Business and Other Risks
Mid the aforementioned background, we will work to tackle the following issues requiring our attention. Since the Group specializes in the global technology human resources services business, the following issues are jointly applicable to each business segment. However, ii. and iv. are particularly relevant to the R&D outsourcing business and construction management outsourcing business, whereas v. and vi. are mainly related to the R&D outsourcing business, construction management outsourcing business, and other domestic businesses.
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. However, impact from the spread of COVID-19 has been unavoidable, and the average domestic utilization rate in the fourth quarter of the fiscal year ending June 2020 decreased by 3.6 points compared to the previous year. If impact from the downturn were to extend into the future, there is the potential that the utilization rate could decline further. However, we are charged with a social responsibility to safeguard the employment of our regular engineer employees and secure employment opportunities, thus maintaining engineer resources 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 2020, we worked to construct a telecommuting system, implement thorough KPI management, realize lean operations, secure financial capacity, and more. Further, we established 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 regrowth 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
|Sales per engineer (thousands of yen per month)||614||622||626||630||630||630|
(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 working to strengthen team matching and raise base charges on an ongoing basis.
In particular, by supporting technological development in Japan going forward, expanding the pool of engineers in the digital domain where demand is expected, and utilizing the TechnoPro-developed market pricing model for engineers, we can advance pricing policies based on the right decisions made in accordance with the state of engineer supply and demand and the state of the technological domain.
In addition, we will promote 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 in their skills.
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 education and training infrastructure and strategic alliances to accelerate the fostering of engineers in target technological domains where demand is expected over the medium to long term (primarily digital technology, including areas such as AI/data science, cloud, cyber security, IoT, embedded control software, CAE technology, FPGA, regenerative medicine, and biopharmaceuticals). 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. Through the advancement of IT, it has become possible to develop a platform which visualizes engineer information in each of these processes. With this platform, by utilizing data science and AI to further enhance the gathering, accumulation, and analysis of engineer information, we are able to effectively strengthen our core processes, including appropriate matching of engineers (increasing base charges). This platform can be developed for utilization not only in the engineer dispatch business, but as a versatile platform that enables the company to effectively acquire and educate engineers, and is considered to be vital to the long-term growth of the Group. The Group is actively implementing investment in talent management systems order to make this a reality.
v. Responding to Changes in Laws and Regulations
Enforcement began in April of 2019 for the Work Style Reform Bill. This law calls on companies to correct long working hours in accordance with changes to maximum hours under the Article 36 Agreement and mandatory paid leave, ensure fair treatment regardless of employment form (i.e. eliminate unreasonable differences in treatment between regular and non-regular workers). The Group is accordingly making various efforts to comply with this law.
Specifically, we are promoting the visualization of overtime hours using an in-house system and the implementation of overtime guidelines, reducing long working hours, and promoting acquisition of paid leave in a methodical manner. In addition, with regard to ensuring fair treatment regardless of employment form, the Group has opted for treatment under a labor-management agreement satisfying the condition of equal or greater wages versus the average of general workers for equal work, and we are reviewing portions of our wage system accordingly.
vi. Business Process Improvements
There is room for greater efficiency in back-office work at the Group’s head office and business offices by promoting standardization of processes, rules, and forms. In January 2019, we launched a business reform project, aiming 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 work functions to improve operating leverage as the business expands and diversifies.
vii. Expansion of Global Business
Japan’s domestic population peaked in the years 2010 and 2011, after which it ended into a phase of decline. Though the workforce population has remained flat in recent years, this workforce is expected to shrink and increase in average age in the future. Though it is necessary to secure engineers on an ongoing basis in order to expand the Group’s businesses, we anticipate that this will become even more difficult within Japan. We will promote the recruitment of human resources globally and secure non-Japanese engineers by establishing local subsidiaries abroad and using M&A to leverage the Group’s overseas locations. Further, in addition to technical staffing services for local Japanese-affiliated companies, we will expand our offshoring development services, primarily in the digital domain, promoting the provision of more advanced, cost-competitive solutions.
viii. Business Expansion through M&A
M&A is an effective means for accelerating the growth of our engineer dispatch business, diversifying and creating value-added to development solutions comprehensively from upstream to downstream and solutions leveraging technological resources overseas. We recognize that using M&A, we can utilize the Group’s business infrastructure, including compliance, education and training, and information technology, to quickly enhance our pool of engineers, consultants, and others in target technological domains, as well as to rapidly expand our business by utilizing our diverse industry and customer bases. In consideration of synergies with existing businesses, the Group is proactively advancing an M&A strategy founded in active sourcing in line with medium to long-term strategies, rigorous business feasibility evaluations for potential acquisition targets, evaluation of future value creation evaluation (using tools such as ROIC), and more. In addition, after converting the target in question into a consolidated subsidiary, we will promote early-stage enhancement of governance using a PMI system centered on specialized teams, as well as business support through intra-Group collaboration. This will have the effect of creating synergies within the Group.
The following are risks that may have an impact on the business operations, performance, or financial condition of the TechnoPro Group (“the Group”). We also discuss matters that are not necessarily risk factors having a significant impact on our business, offering disclosure from the standpoint of providing information to investors proactively. To ensure sustainable growth, the Group identifies potential current and long-term risks, striving to avoid or respond to risks that occur. 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.
A. Risks Related to Business Operations and Compliance
(1) 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. Broadly speaking, risk from infectious diseases can also have knock-on effects in terms of other risks in the areas of Response to Digital Transformation, Economic Trends in Customer Industries, and Securing Human Resources, found below.
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.
(2) Response to Digital Transformation (DX)
The speed of technological change is increasing at an accelerated pace. As a global technology-based human resources service provider, we must be able to 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 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 risk of losing demand to the direct employment or use of freelance engineers by customers due to the development of HR tech, remote work, and other technologies
At the same time, if customers experience greater needs for technical human resources in connection with technological innovation, the Group could experience increased demand.
The Group strives to improve the capital efficiency of education and training investments 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. To ensure sustainable growth, the Group analyzes future technological trends, identifying as strategic technology fields those fields expected to experience strong demand over the long term. We recruit and train engineers who possess skills in these strategic technology fields.
(3) Changes in Related Laws and Regulations
The Group conducts labor dispatch business under the provisions of the Worker Dispatch Act, Standards on the Classification Between Dispatch 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 Dispatch Act or other related 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 Dispatch 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 Dispatch Act, other labor related 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 companies, increasing demand for the Group’s services and allowing the Group to seize larger market share.
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 Dispatch Act and Article 32 of the Employment Security Act. As of September 29, 2020, the Group is not aware of any facts or indications that we have become subject to grounds for business abolition, revocation of permission, or business suspension.
(4) Economic Trends in Customer Industries
As of June 30, 2020, the Group employs 21,264 engineers in Japan, 90.3 percent (19,195 persons) of whom are employed under terms of indefinite-term employment. 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 indefinite-term employment engineers, the burden of personnel costs for such 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-add and is working to maintain a stable engineer utilization rate. By conducting business with a variety of industries and customers in the R&D outsourcing business, the Group avoids the potential impact of relying on specific industries or specific customers, engaging in risk diversification of our business operations. The top ten Group customers accounted for 13.4 percent of total sales for the fiscal year ended June 30, 2020.
(5) Mergers and Acquisitions (M&A)
As part of the growth strategy outlined in our medium-term management plan, the Group may engage in M&A, equity investments, or the establishment of new companies. When conducting M&A or equity investments, we perform due diligence on target companies, striving to avoid risk. However, subsequent to the acquisition, the Group may discover contingent liabilities, or the business may not be able to achieve business plans initially forecasted, or the Group may not be able to exercise sufficient control or monitoring of the management of the investee company, resulting in interference in business operations. The occurrence of such circumstances may affect the Group’s business performance and financial position.
The Group engages in business operations with an awareness of the cost of capital. We have identified return on invested capital (ROIC) as a key performance indicator to consider during price negotiations and post-merger integration of investments, striving to achieve sustainable growth while creating value.
(6) Adoption of Impairment Accounting
As of June 30, 2020, the Group had a total of 38,265 million yen in goodwill and intangible assets on our consolidated statement of financial position. Goodwill and intangible assets account for 35.4 percent of total assets and consist mainly of machinery, electric and electronic-related (14,651 million yen) and embedded control and IT infrastructure-related (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 notable decline in the Group’s profitability, or changes in the business environment leading us to judge that the expected results of M&A cannot be achieved 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 Group treats goodwill as 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 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.
The Group engages in a disciplined approach to M&A, aware of potential impairment risks. 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 closing of an investment as we strive to improve the management of the investee company and secure expected synergies between the investee company and the Group.
(7) Securing Human Resources
In 2020, the spread of COVID-19 caused the Group to temporarily restrict its recruiting activities; however, on the medium to long term, domestic supply and demand will tighten for engineers. Depending on future engineer recruitment market trends, securing engineer resources could become challenging. The Group has worked to strengthen its traditional mid-career recruitment, as well as that of new graduates. However, due to changes in working styles arising from the spread of COVID-19, opportunities for team matchings and OJT will decrease, forcing a suppression of inexperienced workers and new graduates over the medium to long term and potentially impacting Group business operations and performance.
Our recruitment capability is one of the Group’s strengths, and acquisition of superior engineers is a driving force for our growth. By optimizing recruitment channels and diversifying beyond conventional web media and Hello Work (public employment service center) to leveraging recruitment agencies and word of mouth, the Group aims to create greater efficiency in recruitment expenses and improve the quality of human resources, striving to secure engineers who can make an immediate contribution. As a result of these efforts, the number of engineers recruited decreased slightly compared to the fiscal year ended June 2019; however, we succeeded in recruitment that assures quality. As shown in the table below, the number of total registered engineers is steadily increasing.
The Group conducts 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.
|Number of newly recruited engineers||2,413||2,541||2,684||4,151||4,512||4,398|
|Number of engineers employed||11,969||13,127||14,346||16,797||19,293||21,264|
(Figures for engineers hired and total number of engineers employed are for Japan only (including increases due to M&A); number of engineers employed is as of the end of the fiscal year.)
To respond to the rapid increase in the number of engineers and the expansion of our organization, the Group must hire and train sufficient administrative staff to support stable business operations. Difficulty in securing such human resources may affect the Group’s business operations and performance.
Although the Group is competitive in recruiting engineers, we face severe competition from other entities in the recruitment of administrative personnel, regardless of industry, in this tightening labor market. The Group is investing actively in IT system to construct a platform to support core processes of our engineer staffing business, enhancing productivity of our administrative personnel through adoption of the latest IT technologies and work process revisions. At the same time, we are strengthening our administrative functions, having launched a business process reengineering project which involves a fundamental review of our enterprise systems, including sales, human resources, and accounting.
The Group employs more than 20,000 employees and hires a large number of new employees each year, including engineers and administrative personnel. Accordingly, disputes may arise with employees regarding occupational health and safety, management-labor relations, etc. Such events may affect the Group’s business operations and performance.
One of our management policies is to support our engineers and researchers in realizing their dreams. We are executing initiatives to ensure the quality of human resources at the time of hiring, to enhance engineer management (including labor management that emphasizes compliance), to strengthen education and training, and to improve employee satisfaction.
The Group must comply with laws and regulations in the countries or regions in which we operate. If the Group’s executives or employees engage in acts that violate social ethics disregarding compliance, reparations to compensate for damage suffered by society or customers and harm to our reputation may affect the Group’s business operations and performance.
The Group has established an integrated risk management plan under our CSR Committee, which consists of the Group directors and members of the Audit & Supervisory Board and is chaired by the representative director. This plan identifies compliance risks and management focus. In practical terms, the Group has established a cross-Group compliance department. This compliance department is 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.
(10) Information Security
In the course of their duties, the Group’s engineers may become aware of confidential information, including customer research and development. If an external leakage of customer confidential information by the Group’s 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 executives 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.
(11) Business Reputation
The Group’s main business is engineer staffing business. This is a significant business with a social responsibility as an employer of numerous people. If the Group’s executives or employees engage in acts that damage our social credibility or corporate reputation, such acts may affect the Group’s business operations. 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.
(12) 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 such 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 executives and employees. In addition, we have designated a CSR Promotion Officer 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.
(13) Natural Disasters and Accidents
The Group operates more than 200 business locations throughout Japan and the Group’s engineers work at more than 2,000 customers in Japan. 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 rules in the event of natural disasters or accidents. Measures include utilizing a data recovery center in the event of information system failure.
B. Risks that May Affect the Group’s Business from a Medium- and Long-Term Perspective
(1) 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 expected to accelerate further in the future. The improvement of technological capabilities in emerging economies has resulted in low-cost offshore development from Europe and the United States, even for critical development projects. In the future, the number and scale of development projects in Japan could shrink and demand for technology development services could decrease. If the Group is unable to respond to such geographical shift, such changes may affect the Group’s business operations and performance.
At the same time, the Group could develop new growth opportunities if the Group can establish a business foundation to meet customer demand on a global scale and propose the best technology development services and solutions in each region.
The Group is pursuing globalization as part of a growth strategy based on our medium-term management plan. As of June 30, 2020, the Group employs a total of 1,331 engineers in overseas locations that include China, Singapore, India, and the United Kingdom.
(2) Changes in Employment Practices
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. In recent years, employment practices have been changing gradually in Japan. At the same time, employment fluidity will only become more prominent in the future. If customers generally begin direct hiring on a development project basis, such practices could reduce demand for engineering resources outsourcing. This may affect the Group’s business operations and performance.
Working from our medium-term management plan, the Group is diversifying our business domain into a higher-value-added technology development service that includes training engineers who have the latest technology skills, engineering consulting, and professional recruitment services for engineers and others.
(3) Changes in Customer Demand
In recent years, progress in digitalization and software have introduced significant changes in R&D methods and IT systems development. In Europe and the United States, in-house IT systems development and systems packaging has become a widespread practice. The advancement of technology is also likely to change development methods among our customers in Japan in the future. An inability to respond to these changes may affect the Group’s business operations and performance.
At the same time, the Group could develop new growth opportunities if the Group can train engineers in mastering new development methods and optimize development resources on a global basis. In so doing, we may be able to propose technology development services for customers to respond to changes in technology.
(4) Population Trends in Japan
Although the large part of the Group’s business is conducted in Japan, the total population and the number of engineers are expected to continue to decline in Japan. Contraction of the market in which the Group operates and increasing competition for new graduates and mid-career recruits may affect the Group’s business operations and performance.
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 technological development.
(5) Long-Term Trends in the Global Economy
Demand for the Group’s services links to our customers’ willingness to invest in R&D and IT systems development. 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 key factor in the Group’s growth.
However, 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 passive investment in research and development, such events could reduce demand for technical human resources and may affect the Group’s business operations and performance.