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FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
™
Emerging Risk Update
October 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 fourth 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 October 2009:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Continued Recessionary Pressure
Cost Reduction Pressures
Talent Risks
Compliance
Increased Competitive Pressure
Third Party Solvency
Strategic Change Management
Lack of Investment in Product Innovation
Political Trends
Commodity Prices
Request for Ongoing Participation:
Please click here to participate in the November 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
Continued
Recessionary
Pressure
High
Increased
Competitive
Pressure
Likelihood
Cost Reduction
Pressures
RISK VELOCITY
Very Rapid
Impact of the risk would
be evident in a month
Rapid
Talent Risks
Impact of the risk would
be evident in a quarter
Compliance
Commodity
Prices
Third Party
Solvency
Slow
Political
Trends
Impact of the risk would
be evident in a year
Strategic Change
Management
Lack of investment in
Product Innovation
Impact
n=16
Low
High
Methodology
The top 10 risks were identified based on how frequently 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
LIKELIHOOD
TOP 5 RISKS BY
IMPACT
TOP 5 RISKS BY
VELOCITY
Increased Competitive
Pressure
Political Trends
Increased Competitive
Pressure
Continued
Recessionary Pressure
Increased Competitive
Pressure
Continued
Recessionary Pressure
Cost Reduction
Pressures
Talent Risks
Talent Risks
Political Trends
Commodity Prices
Continued Recessionary
Pressure
Cost Reduction
Pressures
Cost Reduction
Pressures
Commodity Prices
Methodology
The top five risks by likelihood, impact and velocity were identified from the list of top 10 risks by frequency.
© 2009 The Corporate Executive Board Company. All Rights Reserved.
3
FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
Overview
A survey of 44 professional forecasters released by the National Association for Business Economics, also known as the NABE, found that 80% of
the respondents believed the economy was growing again after four straight quarters of declines.*
However, continued recessionary pressure, cost reduction pressure and increased competitive pressure continue to be the top risks that
organizations face. Last month witnessed two new risks making it to the Executives’ top ten risks: compliance and third party solvency.
1.
Continued Recessionary Pressure
2.
Risk Description
Risk Description
A vast majority of economists believe that the recession has ended,
but that the economic recovery is likely to be weaker than typically
experienced following steep declines. While the economy is believed
to have rebounded in the third quarter, analysts believe that
unemployment will remain high well into 2010, restraining
consumption. However, there is increasing concern that when
government financial aid stops, the economy might weaken and face
a double dip recession.
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. Even as the
economy begins to recover, companies may face continued pressure to
reduce costs and improve resource utilization. Effective cost management
will enable companies to compete in a tough pricing environment.
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
•
•
•
•
•
Cost Reduction Pressures
• 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
• Improve collections
Enter new markets
• Reduce inventory / Match
Re-evaluate staffing
production to sales
Differentiate product/service
• Segment customers appropriately
Improve underwriting
• Position brand effectively
standards
• Manage costs effectively
© 2009 The Corporate Executive Board Company. All Rights Reserved.
•
•
•
•
•
•
Operating/profit margins
Cash flow
Budgeting and planning trends
Revenue and Margin growth
Budget projections
Expense trend line
• Competitor benchmarking
• Client demands - requests for
concessions and rejection of bids
• Slowing Top line
• Consumer pricing
• Analysts reports
•
•
•
•
•
•
Noted Mitigation Efforts
Plan for longer periods
• Evaluate impact of cost-cutting on
Centralize cost-cutting to maximize gains strategic objectives & future growth
Cascade cost-cutting objectives
• Lock in business for longer periods
Monitor disaggregated results
at reduced prices
Use shared services
• Reduce COGS in addition to SG&A
Benchmark cost-savings
• Assess forward order book
*Source : www.reuters.com
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FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
3.
Talent Risks
4.
Compliance
Risk Description
Risk Description
Even with economic conditions showing signs of recovery, the
employment situation remains quite weak. Although the contraction in
payroll employment has lessened since earlier in the year, monthly
losses in private-sector jobs still averaged more than 200,000 per
month last quarter in the US. And, while the unemployment rate has
not been rising as rapidly since midyear as it did over the preceding
year, it could well reach 10 percent by early 2010.
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.
Common Indicators Used by Members
Common Indicators Used by Members
• Turnover/ headcount
fluctuations
• Compensation
• Absenteeism
• Loss of work ethic
• Industry salary survey
• Productivity levels
• Number of complaints
• Employees exhibiting
discretionary efforts
• Ability to attract talent in
difficult times
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
© 2009 The Corporate Executive Board Company. All Rights Reserved.
•
•
•
•
•
•
Legislative development
Lobbing efforts
Industry reports
Congressional Action
Number of complaints
Quarterly audit status meetings
• Political trends towards more
regulation
• External scrutiny of operations
• Regulatory Action
• Operating Expenses & Fines/Fees
• Increasing external scrutiny
Noted Mitigation Efforts
• Monitor regulatory changes
• Take action as needed
• Develop Compliance
management frameworks
• Install strong project
management capabilities to
deliver on new requirements
• Maintain constant dialogue
with auditors
• Develop personnel and
resources to ensure proper
understanding of
requirements
• Examine business processes
for any gaps
• Develop new processes to fill
any gaps
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FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
5.
Increased Competitive Pressure
6.
Risk Description
Risk Description
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.
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
• Competitive research
• Competitors moving into new
markets
• Market share
• Price trends
• Market feedback
• Customer base and
revenue growth
• Patent life
• Supply and demand
trends
• Market analysis &
technical reviews
Noted Mitigation Efforts
•
•
•
•
•
•
Third Party Solvency
Reduce expenses
Innovate on products
Differentiate brand
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 suit
Support creative ideas
© 2009 The Corporate Executive Board Company. All Rights Reserved.
Common Indicators Used by Members
•
•
•
•
•
•
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
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
• 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.
•
•
•
•
•
Strategic Change Management
8.
Lack of Investment in Product Innovation
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 that undergo such business transformations
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 succeed, both in recession and
slow recovery following it.
The slowdown has reduced availability of capital and led to budget cuts. In
such scenarios, companies need to reprioritize 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 nearterm pressures to longer term strategic projects. The project portfolios
should also display a healthy mix of incremental vs. real innovation.
Common Indicators Used by Members
Common Indicators Used by Members
Performance measures
• Compliance surveys
Market share
• CAPEX
Profitability
• Medium range budget
Market trends
• Industry-wide changes
Ability of Executive
• IFRS Updates
Management to implement
• Internal planning trends
change
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.
• RD&E* spending as a
percentage of sales
• Number of patents applied for
• Budget forecasts
• RD&E employee headcount
• Time to market
• RD&E budget allocation
Noted Mitigation Efforts
• Improve cash management
• Set up incubation cell for ideas
• Improve communication with
internal and external
stakeholders
• Invest in co-creation
• Identify incremental versus
breakthrough projects
• Reflect on probability of
success for evaluation
• Monitor the pulse of the
customer
6
FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
9.
Political Trends
Commodity Prices
Risk Description
Risk Description
In periods of economic uncertainty 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. For fast recovery, there is a need to better
understand the political impediments to the adoption of correct
policies.
Commodity price volatility has been increasing significantly in recent
years, and this trend was further accentuated during the global economic
recession. Fluctuations in commodity prices has 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. However, as prospects improve with
recession showing signs of recovery, commodity prices have staged a
comeback from lows reached earlier this year, and world trade is
beginning to pick up.
Common Indicators Used by Members
•
•
•
•
•
•
10.
• Protectionism measures by
U.S./Western counterparts
• Government changes
• Country-risk ratings
• Climate legislation
• EPA requirements
News/New laws enacted
Inflation
Trade barriers
Lobbyist updates
Regulatory Actions
Congressional Actions
Noted Mitigation Efforts
• Monitor changing landscape
• Install Planning teams
• Stay informed and involved with
key stakeholders
• Communicate proactively with
stakeholders
• Review internal organization
structure and placement of
operations
• Modify business strategy on an
as needed basis
• Review country-risk reports
• Monitor and make corrective
actions as needed
© 2009 The Corporate Executive Board Company. All Rights Reserved.
Common Indicators Used by Members
• Commodity price index
• Reducing margins
• Oil prices and market fibre
prices
• Futures
•
•
•
•
•
Spot and future rate movements
Price quotes
Energy complex
LME trends
Economic indicators
Noted Mitigation Efforts
• Hedge through forward
contracts, futures contracts,
options and alternate hedges
(Delta, Collar)
• Buy substitute inputs
• Trade finance solutions
• New Credit facilities
• Buy and holding more
inventory
• Enter into fixed price contracts
with suppliers
• Evaluate pricing and discounts
to maintain margins
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