Investor Relations Operational and Other Risks

The ID Group is committed to obtaining an accurate grasp of the various risks that can have important effects on investors’ judgements and reducing risks that may have an impact on its management. For this purpose, the Group established the Group Risk Management Committee as an advisory body to the Board of Directors. The Committee divided the main risks it anticipates for the ID Group into three categories—management and financial risk; personnel, labor and general social risk; and business-segment risk—and established subcommittees for each. The subcommittees identify specific risks and propose measures to deal with them, and the Group Risk Management Committee deliberates on and examines those proposals.

The following are some of the items related to the Group’s business results, accounts and similar matters that may have an important impact on investors’ judgements. Future-oriented statements in the text below constitutes the judgement of the Group as of the date of submission of the Group’s Annual Securities Report (June 21, 2021) .

The COVID-19 Pandemic

Damage from the COVID-19 pandemic continues to manifest. Amid the pandemic’s unprecedented worldwide sweep, harm from infection continues to mount as variant strains emerge, prompting the Japanese government to declare a state of emergency for certain regions. If these conditions linger over the long term, the Group’s business results and financial condition may be impacted in a number of ways. For example, clients may postpone or reduce plans for investment in IT systems, or investment appetite may retreat market-wide, preventing the Group from securing new clients and projects at previously expected levels.

In anticipation of such a longer-term trend, the Group is launching initiatives across multiple dimensions to cope and thrive in the new environment . The Group has drafted a plan for responding to the declaration of a state of emergency in response to the COVID-19 pandemic and is circulating it to all employees. In addition to promoting the adoption of telework and thoroughly enforcing measures such as hand washing, wearing of masks, disinfection, ventilation and body-temperature checks, where circumstances warrant the Group is limiting in-person meetings and training events, as well as business trips and outings. Moreover, the Group has launched the New Normal Adaptation Project, an internal reorganization project aimed at promoting flexible and efficient workstyles for effective coexistence with COVID-19. The Group is advancing the adoption of free-address office environments at ID Holdings head office, including THE Forest Room, and transferring certain head-office management functions to the Sanin Department. To supply PCs and other equipment for telework, furnish the necessary communication environment and enhance the quality of work, the Group is drafting the Telework Regulations and the Telework Security Guidelines.

The Group is also taking steps to respond to client needs amid the new conditions.  Regular fact-finding discussions are held with clients on revisions to system investment plans, project status and the like. Moreover, the Group is shifting away from in-person service stationed at client locations to service at a distance using remote-management tools.


Dependence on specific customers

In the consolidated fiscal year under review, the Mizuho Financial Group accounted for 15.8% of the sales of the ID Group. This proportion has shrunk from the previous fiscal year, due to the Mizuho Financial Group’s shift of system-operations work to a joint-venture company with IBM Japan, Ltd., in which the latter holds a 65% stake. Nonetheless, the Mizuho Financial Group’s dominance of the ID Group’s net sales constitutes a state of high dependence. As such, variations in the volume of projects entrusted to the ID Group by the Mizuho Financial Group can significantly impact the business results and financial condition of the ID Group.

The Group is grateful for the stable business relationships it has enjoyed with companies under the Mizuho Financial Group umbrella for many years and remains committed to supporting and expanding its relationship with the Mizuho Financial Group. The Group is strengthening sales activities aimed at the companies of the Mizuho Financial Group and companies affiliated with IBM Japan, while striving to attract other customers through M&A activities, business partnerships and other strategies.

Changes in the market environment

In recent years, clients’ IT needs have diversified and the business environment in the IT services industry has undergone substantial change. The transformation of existing businesses through digital technologies such as robotic process automation (RPA) and AI—digital transformation (DX)—is skyrocketing. Additionally, companies are shifting from owning systems to using them as a service, IoT devices are proliferating rapidly and cybersecurity is growing increasingly sophisticated. If the services provided by the Group become obsolete or uncompetitive, the business results and financial condition of the ID Group may be impacted.

The Group is determined to amplify its knowledge of leading-edge technologies that have the power to change society and apply those technologies in its business. For this purpose, the Advanced Technology Department is pressing ahead with research and development activities.

DX CONSULTING CO., LTD. is a Group company into which the Group has subsumed consulting segments with strengths in systems operation. This company is moving forward with a menu of highly competitive services, such as business innovation and automation. Meanwhile, ID Holdings is expanding its presence in new technologies, for example by acquiring operating companies with strengths in mobile application development.

To respond flexibly to clients’ needs in shifting resources to the cloud, the ID Group established the ID Cloud Managed Center in November 2020 in Japan’s Sanin region. Upon its establishment, the Center launched implementation services with multi-cloud support and remote-operation services.
 
Through measures such as these, based on the wealth of operating knowledge and expertise in customer systems it has accumulated over many years, the ID Group is fusing existing service solutions with advanced technologies. In this way the Group is strengthening its provision of high-value-added services that meet customer needs and responding to changes in the market environment.


Corporate acquisition risk

One of the Group’s strategies for expanding operations is to do so through mergers and acquisitions. However, changes in the market environment and unexpected events may prevent the Group from implementing these moves or result in effects other than originally anticipated. In such cases, the business results and financial condition of the ID Group may be impacted, for example by the need to appropriate impairment of goodwill or a loss on valuation of shares in affiliated companies.
 
When implementing mergers and acquisitions, the Group strives to prevent these risks through due diligence by specialists such as accountants and lawyers, who examine the financial and tax status of target companies, related legal matters and other aspects. After the merger or acquisition is completed, the Group regularly monitors the management of the acquired company by attending meetings of the Board of Directors, inspecting its accounts and other measures. In these ways the Group strives to obtain a clear understanding of the impact of the merger or acquisition on the business results and financial condition of the ID Group.


Global business risk

As part of its operating strategy, the ID Group advances its operations on the global playing field, with particular focus on China, Singapore, Myanmar, the United States and Europe. A broad array of factors can affect these global operations, including trends in the global economy and exchange rates, laws and regulations governing commerce, differences in business culture, and political and social trends. These and other factors have the power to impact the business results and financial condition of the ID Group.
 
Led by the International Business Promotion Department and the Corporate Strategy Department, the ID Group maintains an appropriate understanding of business conditions at each overseas location and changes in the external environment. On individual risk phenomena, the Group Risk Management Committee examines the details, confirms conditions, confirms progress on countermeasures and examines the effects of countermeasures. In these ways the Group makes every effort to reduce risks.

In February 2021, a coup d’état occurred in Myanmar. Local Group affiliates worked closely with the relevant departments in ID Holdings, placing top priority on employees’ safety by switching to remote work. Operations are continuing in Myanmar and the impact on business results from the coup is expected to be negligible.

Recruitment risk

Responding to the latest developments in DX technology and enhancing customer satisfaction are tasks that require the Group to hire and retain excellent personnel as a vital issue of management. If the Group is unable to secure and train such personnel, or if the Group is unable to supplement its workforce with people who can meet its needs related to business innovation, the Group may suffer impact on its business results and financial condition.
 
To respond to these challenges, the ID Group strives to hire people who offer high value-added both in Japan and abroad, whether as fresh graduates or as mid-career hires. After they join the Group, new hires undergo planned rotation and training, to develop and promote them as advanced technology engineers. To respond to customers’ changing needs, the Group is exploring new businesses and encourages its personnel to expand their skill sets.


Information management

The ID Group constantly makes every effort to support and improve information security while providing services that earn the satisfaction of customers. However, in the unlikely event that unlawful access or a major error causes the loss, tampering, leak or other compromise to information about customers or their transactions, the Group’s reputation may suffer, resulting in negative impact to the business results and financial condition of the ID Group. To ensure that personal information and other information assets are handled appropriately, the Group has established various regulations, including the Basic Policy on Information Management and the Privacy Policy. In addition, the Group is now fully compliant with the European Union (EU)’s General Data Protection Regulation (GDPR). 
 
The Group has taken other steps to ensure data security as well. The Information Management Committee has been established to conduct cross-sectoral deliberations on information management generally and is working to strengthen the Group’s information management framework. The Group also revises regulations in response to updates to laws and guidelines and provides regular training for the further enhancement of employees’ awareness of compliance issues. Finally, the Group has obtained certification under PrivacyMark and ISO27001 and is committed to maintaining and supporting those certifications.
 
To deal with the risk of information leaks associated with telework, in April 2020 the ID Group drafted the Telework Security Guidelines. The Group also conducted seminars for all employees, to ensure their thorough and universal understanding of the Guidelines’ content.


Natural disasters, terrorism, infectious disease, etc.

The risks from natural disasters such as earthquakes, typhoons and floods are mounting year by year, and losses from terrorism, infectious disease and other unforeseen events around the world can never be completely avoided. If the Group suffers damage beyond its expectations for incidents such as these, the business results and financial condition of the ID Group could be impacted.
 
To minimize the impact on operations from obstruction of business by unforeseen events such as earthquakes, floods and other natural disasters, as well as terrorism, crime and the spread of infectious disease, the Group has established a Crisis Management Manual and a Business Continuation Plan (BCP).

Amid the COVID-19 pandemic, the Group took steps to reduce centralization risk. These included promoting the widespread adoption of telework and shifting some head-office functions to the Sanin Department.

In addition, the Group stored food and hygiene products, updated manuals and implemented regular training in the use of its safety confirmation system.


ESG

Activities related to non-financial information can have enormous impact on the sustainability and enterprise value of a company over the medium-to-long term. This realization has focused increasing attention on environmental, social and governance (ESG) matters and the Sustainable Development Goals (SDGs).

Guided by the ESG Promotion Department, the ID Group is moving forward with efforts on workstyle reforms and health management. In recognition of these efforts, the Group received certification as an “Excellent Enterprise of Health and Productivity Management (White 500),” for the second year in a row.

In 2021 the Group established a Sustainability Committee. This Committee is working to obtain ISO 14001 certification for ID Holdings head office’s environmental management system (EMS).

The ID Group is also engaged in Group-wide activities related to ESG. These include contributing to regional communities through environmental volunteer activities and the like at Group locations in Japan and overseas, as well as strengthening employee education at each Group company. In this way the Group is striving to ensure its sustainable growth and boost its estimation in the eyes of clients and investors.
 


Risks in software development and infrastructure-building projects

Software development and infrastructure-building projects together comprised some 42.5% of the Group’s net sales in the consolidated fiscal year under review. As these operations become more sophisticated and complex while delivery schedules shorten, the risk arises that problems may occur during development, including changes to required specifications, decrease in quality and late delivery.
 
To hedge these risks, the ID Group is introducing quality management systems that conform to ISO9001. When an inquiry for a new, large project is received, an order-acceptance review meeting is convened to examine the project based on management judgements of business policy, profitability, staffing, technical competence and opportunities to build technical knowledge. The Quality Management Division analyzes and manages risk across all processes, from the project-proposal and estimate stages to delivery, conducting regular reviews of quality, cost and delivery (QCD) as the project unfolds. When abnormalities are detected or predicted, measures are taken at an early stage to prevent the occurrence of unprofitable projects. 
 
In cases where, despite the above measures, the required quality is not achieved according to plan or development is not completed on time, additional expense may be incurred to complete projects, or restitution of damages may be required, reducing the profitability of the project. Such outcomes may impact the business results and financial condition of the ID Group. During the previous fiscal year, however, the Group had no such projects, rendering their impact negligible.

The Group is taking further steps to strengthen project management. From the previous fiscal year, the ID Group is reorganizing with the establishment of a Global Innovation Center (GIC). The GIC unifies the various organizations that had previously conducted batch development work separately. In addition, the Group has appointed a Project Director, establishing a framework for unified management of all projects. This new organization reinforces management of projects awarded in batches while enabling projects to be staffed flexibly and appropriately.


Risks in system operation management

In the consolidated fiscal year under review, system operation management accounted for 46.8% of the Group’s sales. In system operation management, the risk always exists that operational error or the like can cause damage to systems, delays in providing information or other issues. If a major system failure were to occur, the Group could become liable for damages, causing impact to the business results and financial condition of the ID Group.
 
The ID Group is making a number of moves to prevent such system failures. For example, the Group thoroughly implements a system for double-checking of high-impact projects and uses a suite of tools to enhance automation. The Quality Management Division plans and executes a variety of measures, including training to prevent failures, analyzing and giving feedback on the causes of failures, and on-site inspections. Moreover, the Group has obtained certification under ISO9001 and is continuously improving quality. In the previous fiscal year, no major system failures occurred.
 
The field of system operation management, which is the Group’s core business, is currently undergoing a profound transformation. As DX progresses, companies are slashing maintenance costs in existing systems, advancing automation and moving to use of the public cloud, while major customers of the ID Group are shifting to next-generation systems and centralizing operations. If the Group were to confine itself to conventional, stand-alone operations, it would risk a major downsizing of its business. 
 
The ID Group is implementing a number of DX strategies, such as automation of operations that enhancing value-added in work vital for the future viability of its system-operation business. The Group is also advancing the shift into new fields by changing employees’ skill sets.

To respond flexibly to clients’ needs in shifting resources to the cloud, the ID Group established the ID Cloud Managed Center in November 2020 in Japan’s Sanin region. Upon its establishment, the Center launched remote-operation services with multi-cloud support.


Recruiting from partner companies

To attract talented people who fit the needs of its projects and to obtain the capability to respond flexibly to fluctuations in order volumes, the ID Group is moving decisively to recruit from partner companies. Even so, in the event of a rapid increase or decrease in the volume of orders received beyond anticipated levels, the Group may be unable to recruit the necessary personnel or release them in a timely manner. In such cases, the business results and financial condition of the ID Group could be impacted.
 
To minimize this risk, the Group shares information closely with partner companies. On a regular basis, the Group conducts partner meetings and seminars, sharing information about business policies, individual projects and case studies of trouble encountered. With its core partners, the Group is further strengthening cooperative relationships, forming cooperative frameworks to improve its ability to win batch project orders and enhance quality management. In these ways, the Group is working to improve quality as well as its ability to attract talented people.