Transcript Slide 1

FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
™
Emerging Risk Update
December 2009
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 sixth edition of the Emerging Risk Update.
The Top 10 Risks for December 2009:
1. Continued Recessionary Pressure
2. Cost Reduction Pressures
3. Increased Competitive Pressure
4. Strategic Change Management
5. Political Trends
6. Talent Risk
7. Liquidity Risk
8. Commodity Prices
9. Tax Regulations
10. Compliance
Request for Ongoing Participation:
Please click here to participate in the January 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.
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FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Top Ten Emerging Risks – Likelihood, Impact & Velocity
High
Continued Recessionary
Pressure
Cost Reduction Pressures
RISK VELOCITY
Political Trends
Strategic Change
Management
Very Rapid
Impact of the risk would
be evident in a month
Likelihood
Increased Competitive
Pressure
Rapid
Compliance
Impact of the risk would
be evident in a quarter
Commodity Prices
Slow
Impact of the risk would
be evident in a year
Liquidity Risk
Tax Regulations
Low
Talent Risks
Impact
High
n=52
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.
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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
Cost Reduction
Pressures
Increased Competitive
Pressure
Compliance
Political Trends
Strategic Change
Management
Political Trends
Continued
Recessionary Pressure
Cost Reduction
Pressure
Continued
Recessionary Pressure
Strategic Change
Management
Compliance
Increased Competitive
Pressure
Compliance
Increased Competitive
Pressure
Continued
Recessionary Pressure
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, 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, Political trends and Liquidity are also
high risk areas for their companies. Last month witnessed two new risks making it to the Executives’ top ten risks: Political trends and Tax
regulations.
1.
Continued Recessionary Pressure
2.
Cost Reduction Pressures
Risk Description
Risk Description
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 of 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 be 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
•
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•
S&P 500 index movement
Country specific indicators
Unemployment forecast
Client’s financial performance
Sales growth forecasts/ reported
customer expansion or
contractions
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•
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Financial results – own
Bad debt/delinquencies
Earnings forecast
Housing market indices
Consumer spending & creditworthiness
• Commodity prices
Noted Mitigation Efforts
•
•
•
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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
© 2009 The Corporate Executive Board Company. All Rights Reserved.
•
•
•
•
•
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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.
Increased Competitive Pressure
4.
Strategic Change Management
Risk Description
Risk Description
Our research shows that decisions made during recessions and recovery
periods can have lasting effects on their firms. 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.
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
• 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
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Reduce expenses and lead time
Innovate on products
Differentiate brand with quality
Acquire clients
Explore M&A opportunities
Increase product and service
awareness
•
•
•
•
•
•
•
© 2009 The Corporate Executive Board Company. All Rights Reserved.
Focus on customer
Prioritize customer service
Improve value proposition
Focus on key competencies
Expand product offering
Support creative ideas
Improve delivery performance
Common Indicators Used by Members
•
•
•
•
•
Performance measures
Market share
Profitability
Market trends
Ability of Executive Management
to implement change
•
•
•
•
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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
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FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
5.
Political Trends
6.
Talent Risk
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.
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. The unemployment rate edged down to 10.0
percent in November, and nonfarm payroll employment was essentially
unchanged (-11,000), the U.S. Bureau of Labor Statistics reported. In the
prior 3 months, payroll job losses had averaged 135,000 a month. In
November, employment fell in construction, manufacturing, and
information, while temporary help services and health care added jobs.
Common Indicators Used by Members
Common Indicators Used by Members
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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
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•
•
•
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.
•
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•
•
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
Noted Mitigation Efforts
• Promote line led retention
Conduct targeted training
management
programs
• Target tracking and
Focus on succession planning
retention efforts on key/hig
Conduct ongoing systematic
risk employees
sensing and management of
• Provide competitive
departure likelihood
remuneration
Provide challenging/ engaging
• Look for new source of
work
quality candidates
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FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
7.
Liquidity Risk
8.
Commodity Prices
Risk Description
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.
Global commodity market fluctuation has been significant in 2009. While
crude oil prices fluctuated to settle flat for the last month, gold prices
finally settled down from the historical highs they touched in the first week
of December. 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 led many companies to adopt hedges
that don’t qualify for hedge accounting.
Common Indicators Used by Members
•
•
•
•
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
Common Indicators Used by Members
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Commodity Price Index
Reducing margins
Residual risk
Oil prices and market fiber price
Future pricing and volumes
Third party data and trends
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Spot and future rate movement
Price quotes
Energy complex
LME trends
Economic indicators
Noted Mitigation Efforts
Noted Mitigation Efforts
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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
© 2009 The Corporate Executive Board Company. All Rights Reserved.
• 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
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FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
9.
Tax Regulations
10.
Compliance
Risk Description
Risk Description
Changes to U.S. international tax rules were announced recently as part
of the Obama Administration’s 2010 budget proposals. The proposed
changes that could have a significant impact include the deferral of
certain U.S. income tax deductions; foreign tax credit reform; and,
business entity classification reform. These changes, if enacted, may
reduce the competitive position of U.S. multinational businesses across
all industries due to a higher tax cost for foreign operations. The changes
represent a tax increase on US based MNCs to the tune of $200 billion
over the next 10 years (E&Y).
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
• Effective tax rates
• Sales and business unit
forecasts
• Budget deficit
• Constant dialogue with
regulators
• Federal debt
• Treatment of foreign earnings
• Comparison of US system to
corporate tax systems globally
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Legislative development
Lobbying 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
Noted Mitigation Efforts
Noted Mitigation Efforts
• Evaluate the impact of tax reform
• Develop a succint message that
can be modified for different
audiences
• Dialogue with government on
pension funding obligations
• Conduct internal impact
analysis
• Detailed scenario planning
• Involvement with policymakers
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• 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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