Of the items related to the overview of business, financial information and other information described in the annual securities report, the major risks recognized by management that may have a material impact on the financial position, operating results, and cash flows (hereinafter, operating results, etc.) of consolidated companies are as follows. The Group, acknowledging these risks and being fully aware of their potential occurrence, will take steps to the highest degree possible to prevent their occurrence, and will respond accordingly in the event of their occurrence.
These various risks related to the present and future are based on information available as of the filing date of this annual securities report. Furthermore, with respect to the items listed below, if it is difficult for the Group to reasonably foresee the likelihood and timing of the risk materializing and the impact of the risk materializing on the Group’s operating result, etc. and other conditions, such likelihood and timing of the risk materializing and the impact of the risk materializing are not stated. In addition, even for matters that do not necessarily represent business risks, the matters that the Group considers to be important when investors make investment decisions are stated from the standpoint of proactive information disclosure to investors.
(1) Impact from Natural Disasters, Etc.
The Group’s business activities may be restricted, and operating results, etc. may be affected in the event of disasters including earthquakes, typhoons, fire and floods, as well as the progression of climate change due to global warming, in the event of war, terrorism or cyber-attack by computer viruses, in the event of an outage or malfunctioning of the information systems and telecommunications networks caused by the above-mentioned events, and in the event of an epidemic such as a powerful new strain of influenza.
Amid the spread of COVID-19, there is a possibility that the operating results, etc. of the Group’s domestic outsourcing businesses may be affected due to delays in new placements, a decrease in the number of placements, or termination of contracts depending on the recovery of operations of customers.
If the suspension of economic activities in each foreign country is extended or becomes prolonged, there is a possibility that the operating results, etc. of the Group may be affected due to suspension of clients’ operations or termination of contracts. This affects each of the Group’s overseas outsourcing businesses, as a result of the impact of lockdowns and other regulations with a strong legally binding force.
The Group, in addition to developing the engineering field so that it can handle working remotely from home, even from overseas, as well as addressing a certain amount of rebound in demand toward normalization in economic activities, is actively working to respond to demand generated from life during the COVID-19 pandemic. Such efforts include responding to the need for digital government functions, and further developing the e-commerce-related logistics business that supports lifelines. Going forward, however, a resurgence of COVID-19, including the emergence of variant viruses, will have the same impact as a prolonging or increasing severity of the pandemic and there is a possibility that the operating results, etc. may be affected.
(2) Laws and Regulations and their Potential Changes
Each domestic outsourcing business that the Group engages in is strictly regulated by the Labor Standards Act, the Worker Dispatching Act, and other related laws and regulations.
Regarding the outsourcing businesses, a law that regulates contract labor does not exist; however, according to the standards for the classification of worker dispatching services and contract labor work (hereinafter, “Official Notice No. 37”), worker dispatching and contract labor are clearly classified separately. The Group has prepared “The Group’s Interpretation Standard for Official Notice No. 37” focused on stable employment, and through its utilization is avoiding the risk of disguised contract labor and promoting contract labor that meets compliance standards.
With regards to workers with fixed-term employment contracts such as contract workers and temporary workers, in addition to the introduction of equal pay for equal work with the revised Worker Dispatching Act that went into effect in April 2020, there have been repeated amendments to laws aimed at protecting fixed-term workers, including revisions such as allowing the digitization of worker dispatch contracts in January 2021 and strengthening of employer’s responsibility concerning the collection of information related to employment stabilization measures in April 2021.
In addition to these labor-related laws and regulations, the Group is subject to the Act on the Protection of Personal Information, regulations on internal control and regulations for companies listed on the first section of the Tokyo Stock Exchange (after the restructuring of market segments in April 2022, the Listing Criteria for the Prime Market, etc.). The Group places the highest priority on complying with all the applicable laws and regulations, and, mainly through the departments related to legal affairs and internal control, is proactively working toward strengthening the education, guidance, management, and supervision pertaining to the related laws and regulations.
Similarly, the Group’s overseas outsourcing businesses are subject to the local laws and regulations, including the respective national labor laws. The Group places the highest priority on fully complying with all the local laws and regulations, utilizing the services of major law firms in each country to fulfill this responsibility. The Group is also focusing on global governance project activities and strengthening governance, with an emphasis on the Group’s overseas companies in this period.
Going forward, however, the enactment of new laws and amendments or changes in their interpretation in response to changes in the domestic or overseas social conditions, or any divergence of views between the Group and any regulating authority, may affect the operating results, etc. of the Group.
(3) Impact of Business Conditions of Client Industries, Etc.
As the Group’s Manufacturing Outsourcing Business undertakes the variable portion of a manufacturer’s mass production line, and as all industries are assumed to have down cycles, by creating a balanced diversification of client sectors, the Group minimizes the impact of business cycles.
Also, with an overall strategy to increasingly specialize in certain industries such as the automobile industry and pharmaceutical/medical industry, the Group is engaged in the Engineering Outsourcing Business, providing outsourcing for the research and development divisions of manufacturers. Therefore, the business conditions of each of the specialized industries may have an impact on the Group; however, by transferring engineers within the Group companies across industry divides, the Group minimizes the impact of client business cycles.
However, in the event that a nation that the Group has entered slips into a major recession, and overall domestic production and R&D activities decline, the Group’s operating results, etc. may be affected.
The use of data in a broader range of fields due to technological innovation such as IoT and AI is expected to lead to changes in various fields of industry and business models. If the Group cannot fully respond to these changes, this could have an impact on its operating results, etc. for various reasons, including losing its market position in the future.
(4) Regarding the Securing of Necessary Staff
In recent years in Japan, there have been cycles of ups and downs in the demand for human resources, such as periods of production slowdowns resulting in excess workforce, for instance, due to economic crises such as the Lehman Brothers collapse and natural disasters such as major earthquakes and heavy floods, followed by periods of economic recovery and production ramp-ups that result in a shortage of workers.
In order to respond to manufacturers’ needs that change with the external environment, the Group is making various proposals for the use of external personnel suited to the needs of each manufacturer, and is placing a priority on the securing of staff in order to realize these proposals.
The business model of dispatching, or worker dispatching, is supplying workers, and the business model of recruiting and placing, or fee-charging employment placement, where workers are directly employed by manufacturers, is introducing workers; therefore, increasing the recruited number of staff for both supply and introduction is important.
In addition to the Group’s global recruiting network, through the strengthening of the company brand by various means, including cooperation with local universities, the Group is simultaneously differentiating itself from its competitors as well as expanding recruitment numbers.
As for the Engineering Outsourcing Business, the Group aims to expand recruitment through an increased recruitment of inexperienced persons, as well as new graduates, and the scheme to provide satisfactory placement to its staff after education and training through the Group’s KEN School.
On the other hand, the business model of contracting differs from the worker supply and referral of the dispatching model and recruitment agency model, as improvements of the individual skillsets of each worker at the contract worksite are essential in order to raise productivity. Therefore, led by manufacturer-invited key persons who possess the knowledge and expertise required to develop staff education and training systems, the Group is placing a priority on staff development with career path/career advancement programs and enhancement of suitable training systems and remuneration evaluation programs for each office. Another goal of establishing these programs is to stably secure employees who can become the core leaders required in the development of the contracting business.
In securing worksite supervisors, the Group aims to differentiate itself from its competitors by presenting an attractive career path program to the workers.
Also, in the hiring process, the Group works to secure its necessary staff by pursuing an efficient placement of advertisement through region analysis and media analysis of recruitment advertising, introducing a real-time interview scheduling system and matching system, and regularly training its recruitment staff, thus reducing any inefficiency in each step from application to hiring.
Furthermore, compared to its industry peers, the Group is superior in recruitment activities due to PEO, a scheme that takes in fixed-term contract employees who were directly employed by manufacturers as the Group’s regular employees, enabling the Group to recruit skilled human resources while holding down the recruitment unit price.
The Group has also emerged, through M&A deals, as a leading player in the overseas markets that it has entered, and has advantageously positioned itself in recruitment relative to its competitors by collaborating within the Group.
However, problems could arise if demand increases at a pace dramatically greater than expected, other companies in the same industry undertake recruiting activities that are more effective than the Group’s by spending more on advertising, or the Group is unable to respond to the introduction of technological innovation such as AI or alternative methods such as SNS. In such cases, the Group may not be able to secure the number of workers to meet demand and face greater loss of potential orders and costs for re-recruiting, which could impact the Group’s operating results, etc.
In addition, the Company’s management divisions expect to recruit highly professional human resources to further increase effectiveness. However, because the competition for hiring highly professional and competent human resources has been intensifying, in the event that such human resources cannot be secured or cultivated, there is a potential risk that detailed responses to diversified administrative operations cannot be given, and costs may increase.
(5) Risks Related to Developing Overseas Business
Regarding the medium- to long-term economic environment, the domestic economy faces a concerning decline in purchasing power due to the population decline. On the other hand, for the overseas market, consumption is expected to grow primarily in the emerging markets where populations are increasing and a broad array of industries is developing.
Presently, approximately half of the Group’s business activities are conducted in Japan; however, in order to achieve sustainable growth for the Group as a whole, expansion of the overseas businesses is a priority strategy.
In addition to foreign exchange volatility, political instability such as those from conflicts, terrorism and kidnappings, uncertainty of economic activity, differences in cultures and religions, local clashes between laborer and management, etc., are all potential risks that the Group, which has launched business operations in Europe, Oceania, North America, South America and Asia, may face as it accelerates its global operations.
Also, there are potential impediments related to overseas business practices, including collecting receivables and building and expanding relationships with trading partners. In addition, regulations on investment, regulations related to the repatriation of profits to the home country, nationalization of local industries, export/import controls, changes in the foreign exchange system, and changes in the tax system and tax rates are all potential political, legal, and other types of impediments that the Group may face.
Expansion of overseas business may require long periods and large investment amounts to realize a return on investment, and the increase of expenses related to investment can potentially exceed the increase in revenue.
(6) Risks Related to M&A and Capital Tie-Ups, Etc.
In addition to the increasing market share from regular sales activities, in order to acquire the resources to expand business, the Group is aggressively engaged in the acquisition of companies through M&A deals and capital tie-ups. In doing so, the Group makes sure to perform due diligence on the financials and businesses of the target companies and considers both profitability and probability of recovering the investment in an effort to identify and recognize the risks in advance.
However, as a result of changes in both the domestic and overseas economic environments, there is a potential risk that adequate controls cannot be put in place for the management, business and assets of the targets of the Group’s M&A deals and capital tie-ups. Also, outflow/decline of the client base and staff of the acquired company may occur, and initially expected synergies may not be fully realized. In these events, there is a potential risk that the investments already made by the Group cannot be adequately recovered, and in the event that business is not developed as originally anticipated, there can be an impact on the operating results, etc. of the Group.
In addition, in the event that the Group establishes a joint venture firm or conducts a business tie-up with a business partner, there is a potential risk that the Group will encounter difficulty in acquiring actual control over the invested company, or not be able to have decision-making authority on important matters, and in the event that business is not developed as originally anticipated, there can be an impact on the operating results, etc. of the Group.
(7) Regarding Management of Information
The Group takes orders from across a broad spectrum of fields ranging from the engineering division of manufacturers in the research and development phase to the manufacturing division in the mass production phase, and is in a position to acquire highly confidential information including manufacturers’ research on new technologies, development of new products and production plans. Because of the unique nature of the outsourcing business, the Group’s main business, the Group is considered an enterprise that handles personal information and is subject to the Act on the Protection of Personal Information because it possesses the personal information of many clients, applicants, officers, employees, etc. The Group fully recognizes the importance and dangers related to handling this information, which includes customer information and personal information. As for managing this information, the Group is aware of the major risks related to information leaks and unauthorized access to the information and has established an information protection system and carefully manages the information it possesses, which includes implementing the best information security measures, formulating the OUTSOURCING Group Code of Corporate Ethics and Conduct, personal information protection guidelines, and in-house rules and thoroughly educating group employees of these items.
However, in the worst case that critical information is divulged or leaked, the Group may become liable for damage compensation, and further, loss of trust may have a material impact on operating results, etc. Also, going forward, costs may increase from investing in information systems to safeguard communications confidentiality and creating systems for the protection of client information.
(8) Risks Related to Medium-term Management Plan
The Group announced not only its new medium-term management plan “VISION 2024: Change the GAME,” the last year of which is fiscal 2024, in February 2020, but also various other materials, including a medium- and long-term vision and strategy, and priority policies and targets for each business segment.
Although the Group was forced to revise the financial forecast in fiscal 2020, which was the first year of the plan, due to the COVID-19 pandemic, in the current period (fiscal year ended December 31, 2021), amid the remaining impact of the COVID-19 pandemic, the Group made progress in returning to the results of increased revenue that exceeded the target in the medium-term plan (medium-term plan: revenue of ¥497.0 billion, actual result: revenue of ¥569.3 billion) and operating profit almost as planned (medium-term plan: operating profit of ¥25.0 billion, actual result: operating profit of ¥24.2 billion). The plans and figures are the Company’s forecasts based on information available at the time they were announced. Actual earnings, etc., may not be as projected for various reasons including the risks given in this “Business and Other Risks” section.
(9) Risks Related to Impairment of Goodwill
The Group adopted IFRS for its consolidated financial statements starting with the annual securities report for the fiscal year ended December 31, 2016. Under IFRS, companies are not required to amortize goodwill using the straight-line method unlike the generally accepted accounting principles in Japan. However, if the recoverable amount of goodwill falls below its carrying amount because of the indication of impairment for goodwill for any of various reasons such as a deterioration in business performance of the acquired company, it may be necessary to recognize a loss on impairment of goodwill. In this event, it could have a material impact on the Group’s operating results, etc.
(10) Regarding Interest-bearing Debt
The Group makes investments, mainly in the form or M&As, in order to increase its corporate value in the medium and long term by expanding its business base and reinforcing its earnings power. If there is a future increase in borrowings, etc., this could impact the financial position of the Group.
(11) Regarding Fund Raising
The Group is actively moving forward with corporate M&A deals, capital tie-ups, etc., and some of the necessary business funds, including those for these activities, are raised through loans from financial institutions, etc.
If the Group is unable to raise the required funds as envisioned because of a deterioration in the Group’s business performance or financial position or changes in financial conditions, this could impact the Group’s financial position. Furthermore, some of the Group’s borrowings from financial institutions, etc., include covenants on representations and warranties and obligations of the borrower in addition to financial covenants. If the possibility of a violation of any of these covenants arises and Group may or cannot avoid violating, the Group may forfeit the benefit of time for that debt, and because of that, the Group may be required to fully repay other debt. This could impact the Group’s financial position.
Because the Company received an investigative report from the external investigative committee on December 28, 2021, and it came to light that material misstatement due to inappropriate accounting or error had been carried out at 17 companies inside the Group in prior years, the Group violated covenants on representations and warranties and obligations of the borrower for syndicated loan contracts, etc. which were concluded between the Group and its major financial institutions. However, the Group obtained consent from all said financial institutions as of February 10, 2022 that they would not exercise their rights of claim for forfeiture of the benefit of time due to this violation.
(12) Regarding Interest Rate Risk
The Group raises funds from entities such as financial institutions, and on some of those funds, the Group pays a variable interest rate. If there is a sudden and major change in interest rates, this could increase the burden of interest payments and impact the Group’s financial position.
(13) Regarding Currency Risk
The Group’s investments in overseas businesses through aggressive M&As entails the risk of an increase or decrease in shareholder capital due to translation adjustments and a change in the amount of gains or losses for the fiscal year when translated into yen. These currency risks could have a material impact on the Group’s operating results, etc.
(14) Regarding Risk of Lawsuits
Having positioned strengthening the compliance system and internal control system as important management issues, the Group provides appropriate instruction and guidance for the employees of the various Group companies and has implemented necessary preventive measures to sever connections with antisocial forces and detect and prevent misconduct in order to adhere to laws, ordinances, rules, etc.
However, there could be unexpected issues with or lawsuits involving users, clients, employees, or other third parties whether or not the Group, officers, employees, etc., violate laws or ordinances, etc. There is also the risk of lawsuits related to patents or other types of intellectual property.
The details and outcomes of these lawsuits, etc., could have an impact on the Group’s business and operating results, etc. The massive cost of responding to lawsuits and damage to the brand image, etc., could have an impact on the Group’s businesses and operating results, etc.
(15) Regarding Information System
The Group information system is playing a more and more important role in the Group’s business activities. The Group strives to achieve stable operation of its information system, but its business and operating results, etc. may be affected in the event that the system experiences major problems for various reasons, including natural disaster, accident, cyberattacks such as computer virus or unauthorized access.