(As of 31st March, 2018)
Items that could have an important influence on investor judgments in NRI's business and other operations are outlined below.
The risks that we list here are representative risks inherent to our business as of 31st March, 2016, but the potential risks are not limited to those listed below. Furthermore, items herein relating to future events are based on judgments by NRI as of the end of the fiscal year under review.
1.Risks Concerning Management Strategies
Price competition in the information services industry
Competition is fierce among service providers in the information services industry. Intense price competition could occur in the future as a result of the continuing participation by new service providers from other industries, emergence of overseas providers, and an increase in demand for packaged products.
Under these business circumstances, NRI strives to differentiate our services from those of our competitors by offering high value-added services that enhance our ability to offer end-to-end services from consulting to system development and system management and operation. We also strive to improve productivity.
However, if price competition becomes more intense than forecasted, NRI's business performance may be adversely affected.
Technological changes in the information services industry
In the information services industry, we must constantly match market needs that often change as information technology evolves.
Acknowledging such a changing business climate, NRI is striving to respond rapidly to technological innovations by being active in investigation and research of advanced, basic, and developmental IT through implementing a cross-sectional system.
However, if technological innovations advance in a wide range of areas, and if our response to these changes is delayed, it could adversely affect NRI's business performance.
Stability of management and operation services business
Expansion of system management and operation services requires various investments, such as real estate for data centers and equipment for operations and software. Return on such investments is obtained over the long term through client contracts.
Many contracts for system management and operation services span more than one year or are automatically renewed in the case of one-year contracts. Accordingly, sales are deemed relatively stable; moreover, NRI strives to achieve steady return on investments through careful management of work in progress and continuous credit control of clients. Nevertheless, there is no guarantee that this stability in sales of system management and operation will continue in the future; each time a client business undergoes a merger or bankruptcy, or when a client decides to overhaul its information systems strategies, there is a possibility that it will not renew its contract with NRI.
Investment in software
NRI invests in software to expand our business, including product sales, shared online services and outsourcing services. In many cases, the software is designed for specific use and cannot be readily adapted for other applications, which means that careful consideration must go into the decision to make such an investment.
At NRI, we exhaustively discuss the legitimacy of each business plan before commencing software development. We also have an internal system whereby regular checks on the plan's progress enable prompt revision to the plan when necessary, both in the development stage and after completion.
However, with this type of software investment, there is never a total guarantee that the initial investment will be recovered, and there is a chance the capital will not be recovered and a loss will be incurred.
Dependence on specific business categories and clients
NRI sales showed strong dependence on specific business sectors and clients. In the fiscal year ended on 31st March, 2016, sales of Financial IT Solutions to external clients mainly in the financial sector accounted for 50% of total sales. Moreover, NRI's combined sales to our major clients, Nomura Holdings, Inc. and its subsidiaries, and Seven & i Holdings Co., Ltd. and its subsidiaries, accounted for one-fourth of consolidated sales.
NRI possesses the operational know-how gleaned from our businesses for the financial sector and large-scale and advanced system development and operation expertise. NRI is aggressively cultivating new clients by utilizing these strengths in services for other sectors. In terms of our approach to major clients, NRI is differentiating ourselves from our competitors by becoming even more adept in our areas of strength and is strengthening our client relationships through strategic deployment of human resources.
However, it is possible that in the future NRI will experience an enormous impact on business performance if the legal system in a specific sector is changed, if the business environment is suddenly changed, if the business circumstances of our major clients change, or if they radically reexamine their information systems strategies. There is also a possibility that NRI, against expectations, will be unable to secure new clients.
Investments, M&A, alliances
NRI invests in various companies with a view to developing future business opportunities, and it also takes equity stakes in clients to strengthen business relationships, considering expected return on investment. NRI also undertakes M&A and forms business alliances with a view to strengthening its global operating base. Such actions involve careful prior examination of the target company's financial standing and its business activities, and decisions are made only after all the necessary information has been gathered and due diligence exercised. Despite this approach, there is a possibility that NRI's business performance may be adversely impacted by, among other things, the need to apply impairment accounting procedures to goodwill in the event that clear problems arise that were unrecognized by NRI prior to completed investments, M&As and alliances, or if expected benefits fail to materialize.
Capital relationship with Nomura Holdings, Inc.
As of 31st March, 2018, Nomura Holdings, Inc. held 38.5% of the voting rights of NRI (including 9.5% of indirectly held voting rights).
There is no guarantee that the percentage of voting rights held by Nomura Holdings, Inc. and its affiliates will remain stable. Furthermore, the exercise of voting rights by Nomura Holdings, Inc. and its affiliates may not necessarily be aligned with the interests of other NRI shareholders.
As a result of the advance of globalization of business activity and a widely networked environment, significant damage may be caused by unexpected events such as disasters and system failures, requiring the reinforcement of a crisis management system.
NRI has prepared a contingency plan (emergency response plan) outlining the emergency response system and action guidelines in the event a large-scale disaster, large-scale system disruption, accident, or other incident occurs that affects the business and execution of operations. While taking proactive measures and conducting repeated drills, we will work to upgrade and reinforce our crisis management structure, including preparing the infrastructure necessary for business continuation and establishing a structure to achieve smoother business continuation.
The NRI’s main office buildings have sophisticated disaster prevention features for facilitating business continuity. Our Tokyo Head Office, Yokohama Center, and Osaka Center have the highest level of disaster prevention features in Japan.
Also, the data centers held by NRI meet the highest Japanese standards for disaster preparation, in terms of security measures and earthquake resistance among other aspects. They feature wide-area disaster control measures such as mutual back-up and functional distribution linked with the data centers in Kanto area and Kansai area.
We intend to further reinforce our backup systems for NRI's information assets contained within these data centers as well as take measures based on standards agreed upon with clients regarding their information assets in our keeping. However, in the event of a contingency or situation that exceeds the capabilities of one company, in which interruption of operations is unavoidable, provision of services at the standards agreed upon with clients may not be feasible and could potentially affect NRI's performance.
3.Intellectual property rights
NRI sees the growing importance of intellectual property rights related to information systems and software, such as patents for business models related to e-commerce.
With these circumstances in mind, in the development of information systems, NRI is constantly investigating any and all possible breaches of other party’s patents.
Furthermore, through education, training and other measures, we are raising employee awareness of intellectual property rights. At the same time, we recognize that intellectual property is an important business resource, so by proactively investing in applications for patents, we are rigorously protecting the intellectual property of NRI.
If, despite these measures, the product or service of NRI breaches the intellectual property rights of a third party, not only would this potentially make NRI liable for reparation, but NRI might also be ordered to stop using an information system, or service, which could interfere with business execution. There is also the possibility that NRI's intellectual property could be breached by the third party.
4.Laws and regulations
NRI is subject to domestic and overseas laws and regulations when conducting business activities. In recent years, further legal compliance has been required for labor laws and regulations.
NRI has established a compliance structure and makes every effort to ensure compliance with laws and regulations.
However, there is a possibility that the breach of laws and regulations or the implementation of new laws and regulations could have a negative impact on NRI's operations and performance.
5. Information Security
With the penetration of Internet infrastructure, dissemination of all kinds of information throughout society has become instantaneous.
These technological advances have heightened the risk of information leaks through improper network access, both internal and external. The question of security management is now being closely scrutinized by the public eye as well as from regulators. In the information services industry, in which NRI regularly handles our clients’ confidential data, more sophisticated information security management and comprehensive employee training are needed.
In the area of personal information management, NRI has obtained Privacy Mark certification, accrediting our management system to protect personal information including national identity numbers. We conduct appropriate management of confidential information, and a portion of our business has obtained Information Security Management System certification. Among the steps we take to consistently maintain a high level of security, we have systems that control entering and exiting of buildings, ensure rigorous computer security management, and conduct training sessions on protection of personal information. NRI has introduced stricter entry/exit controls such as X-ray scanning of articles being brought into and out of the facilities, including in our data centers that operate our clients' mission-critical systems.
Moreover, we are strengthening internal controls throughout the NRI Group by investigating information security compliance and implementing risk assessment.
However, in the event that information leaks occur despite our efforts, factors such as claims for compensation for damages from clients and others and a loss of confidence in NRI could potentially affect NRI's performance.
6.Quality of services
NRI aims to provide clients with high value-added services by taking advantage of our total capabilities from consulting through system development and system management and operation by following a basic strategy of "Navigation × Solution," which is to propose strategies to achieve those objectives, and provide measures to bring such strategies to fruition. Our clients expect a high-quality service.
In our consulting services, we are working hard to establish systems that offer high-quality services such as the provision of infrastructure that allows the sharing of information on the expertise accumulated within NRI. In addition, we are committed to continuing to improve quality on an ongoing basis by conducting client satisfaction surveys, analyzing results and addressing feedback.
However, if we are unable to provide the high-quality service that our clients expect, this may hinder prospects for future business contracts.
Generally, system development projects are undertaken on a contract basis. We are obliged, under such a contract, to complete an information system and deliver it by the specified deadline. However, there may be times when more person-hours are required than initially estimated because of the client's requests for a more advanced and complex system as well as requirement changes made before completion, which may delay delivery. Even after delivery, more work than expected may be needed to complete the contract, such as carrying out additional improvements on system performance. In particular, long-term projects that take several years to complete have a higher likelihood of being affected by requirement changes to respond to the changes in both technology and the surrounding environment. Information systems are important social infrastructure, and quality management and risk management are essential from the development stage to achieve stable operation after system completion. We strongly recognize that, for systems in the financial services sector in particular, the systems not only involve the reliability of NRI's client, but also the entire financial market.
Therefore, in order to deal with these situations, NRI is making efforts to ensure that project estimate examination before contract signing as well as project management after contract signing are done properly. These efforts include improving the management abilities of our project managers through training programs and providing quality management systems based on ISO (International Organization for Standardization) 9001. We established exclusive examination bodies, such as our systems development committee, for projects over a certain size in order to thoroughly review the progress of projects through system delivery and operation. We will further develop examinations for and improvements to the system development process for systems in the financial services sector. However, in the event extra costs are incurred, such as an increase in person-hours or performance improvement work conducted after delivery, the project's final profitability may deteriorate. Moreover, if the client's business is harmed because of a delay in delivery or because of problems with the delivered information system, not only may NRI be liable for the loss, but the situation might also damage the reputation of NRI.
System management and operation services
The information systems developed by NRI are often important platforms for client business and it is essential that these systems operate stably after completion. Regarding financial sector systems, in particular, there are cases in which credibility is on the line not only for our clients but also for entire financial markets, and we are keenly aware of the weight of that reality.
NRI is seeking to improve the quality of system management and operation. We are constantly striving to maintain and improve the quality of services we provide, based on the ISO27001 information security management system, and ISO20000 IT service management system. Concerning financial sector systems, we perform management status and other inspections on a prioritized basis and are formulating measures for responding to failures in the unlikely event they occur.
Data centers play a crucial role in the economy and society, and we are keenly aware of their importance. NRI put in place an operating structure that enhances security and regularly evaluates and verifies their operating status. Nevertheless, there is a possibility that the stability of datacenter operations may not meet the standards agreed to with clients, despite our efforts, as a result of human failure to follow correct operating procedures, equipment failure, or power outages and other infrastructure-related problems. Such adverse developments could not only have a negative impact on our performance but could also damage the reputation of NRI.
To improve productivity and make use of the highly specialized know-how of outside corporations, NRI outsources some business operations. Many of these outsourcing operations are carried out under subcontracting contracts.
Good business relationships with subcontractors
In the fiscal year ended 31st March 2018, subcontractors were responsible for 40% of NRI's actual production. It is essential to secure top-level subcontractors and maintain a good business relationship with them in order to carry out NRI's operation.
We strive to secure superior subcontracting partners by performing corporate screening regularly and searching for new collaborating partners both domestically and overseas. Furthermore, we are conducting activities to raise productivity and quality, including activities with subcontracting partners, through such measures as sharing of project risks through e-Partner contracts, a contracted business partner with high levels of specialized business expertise, and demands for greater security and thorough information management on the part of subcontracting partners.
Our subcontracting partners are not only in Japan, but also in various overseas locations, including China. Currently, Chinese companies account for 15% of NRI’s subcontracting costs. We are therefore striving to strengthen this system of cooperation by regularly dispatching executives and employees to China to visit subcontracting partners and check the status of projects.
In spite of all these efforts, if we fail to secure superior subcontracting partners or maintain a good business relationship with them, we might not be able to conduct business smoothly. Especially in subcontracting to a subcontracting partner overseas, an unexpected event might occur caused by political, economic, or social factors which are different from those in Japan.
There have been calls for appropriate responses in compliance with labor-related laws when contracting business outsourcing work is carried out under service contracts.
NRI has formulated guidelines relating to contract work to raise common awareness of this problem and to allow the awareness to take root in NRI. In addition, we host meetings to explain our policies to subcontracting partners as part of our drive for entirely appropriate business outsourcing.
If despite these efforts, work outside the scope of the contract work is carried out and disguised contract issues and so forth arise, NRI may lose credibility.
NRI believes that the specialized expertise of our employees is the foundation of our high value-added services. In addition, hiring and fostering highly specialized human resources and establishing personnel systems and workplace environments that allow these individuals to demonstrate their full potential is necessary to build long-term trusting relationships between NRI and our clients and ultimately enable NRI to achieve medium- to long-term growth.
We perceive our employees as valuable human assets and are dedicated to creating a system that allows us to secure and develop these assets. We strive to recruit highly capable staff with specialized skills, while focusing on the work-life balance of employees, constructing a personnel system that accommodates diverse working methods and values, and implementing improvements to the working environment. As part of our strategies for personnel development systems, we offer assistance to and subsidize our employees to obtain various licenses and qualifications and hold many human resources development seminars at a facility dedicated to employee education and training. We encourage employees to improve themselves by taking advantage of NRI's internal certification program.
Despite these efforts, if we fail to secure and develop professionals who can respond to the highly specialized demands of our clients, NRI's performance could suffer. Furthermore, if workplace conditions worsen and cause employees' mental and physical health to deteriorate, this could possibly lead to a drop of worker productivity and attrition.
NRI holds stocks of client companies with a view to strengthening business ties and bonds for investment purposes. In the event of business deterioration or bankruptcy at an issuer, NRI may incur an impairment loss or be unable to recover our investment. Moreover, market prices for these securities fluctuate in line with the economic environment, market trends, and earnings at issuers. Such fluctuations can affect NRI's financial position.
10.Assets and liabilities related to retirement benefits
NRI has established a defined contribution pension system and a retirement allowance system as our defined-benefit system. The allowance for employee retirement benefits will fluctuate according to changes in the amount of retirement benefit obligations and pension plan assets.
Retirement benefit obligations are calculated using a number of assumptions and estimates, such as employment termination trends and discount rates. A change in any of these factors could change the amount.
Meanwhile, pension plan assets fluctuate according to trends in the stock market and interest rates. Moreover, if any change in the pension plan is adopted, it could affect the liabilities of retirement benefit obligations.
11.About social responsibility
Global social issues including climate change are becoming more severe, and as international organizations have agreed on targets aimed at solving these social problems such as the Paris Agreement and the United Nations Sustainable Development Goals (SDGs), companies also face increasing expectations for their social responsibility initiatives. For the problem of climate change in particular, there is a rapidly growing movement in the global information services industry to utilize renewable energy when providing information services.
The multiple data centers owned by NRI have the highest level of environmental performance in Japan, while also employing environmental management systems based on ISO 14001 standards. We have set an environmental target of 36% renewable energy usage for our data centers by FY2030. However, if our transition to this target level of renewable energy falls behind schedule, or if societal demand for action against climate change quickly accelerates and we are late to respond, the social image of NRI could suffer.
Furthermore, NRI has grown in size to the point of employing over 12,000 people around the world, with an additional 10,000 employees across our partner companies, and we must inevitably deal with human rights-related issues, including in supply chains. The information services industry also has established a belief that personal information handled by companies, including Japan's "My Number" individual ID numbers, should considered "digital rights." This information must therefore be handled with the utmost care. The social image of NRI could suffer if we are unable to appropriately address these human rights-related issues.
On 30th April 2015, NRI was served notice of a lawsuit brought against it by Japan Post Information Technology Co., Ltd., which is currently in litigation. The lawsuit states that Japan Post Information Technology placed an order to procure communication line service and related maintenance operations from Softbank Group Corp., and an order for network transfer management and streamlining services from NRI. The suit alleges that Japan Post Information Technology was harmed by delays in the transfer over to the new communication lines and is seeking a joint payment of 16,150 million from Softbank and NRI. Depending on the outcome of this litigation, NRI business performance may be adversely impacted.
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