Among the matters relating to the business and accounting etc., of the Group, major risks recognized by management as risks that could have a material impact on the financial condition, operating results and cash flows of the consolidated companies include the following. However, the statements below do not cover all risks, and the Group may be impacted by risks in the future that cannot be foreseen or are not perceived to be material risks at the present time. Based on the risk management system and methods stated in (1) and (2) below, the Group makes efforts to avoid risk and, if they have occurred, take appropriate measures.
* Forward-looking statements in this document are based on judgments made by the Group at the end of the consolidated fiscal year under review.
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To manage the risks faced by the Group, the president, who is a responsible official with final authority over risk management, appoints an officer in charge of risk management, and MRI has established the Risk Management Division to be the department supervising risk management.
The Risk Management Division detects risk predictors and practices risk management in emergencies in cooperation with the risk management departments of the Group companies. Risk predictors are detected monthly by all the Group companies by the risk management method below and reported to the Management Meeting, and the Internal Control and Risk Management Committee (chaired by the president) meets four times a year to submit the review of risk management and an annual policy and an annual plan for risk management to the Management Meeting once a year or more for discussion before reporting to the Board of Directors.
① Risk detection and assessment
The Risk Management Division continuously examines and detects risks relating to businesses of the Group. Detected risks are assessed according to the probability of occurrence and impact, and focused, proactive measures are taken for risks that are determined to be high priority as a result of the examination.
② Risk monitoring and measures
The Risk Management Division collects risk situations and predictors from all the Group companies monthly to detect risks at an early stage, prevent them from surfacing, and take appropriate measures to address them. To manage progress in its risk management, the Risk Management Division compiles the results of its risk management and reports monthly to the Management Meeting.
③ Response to risks that have surfaced
If a risk surfaces, the Risk Management Division considers and implements appropriate measures to minimize its impact. When the situation is a crisis alert or crisis outbreak as specified in rules, the Risk and Compliance Management Division will immediately shift to crisis management headed by the officer in charge of risk management or the president.
（３） Particularly significant risks
Because the Group handles a great deal of personal information and confidential information of its customers, information management and security management are important matters that are directly linked to the Group’s business credibility. Therefore, if a situation such as the leakage, loss or destruction of information has occurred due to unauthorized access from the outside such as a computer virus infection or a cyber attack, or the occurrence of natural disaster or imperfect information management derived from increase in remote work and new foundation of overseas bases, this may result in customers claiming compensation and a loss of confidence in the Group, etc., and these events could have an impact on the Group's financial results.
To address these risks, the Group strengthens and fully enforces information management, including access control for rooms, security measures for information and network equipment, the development of rules for sending email, and regular training for employees, accident-response training on the supposition of the leakage, preparation of individual measures for overseas bases etc. In addition, in response to an increase in remote work, the Group has set rules for handling information.
The Group’s Think Tank & Consulting Services and IT Services businesses are performed in individual projects, reflecting specifications and operations in pursuance of customer’s request.
Highly diverse projects which were expected to be profitable when the order was received may become unprofitable due to a difficulty of customer’s request, or a complication of projects, or a change of circumstances causing an increase in the labor, especially in projects such as those adopted new technology or projects of new area, or projects of new customer. In addition, if quality deteriorates due to inadequate management or the deterioration of profitability due to unexpected circumstances, business results may be impacted.
To address these risks, the Group assesses the risks of projects in their entrance management based on Group-wide criteria. In their management of execution, line managers examine risks, in addition to monitoring projects that require it, an automatic alert mechanism regarding profitability, and the daily management of project leaders.
Sales to public-sector customers accounted for 30.9% of consolidated net sales in the consolidated fiscal year under review.
In the public sector, active fiscal actions based on growth strategies with a view toward the DX propulsion, as well as the promotion of more complex and sophisticated projects is expected.
While the shift of policy focus to areas where the Group has a proven track record and can demonstrate its strengths will benefit the Group, a delay in any response to the content of projects that continue to become increasingly complex and sophisticated, or intensifying competition to win orders could impact the Group’s financial results if they occur.
In addition, there are increasing requirements regarding the prohibition of anticompetitive behaviors and the transparency of accounting procedures to conduct transactions with public-sector customers. If there is an inappropriate response regarding this, it may impact the financial results of the Group.
To address these risks, the Group is continuously engaging in improvement activities in the proposal stage through the collection of many kinds of information, the analysis of factors for results and improvement activities in the execution stage and improve the quality of deliverables, aiming to provide more value to customers.
The Group is proactively promoting VCP (value creation process) management, carefully considering the process from research through recommendation and implementation. As a result of this, we expect new business and business requiring operational tie-ups or capital alliances to increase in the Group. However, if there is greater-than-expected change in the business environment or in the situations of business partners, or customer dissatisfaction or complaints, service outage due to system trouble, business results may be impacted due to a suspension of business or claim for damages from customer or loss of credibility.
In business providing using AI etc., if there is an inadequate response to fairness, transparency and safety necessary for the use of AI or insufficient measures for the establishment of accountability for it, this could also impact business results.
To address these risks, we judge the implementation of these businesses after confirming business forecasts, investment profitability, and overall risk through internal examination procedures.
In addition, we have established Guidelines for new business creation and Guidelines for Promoting AI Businesses
We are promoting these businesses in accordance with these guidelines.
For the Group to respond to the diverse needs of society and its customers and achieve sustainable growth, it is extremely important to secure and develop human resources with a high level of expertise, uniqueness and creativity, and provide opportunities for active participation.
However, if it is not possible to adequately secure human resources with a high level of expertise due to recruitment difficulties, increased liquidity across the labor market, or a deterioration in the working environment of the Group, business results may be impacted.
To address these risks, the Group strives to ensure a pleasant and rewarding work environment that are comfortable and enable employee vitality through a multifaceted human resources policy that includes the enhancement of recruitment and training, the promotion of diversity, the enhancement of welfare programs such as childcare support systems, the improvement of the work environment including working hours, and the prevention of harassment.
Furthermore, for human resources staying and performing work overseas, we are working towards the strengthening of safety measures, the double-tracking of information gathering, the alerting travelers and representatives to dangers, and other measures.
MRI has subsidiaries and affiliates including Mitsubishi Research Institute DCS Co., Ltd. (DCS). While the Group has developed a system to enhance its corporate value and ensure operations are conducted appropriately, a delay in responding to an incident that has occurred due to insufficient governance of subsidiaries could impact the Group's financial results if it occurs.
To respond to this risk, the Group will improve its internal control and position governance improvement such as the sophistication of consolidated management including the cultivation of human resources and organizational culture reforms as important issues in the medium-term management plan, thereby promoting organizational and climate reforms that are conscious of cooperation between the Group companies, including personnel exchanges and mutual coordination of measures to raise awareness of compliance.
(Relationship between MRI's subsidiary DCS and its non-controlling shareholder (Mitsubishi UFJ Financial Group, Inc. (MUFG))
As of the end of the consolidated fiscal year under review, the shareholding structure of DCS, which plays a key role in the IT services segment of the Group, is that MRI has an 80% stake and MUFG has a 20% stake. MUFG Bank, Ltd. (MUFG Bank), a subsidiary of MUFG, is a major and important business partner of DCS.
In the consolidated fiscal year under review, transactions between DCS and MUFG Bank (including its information system subsidiary Mitsubishi UFJ Information Technology, Ltd.) account for about 20% of the net sales of DCS. Given the history of being entrusted with the development, operation and maintenance-related work of the core systems of MUFG Bank for many years, the Group expects that the good business relationship will be maintained between the companies in the future.
At the end of the consolidated fiscal year under review, out of the 11 Directors and Audit & Supervisory Board Members of DCS, three served concurrently as officers of MRI, one was originally from MRI, one served concurrently as officers of MUFG Bank, Ltd., and two were originally from MUFG Bank.
MRI dispatched a person who concurrently serves as an officer of MRI to DCS to further improve Group governance. MRI will also continue striving to promote competent and appropriate personnel with business expertise and business experience from inside and outside the company.
Intellectual property rights are important management resources from the perspective of ensuring business competitiveness, and the Group is actively working to protect them and to respect and not infringe on the intellectual property rights of third parties. However, if MRI infringes on the intellectual property rights or any other rights of another entity, this may impact MRI's financial results due to claims for compensation or the loss of confidence in the Group.
To respond to this risk, MRI has developed internal rules regarding copyrights and provides education and training programs every year. MRI also checks deliverables before their delivery.
Generative AI is a natural language processing tool that can summarize web search results and create documents by AI, etc. It is expected to increase the value of our company by properly utilizing it while identifying its characteristics. However, at the current stage, it often produces incorrect results, and if used incorrectly, such as by leaking information through the input of confidential information or infringing on copyrights of output results, it may damage the credibility of our company's research results. On the other hand, if the spread of generative AI makes it possible for customers to conduct the survey and analysis work that our group is entrusted to perform by themselves, our business opportunities and competitiveness may be lost.
To address this risk, we have established "Guidelines for Generated AI" and are promoting effective use of generative AI based on these guidelines.
In addition, the Company is promoting the effective use of AI based on the Guidelines. Furthermore, we are keeping a close watch on the latest diffusion of generative AI and technological progress, and are striving to maintain our competitive advantage by proposing and providing our clients with projects that make the best use of generative AI.
The Group outsources a part of its work to utilize the knowledge and expertise of outside experts and to improve productivity.
In addition to the outsourcing of programming duties in system development in the IT services segment, we outsource various surveys and data entry duties in the think tank and consulting services segment.
However, if unexpected circumstances arise within an outsourcing partner, cost may increase to maintain quality and it may be necessary to compensate customers for damages due to delayed deliveries, and this could impact business results.
To respond to these risks, the Group regularly inspects its outsourcing partners' quality and management systems and strives to stably secure excellent outsourcing partners by providing guidance on improvements as necessary.
a. The business environment in the information service industry
In the information service industry that the Group is a part of, fierce price and technology development competition continues to accelerate due to new competitors entering the market from outside the industry into areas where the expansion of IT investment aimed at strengthening business competitiveness is expected, and also due to continuing progress in the reduction of costs for the sourcing of IT resources. Therefore, if price competition intensifies, the degradation of quality or delays in responding to technological innovation could impact the Group's business results.
To address these risks, the Group is laying out a framework for providing consistent services from consulting to system development, operation and BPO (business process outsourcing), and is working to further enhance its project proposal capabilities in addition to quality and productivity.
b. Information processing service
The information processing services provided by the Group require new and replacement investment in operational equipment and systems relating to data centers, the amount of investment is recovered over multiple years through information processing service contracts. Therefore, if there is an unexpectedly significant change in the economic environment or changes in the management status of customers, it may not be possible to recover the investment and business results may be impacted.
To respond to these risks, investment is determined after comprehensive consideration of customer needs, business forecasts, investment profitability, etc..
The Group’s net sales to the financial industry in the fiscal year under review comprised 45.6% of consolidated net sales.
In business for the financial industry, the need to investment in information technology and information security relating to legal and regulatory responses is rising, and we receive orders on an ongoing basis for product development based on analyses of internal data and for consulting services related to risk management. The Group expects transactions with the financial industry to remain steady. However, if there is sudden change in the business environment, business conditions or information system investment policies of customers, business results may be impacted.
To address these risks, the Group will aim for the sustainable growth of business following the medium-term management plan to increase its growth potential and profitability and enhance the value it provides by strengthening business development in fields where the Group can make the most of its strengths.
The corporate activities of the Group may be affected by restrictions on the attendance of employees due to large infectious disease outbreaks such as the COVID-19 pandemic or large disasters such as earthquakes.
In addition, because the stable operation of systems is an important element of information processing services, business results could be impacted if a natural disaster, accident or human error causes a defect or failure in systems.
To address these risks, we will consider and implement appropriate measures to minimize their impact by promptly taking steps to address risks according to the aforementioned risk management system and procedures.
a. Risks relating to retirement benefit obligations
The Group’s retirement benefit expenses and retirement benefit obligations are calculated based on actuarial assumptions such as the discount rate and the expected rate of return on pension plan assets. If retirement benefit expenses increase due to a decline in the market value of the pension plan assets or changes in the interest rate environment, business results may be impacted.
b. Seasonal variations in performance
Because there are many projects which usually we receive as orders in the third quarter and finish delivery in the next second quarter, in an average year due to the fiscal years of the Group’s main trading partners, government and public offices, business results in the first and second quarters are relatively better than other quarters. The second quarter in particular, due to a high operation rate just prior to the intensive term of project completion, usually has the highest operating profit of the fiscal year.
In addition, in the third and fourth quarters, which have lower net sales, an operating loss is sometimes posted because expenses such as selling, general and administrative expenses occur almost equally in every quarter.
For reference, outlines of consolidated financial results of each quarter in the last two years are as below.
FY2022 1Q 2Q 3Q 4Q Total Net sales (Million yen) 25,358 42,907 23,407 24,947 116,620 Operating profit (loss) (Million yen) 1,834 7,480 21 （170） 9,165 FY2023 1Q 2Q 3Q 4Q Total Net sales (Million yen) 27,459 45,865 23,553 25,247 122,126 Operating profit (loss) (Million yen)
（905） 302 8,688