Transcript Overview of Top 10 Emerging Risks

FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
™
Emerging Risk Update
November 2009
FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Emerging Risk Update – Summary
Introduction:
The Risk Integration Strategy Council recently launched a Monthly Emerging Risk Survey. We are pleased to present the results of
this survey in the fifth edition of the Emerging Risk Update. This initiative is an effort to leverage the power of our network to
create a “risk sensing engine” capable of identifying risks emerging over the horizon.
The Top 10 Risks for November 2009:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Continued Recessionary Pressure
Cost Reduction Pressures
Talent Risks
Strategic Change Management
Commodity Prices
Increased Competitive Pressure
High Cost of Capital
Liquidity Risk
Compliance
Third Party Solvency
Request for Ongoing Participation:
Please click here to participate in the December 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
High
Continued Recessionary
Pressure
Cost Reduction Pressures
RISK VELOCITY
Increased Competitive
Pressure
Very Rapid
Impact of the risk would
be evident in a month
Commodity Prices
Rapid
Likelihood
Likelihood
Strategic Change
Management
Impact of the risk would
be evident in a quarter
Talent Risks
Slow
Impact of the risk would
be evident in a year
High Cost of Capital
Third Party Solvency
Liquidity Risk
Compliance
n=63
Low
High
Impact
Impact
Methodology
The top 10 risks were identified based on how frequently executives marked these risks in their list of 5 top risks
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2
FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
Overview
In the current economic environment, Continued Recessionary Pressures and Cost Reduction Pressures are still considered as the most crucial
risks. However, members have also indicated that Increased Competition, Strategic Change Management, Compliance and Talent are also high
risk areas for their companies. Last month witnessed two new risks making it to the Executives’ top ten risks: Liquidity and Higher cost of capital.
1.
Continued Recessionary Pressure
2.
Cost Reduction Pressures
Risk Description
Risk Description
Even as the economy emerges from recession, policymakers and
analysts doubt that the recovery will be robust enough to either 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.
With the economy showing signs of recovery, companies are optimistic
about achieving higher revenue goals in the coming year. However, with
uncertainty still looming in the market, a significant portion of the increase
in profits may have to achieved through cost reduction. Our business
executives’ sentiment index reveals that 56% of executives foresee higher
revenue growth, with 63% of executives expecting cost pressures to
increase in the next 12 months.
Common Indicators Used by Members
Common Indicators Used by Members
• S&P 500 index movement
• Country specific economic &
financial indicators: GDP
• Unemployment forecast
• Client’s financial performance
• Sales growth forecasts/ reported
customer expansion or
contractions
• Financial results – own
• Bad debt/delinquencies/loan
losses/ Write-offs
• 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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•
•
•
•
•
•
•
Operating/profit margins
Cash flow
Budgeting and planning trends
Revenue and Margin growth
Budget projections
Expense trend line
Productivity ratio
• Competitor benchmarking
• Client demands - Requests for
concession, rejection of bids
• Slowing Top line
• Consumer pricing
• Analysts reports
• Staff reduction requirements
Noted Mitigation Efforts
• Plan for longer periods
• Centralize cost-cutting to
maximize gains
• Cascade cost-cutting objectives
• Monitor disaggregated results
• Use shared services
• Benchmark cost-savings
• Evaluate impact of cost-cutting
on strategic objectives & future
growth
• Lock in business for longer
periods at reduced prices
• Reduce COGS and SG&A
• Assess forward order book
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FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
3.
Talent Risks
4.
Strategic Change Management
Risk Description
Risk Description
Job losses in the U.S. slowed sharply in November, cushioned by
seasonal adjustments and a budding economic recovery. Analysts believe
that the labor market is edging toward stability and the deterioration in
payrolls is in its final stages. A survey of 72 economists forecast that U.S.
employers cut 130,000 jobs this month after reducing payrolls by 190,000
in October. The unemployment rate, derived from the Labor Department's
survey of households, was seen steady at 10.2 percent.*
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.
Common Indicators Used by Members
Common Indicators Used by Members
•
•
•
•
•
•
Turnover/ headcount fluctuations
Compensation
Absenteeism
Loss of work ethic
Industry salary survey
Age and experience level of staff
• Productivity levels
• Number of complaints
• Employees exhibiting
discretionary efforts
• Ability to attract talent in
difficult times and retention risk
Noted Mitigation Efforts
• 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/high risk
employees
• Provide competitive
remuneration
• Look for new sources of quality
candidates
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•
•
•
•
•
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
*Source : www.reuters.com
5
FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
5.
Commodity Prices
6.
Increased Competitive Pressure
Risk Description
Risk Description
Global commodity market fluctuation has been significant in 2009. While
crude oil prices fluctuated to settle for a moderate increase, gold prices
witnessed a sharp climb in month of November. The U.S. dollar decline
has further contributed to the increasing volatility. 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 lead
many companies to adopt hedges that don’t qualify for hedge accounting.
The economic recession has altered consumer behavior, preferences and
spending patterns. While the economic recovery is good news, now is not
the time for complacency. Pricing power is limited and demand growth will
be moderate. Competition will remain fierce and a firm eye must remain
on controlling expense growth. Given this tough environment, businesses
must constantly strive to improve efficiency and profitability. They need to
be vigilant in sensing changing customer needs, monitoring competitors’
strategies and modifying their strategy accordingly. Companies that don’t
do so will stand to lose competitive advantage.
Common Indicators Used by Members
Common Indicators Used by Members
•
•
•
•
•
•
Commodity price index
Reducing margins
Residual risk
Oil prices and market fibre prices
Futures pricing and volumes
Third party data and trends
• Spot and future rate
movements
• Price quotes
• Energy complex
• LME trends
• Economic indicators
• Competitive research
• Competitors moving into new
markets
• Competitive intelligence analysis
• Market share
• Price trends
• Market feedback
Noted Mitigation Efforts
• Hedge through forward
contracts, futures contracts,
options and alternate hedges
(Delta, Collar)
• Buy substitute inputs
• Trade finance solutions
• Identify new Credit facilities
• Develop supplier partnerships
• Buy and holding more
inventory
• Enter into fixed price contracts
with suppliers
• Evaluate pricing and discounts
to maintain margins
• Enter into long term
agreements/contracts
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• 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
6
FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
7.
High Cost of Capital
8.
Liquidity Risk
Risk Description
Credit crunch and high cost of capital are likely to persist till global credit
markets stabilize. With bank loan markets shrinking and public debt and
equity markets becoming tighter, the cost of funds is increasing. Credit
providers are becoming apprehensive in extending capital and are
expecting higher returns for the risks they undertake while lending. In
these scenarios, it is becoming important for companies to be more
forward looking and focus on long-term implications of cost of capital.
Risk Description
Though corporate credit markets are beginning to show signs of
improvement, lending standards remain stringent. Banks are no longer
treating investment grade facilities as “loss leaders”, and are focusing on
credit risk for loan pricing rather than expectation of fee business. With
the expectation that bank credit availability will remain limited, companies
need to explore alternative funding sources to ensure adequate liquidity
levels.
Common Indicators Used by Members
•
•
•
•
Equity risk premium
WACC
Interest rates
Cost of issuing letter of credit
• Credit ratings
• Treasury bill
• Financial indices
Common Indicators Used by Members
•
•
•
•
Noted Mitigation Efforts
• Optimize working capital
management
• Alter WACC calculations to
reflect market conditions
• Find alternate resources for
financing
• Maintain strong credit and equity
rating
• Use a target structure that
reflects seasonal variation in
debt, and monitor it on an on
going basis
• Optimize banking relationships
• Reduce risk profile in
investment portfolio
• Sell surplus assets
• Improve cash flow
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Cash flow forecasts
Loan repayment defaults
Net new business figures
Decrease in credit line
availability
• Non-renewal of loan
commitments
• Inability to access unsecured
long-term funding
• Cash Shortage
Noted Mitigation Efforts
•
•
•
•
Monitor cash flow daily
Reduce spend
Focus on working capital
Identify multiple sources
• Sell property at a discount
• Manage Treasury operations
• Shorten the duration of
underlying assets
6
FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
9.
Compliance
10.
Third Party Solvency
Risk Description
Risk Description
The uncertain conditions and demands have forced compliance and
ethics functions to make difficult resource trade-offs, rationalize cost
savings and abandon long standing assumptions about risk management.
In the US alone, organizations already lose an estimated 7% of their
annual revenue to fraud. That number seems to be compounded by
heightened government vigilance. We should witness more intense
scrutiny and regulation of business practices in the near future, as this
period of deep corporate distrust requires unprecedented compliance
responsiveness with limited resources.
In 2009, bankruptcies were expected to rise by over 50%, leaving
organizations at higher risk for potential instances of supplier insolvency.
In response to rising instances of critical supply failure, many
organizations were 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
•
•
•
•
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•
Legislative development
Lobbing efforts
Industry reports
Congressional Action
Number of complaints
Quarterly audit status meetings
Internal operational risk matrix
• Political trends towards more
regulation
• External scrutiny of operations
• Regulatory Action
• Operating Expenses &
Fines/Fees
• Increasing external scrutiny
Noted Mitigation Efforts
• Monitor regulatory changes
• Implement regulatory requisites
• Develop Compliance
management frameworks
• Examine business processes for
any gaps
• Maintain constant dialogue with
auditors
• Develop personnel and
resources to ensure proper
understanding of requirements
• Install strong project
management capabilities to
deliver on new requirements
• Develop new processes to fill
any gaps
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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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