Transcript Slide 1

FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
™
Emerging Risk Update
January 2010
FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Emerging Risk Update – Summary
Introduction:
The Risk Integration Strategy Council launched a Monthly Emerging Risk Survey in July 2009. We are pleased to present
the results of this survey in the seventh edition of the Emerging Risk Update.
The Top 10 Risks for January 2010 are:
1. Commodity Prices
2. Continued Recessionary Pressure
3. Political Trends
4. Increased Competitive Pressure
5. Strategic Change Management
6. Third Party Solvency
7. Lack of Investment in Product Innovation
8. Inflation
9. Talent Risk
10. Fraud
Request for Ongoing Participation:
Please click here to participate in the February Emerging Risk Survey. This survey will take less than 3 minutes to complete.
Survey Methodology and Overview of Presentation:
In our survey, executives were asked to identify the top five risks and also provide an estimate of probability, impact and velocity for
each of these risks.
In the following pages, you will find a summary of the top ten risks within the content of likelihood (likelihood is defined as the
combination of how frequently executives marked these risks as their top five risks and the probability score for these risks). You
will also find details of the top ten risks including risk description, indicators and mitigation strategies adopted by members.
© 2009 The Corporate Executive Board Company. All Rights Reserved.
1
FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Top Ten Emerging Risks – Likelihood, Impact & Velocity
RISK VELOCITY
High
Very Rapid
Continued Recessionary
Pressure
Impact of the risk would
be evident in a month
Commodity Prices
Rapid
Likelihood
Political Trends
Increased Competitive
Pressure
Third Party Solvency
Fraud
Low1.70
Impact of the risk would
be evident in a quarter
Strategic Change
Management
Slow
Impact of the risk would
be evident in a year
Lack of investment in
Product Innovation
Inflation
Talent Risks
Impact
High
n=38
Methodology
The top 10 risks were identified based on how frequently and on what priority executives marked these risks in their list of 5 top risks
© 2009 The Corporate Executive Board Company. All Rights Reserved.
2
FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Top Five Emerging Risks By Likelihood, Impact and Velocity
TOP 5 RISKS BY
PROBABILITY
TOP 5 RISKS BY
IMPACT
TOP 5 RISKS BY
VELOCITY
Commodity Prices
Commodity Prices
Continued
Recessionary Pressure
Continued
Recessionary Pressure
Continued
Recessionary Pressure
Political Trends
Political Trends
Third Party Solvency
Third Party Solvency
Strategic Change
Management
Strategic Change
Management
Lack of investment in
Product Innovation
Inflation
Political Trends
Commodity Prices
Methodology
The top five risks by probability, impact and velocity were identified based on how high the respondents rated them on each parameter.
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FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
Overview
In the current economic environment, Commodity Prices and Continued Recession are considered as the most crucial risks. However, members
have indicated that Political Trends, Increased Competition, Strategic Change Management and Third Party Solvency are also high risk areas for
their companies. Last month witnessed four new risks making it to the Executives’ top ten risks: Third Party Solvency, Lack of Investment in
Product Innovation, Fraud and Inflation.
1.
Commodity Prices
2.
Continued Recessionary Pressure
Risk Description
Risk Description
January 2010 has seen a shift from the trends of 2009. Crude oil prices
briefly rose and then settled down to around $72. Gold was down 4.7% for
the month but seems to be bottoming. The US Dollar Index is up 2.5% for
the month. Fluctuations in commodity prices have disrupted companies’
forecasts and organizations are increasingly turning towards financial
hedging strategies to manage this volatility. An increase in the need for
commodity hedging has led many companies to adopt hedges that don’t
qualify for hedge accounting.
Even as the economy emerges from recession, policymakers and
analysts doubt if the recovery will be robust enough to create many new
jobs or pose a threat to inflation. According to Mr. Kohn, the Vice
Chairman of Fed, unlike other recent recoveries, the current turnaround is
likely to be more subdued because of “difficult conditions in the labor
market and the consequent implications for household incomes,” among
other factors
Common Indicators Used by Members
Common Indicators Used by Members
•
•
•
•
•
•
Commodity Price Index
Reducing margins
Residual risk
Oil prices and market fiber price
Future pricing and volumes
Third party data and trends
•
•
•
•
•
Spot and future rate movement
Price quotes
Energy complex
LME trends
Economic indicators
•
•
•
•
•
Noted Mitigation Efforts
• Hedge through forward
contracts, future contracts,
options and alternate hedges
• Buy substitute inputs
• Trade finance solutions
• Identify new credit facilities
• Develop supplier partnerships
• Buy and hold more inventory
• Enter into fixed price contracts
with suppliers
• Evaluate pricing and discounts
to maintain margins
• Enter into long term
agreements/contracts
© 2009 The Corporate Executive Board Company. All Rights Reserved.
S&P 500 index movement
Country specific indicators
Unemployment forecast
Client’s financial performance
Sales growth forecasts/ reported
customer expansion or
contractions
•
•
•
•
•
Financial results – own
Bad debt/delinquencies
Earnings forecast
Housing market indices
Consumer spending & creditworthiness
• Commodity prices
Noted Mitigation Efforts
•
•
•
•
•
•
Reduce market exposures
Enter new markets
Re-evaluate staffing
Differentiate product/service
Improve underwriting standards
Improve collections
• Reduce fixed expense
• Reduce inventory / Match
production to sales
• Segment customers suitably
• Position brand effectively
• Manage costs effectively
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FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
3.
Political Trends
4.
Increased Competitive Pressure
Risk Description
Risk Description
Globalization, along with opportunities, brings along difficult challenges. In
periods of economic turmoil, there’s a greater likelihood of political and
economic discontent, which amplifies political risks. With growing political
instability and the expanding political risk universe, it is important for
organizations to perform thorough country-risk assessments while
expanding their operations and protecting their existing global operations
Our research shows that decisions made during recessions and recovery
periods can have lasting effects on firms’ prospects. Consumer spending
has plummeted to new lows and the companies are now fighting it out for
a share of a very shrunken pie. Executives need to innovate on products,
prioritize on customer service, reduce expenses on their current offerings
as well as expand their product portfolio. They need to explore all
opportunities in the competitive space to ensure their companies are
striking the right notes.
Common Indicators Used by Members
•
•
•
•
•
•
Inflation
Trade barriers
News/new laws enacted
Regulatory actions
Lobbyist updates
EPA requirement
• Protectionism measures by
US/Western counterparts
• Government changes
• Country-risk ratings
• Climate legislation
Noted Mitigation Efforts
• Monitor the changing landscape
(banking regulatory changes, OTS
impact etc) internally
• Review country-risk reports
• Stay informed and involved through
meetings with key stakeholders
• Communicate proactively with
stakeholders
• Review internal organization
structure and placement of
operations
• Modify business strategy on an
as needed basis
• Monitor and make corrective
actions as needed
© 2009 The Corporate Executive Board Company. All Rights Reserved.
Common Indicators Used by Members
• Competitive research
• Competitors moving into new
markets
• Competitive intelligence analysis
• Market share
• Price trends
• Market feedback
• Customer base and revenue
growth
• Patent life
• Supply and demand trends
• Market analysis & technical
reviews
• Strength of sales pipeline
Noted Mitigation Efforts
•
•
•
•
•
•
Reduce expenses and lead time
Innovate on products
Differentiate brand with quality
Acquire clients
Explore M&A opportunities
Increase product and service
awareness
•
•
•
•
•
•
•
Focus on customer
Prioritize customer service
Improve value proposition
Focus on key competencies
Expand product offering
Support creative ideas
Improve delivery performance
*Source : www.reuters.com
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FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
5.
Strategic Change Management
6.
Third Party Solvency
Risk Description
Risk Description
The recession saw many organizations undergoing changes by way of
mergers, divestitures, portfolio rationalization and other strategic
developments to ensure survival. These changes coupled with internal
reorganizations are fundamentally altering the risk and control
environment. Companies need to effectively plan for various scenarios,
determine the impact of these changes on existing processes and monitor
risk information related to strategic plans, in order to be successful in
such business transformations.
Corporate bankruptcies in 2009 were the greatest since 2002, leaving
organizations at higher risk for potential instances of supplier insolvency.
In response to rising instances of critical supply failure, many
organizations are looking for ways to avert supplier solvency, continuity,
and reputation failures before they happen. As the world economy pulls
out of the recession, solvency of major suppliers will be the biggest risk. It
is easy not to contract with insolvent vendors but what is worse is the
ones on the edge that are hiding.
Common Indicators Used by Members
Common Indicators Used by Members
•
•
•
•
•
Performance measures
Market share
Profitability
Market trends
Ability of Executive Management
to implement change
•
•
•
•
•
•
Compliance surveys
CAPEX
Medium range budget
Industry-wide changes
IFRS Updates
Internal planning trends
Noted Mitigation Efforts
• Review change management
process
• Communicate change honestly
and consistently
• Assess employee reaction and
morale
• Hire from outside to bring in new
perspective when appropriate
• Utilize consultants to review
strategy
• Train managers on change
management
• Assign responsibility to create
accountability
• Ensure proactive
communications with leaders
© 2009 The Corporate Executive Board Company. All Rights Reserved.
•
•
•
•
•
•
Number of defaults
Solvency of key suppliers
Increased ageing
Unusual billing requests
Analyst reports/market intelligence
Banking trends
•
•
•
•
•
•
Timing of payments
Industry feedback
Credit quality of customers
Delay in delivery
Changes to contracting terms
Credit risk insurer assessments
Noted Mitigation Efforts
• Test Continuity plans
• Set collection activity early in
the cycle
• Leverage IT to plug critical
supply chain information gaps
• Select reliable suppliers
• Duplicate vendors
• Focus on collection from
debtors
• Conduct due diligence of
partners’ financial health
based on clear financial and
market metrics
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FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
7.
Lack of Investment in Product Innovation
8.
Risk Description
Risk Description
The slowdown has reduced availability of capital and led to budget cuts.
In such scenarios, companies need to prioritize their investments to
ensure business continuity and generate highest returns. As a result,
product innovation has taken a backseat. In such uncertain times, it is
imperative for companies to sense customers’ changing behavior and
requirements and invest in product innovations to respond accordingly. .
With the recession showing signs of recovery, the focus should move
from near-term pressures to longer term strategic projects. The project
portfolios should also display a healthy mix of incremental vs. real
innovation
With the influx of tax-payers’ money into the financial system through
governmental injection of liquidity, inflation fears have resurfaced. The
inflation rate year over year was 2.7213% (compared to 1.8383% for the
previous month). Skeptics have continuously doubted whether the
recovery from the latest recession is robust enough to allay inflation fears.
Companies are being forced to enter into long-term contracts with
suppliers as well as distributors to hedge against a possible inflationafflicted business period.
Common Indicators Used by Members
Common Indicators Used by Members
• RD&E spending as a
• RD&E employee headcount
percentage of sales
• Time to market
• Number of patents applied
• RD&E budget allocation
for
• Market share among niche
• Number of new products
product segments
rolled out
Noted Mitigation Efforts
• Improve cash management
• Set up incubation cell for
ideas
• Improve communication with
internal and external
stakeholders
• Invest in co-creation
© 2009 The Corporate Executive Board Company. All Rights Reserved.
• Identify incremental versus
breakthrough projects
• Reflect on probability of
success for evaluation
• Monitor the pulse of the
customer
Inflation
•
•
•
•
Market rates
Cost indices
Weakened supply chain
Waning credit support from bank
partners
• Economic indicators
• Base inflation rate
• Supplier costs (if in a different
country)
• FX trends
Noted Mitigation Efforts
• Capacity dedication
• Dollar-based fixed-price supply
contracts
• Monitor KPI of the economy
• Increase responsiveness to
changes in pricing with scenario
planning and budgeting
• Understand opportunities to
increase sales in a regulated
environment
• Build flexible resource
allocation and alternative cost
frameworks
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FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
9.
Talent Risks
Risk Description
The silver lining is that the U.S. unemployment rate seems to have
started a retreat from the peaks that we saw late last year. Nonfarm
payroll employment edged down (-85,000) in December, but the
unemployment rate was unchanged at 10.0 percent, the U.S. Bureau of
Labor Statistics reported. In December, employment fell in construction,
manufacturing, and wholesale trade, while temporary help services and
health care added jobs. Employment losses in the first quarter of 2009
averaged 691,000 per month, compared with an average loss of 69,000
per month in the fourth quarter.
Common Indicators Used by Members
•
•
•
•
•
• Age and experience level of
staff
• Productivity levels
• Number of complaints
• Employees exhibiting
discretionary efforts
Noted Mitigation Efforts
Turnover / headcount fluctuations
Compensation
Absenteeism
Loss of work ethic
Industry salary survey
• Conduct targeted training
programs
• Focus on succession planning
• Conduct ongoing systematic
sensing and management of
departure likelihood
• Provide challenging/ engaging
work
• Promote line led retention
management
• Target tracking and
retention efforts on key/hig
risk employees
• Provide competitive
remuneration
• Look for new source of
quality candidates
© 2009 The Corporate Executive Board Company. All Rights Reserved.
10.
Fraud
Risk Description
Fraud has gained unprecedented importance in the current economic
environment because of technological advances, growing complexities of
organizations, increasingly transient employees and the economic
downturn. This holds true especially for cases of employee misconduct
which are related to the pressures of operating in a business environment
of severe cost reduction demands. Research shows that businesses with
the weakest cultures (where employees perceive a weak ethical culture)
have experienced 5 times the amount of misconduct as compared to
those with the best
Common Indicators Used by Members
• Oversight reports
• Reports to the Code of Conduct
office
• Number and nature of frauds
• Analysis of spending patterns
• Fraud losses
• Average claim costs and
frequency
• Internal Audit checks
Noted Mitigation Efforts
• Utilize internal controls group to
provide oversight
• Respond to acts of misconduct
quickly and consistently
• Background checks for new hires
• Staff-rotation
• Reinforce ethics training and
policy
• Anonymously communicate
instances of fraud
• Establish whistleblower hotline
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