may interfere with business operations.

-Labor Management-

(16)Labor Management

  Description Measures
Negatives Disputes may arise with employees regarding occupational health and safety, management-labor relations, etc. Implement initiatives such as ensuring the quality of human resources at the time of hiring, enhancing management of engineers including labor management with an emphasis on compliance, strengthening our education and training system, and improving employee satisfaction.

-Disaster, ESG, Climate Change-

(17) Response to Infectious Diseases

  Description Measures
Negatives Supply-side impact such as requests for remote work, limitations on engineer movement between regions, and restrictions on face-to-face sales and recruitment activities. Practice a business operation that prioritizes the health and safety of employees amid the spread of infectious diseases, including installing and operating information technology and personnel systems that support telecom- muting, promoting remote customer development, and more.
Demand-side impact in the form of reducing engineer demand and shrinking and postponed R&D projects due to deterioration in business performance of customers.
Positives The increase in infectious disease risk awareness may promote the penetration of digital technologies in social and corporate activities. Enhance our engineering resources and solution capability supporting digital technologies, expanding our business.

(18) Natural Disasters and Accidents

  Description Measures
Negatives If a natural disaster such as earthquake or flooding occurs, or if an unforeseen accident occurs, such events may damage the Group’s or its customers’ facilities.
  • Establish business continuity plans and corporate crisis countermeasure rules in the event of natural disasters or accidents.
  • Promote measures such as utilizing a data recovery cen- ter in the event of information system failure.
Positives Efforts to realize carbon neutrality, etc., that take climate change into account may progress. Expand our business by hiring engineers and creating solutions that utilize related technological innovations.

-Reputation-

(19) Compliance, Industry Image

  Description Measures
Negatives If the Group’s executives or employees engage in acts that violate social ethics disregarding com- pliance or acts that damage social trust or the corporate image, this may necessitate indemnity for damage suffered by society or customers and harm to our reputation.
  • Identify compliance risks requiring close attention and intensively manage them under the Compliance Committee, which consists of the general managers of each division and others of the Company and is chaired by the president, representative director and CEO.
  • Established a group-wide compliance department charged with preventing major compliance violations by ensuring consistent escalation of arising issues, implementation and of internal audits and corrective action, and a reporting system for internal communications.
If other companies involved in similar business- es engage in activities such as those mentioned above, the image of the overall industry could deteriorate.
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