Transcript Slide 1

FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
™
Emerging Risk Update
September 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 third 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 September 2009:
1. Continued Recessionary Pressure
2. Cost Reduction Pressures
3. Increased Competitive Pressure
4. Talent Risks
5. Political Trends
6. Strategic Change Management
7. Commodity Prices
8. High Cost of Capital
9. Liquidity Risk
10. Lack of Investment in Product Innovation
Request for Ongoing Participation:
Please click here to participate in the October 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
Continued
Recessionary
Pressure
High
Cost Reduction
Pressures
Political Trends
RISK VELOCITY
Commodity Prices
Very Rapid
Likelihood
Impact of the risk would
be evident in a month
Increased
Competitive
Pressure
Talent Risks
Rapid
Impact of the risk would
be evident in a quarter
Strategic Change
Management
Slow
Impact of the risk would
be evident in a year
High Cost of Capital
Lack of investment in
Product Innovation
Liquidity
Risk
Low
Impact
n=44
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.
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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
Continued
Recessionary Pressure
Liquidity Risk
Liquidity Risk
Political Trends
Lack of Investment in
Product Innovation
Cost Reduction
Pressures
Commodity Prices
Political Trends
Commodity Prices
Cost Reduction
Pressures
High Cost of Capital
Political Trends
High Cost of Capital
Commodity Prices
Continued
Recessionary Pressure
Methodology
The top five risks by probability, impact and velocity were identified from the list of top 10 risks by likelihood
© 2009 The Corporate Executive Board Company. All Rights Reserved.
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FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
Overview
According to a recent AMR survey, 44% Executives believe that the recovery cycle is the biggest risk in 2010 due to potential commodity price
increases, employee disengagement, and capacity constraints. Continued recessionary pressure, cost reduction pressure and increased
competitive pressure continue to be the top risks that organizations face. Last month witnessed three new risks making it to the Executives’ top ten
risks: commodity prices, high cost of capital and lack of investment in innovation.
1.
Continued Recessionary Pressure
Risk Description
Even as the worst recession in recent history shows signs of
bottoming out, no one expects the U.S. economy to recover and
return to its pre-recession state. According to our survey, a majority of
executives expect economic conditions to either remain stagnant or
worsen in the next 12 months. With the economy still vulnerable to
price instability, companies need to be prepared for both the
inflationary and deflationary scenarios.
With the economy showing signs of recovery, companies are optimistic
about achieving higher revenue goals in the coming year. However, with
uncertainty still pertaining in the market, a significant portion of the
revenue increase may come through cost reduction. Our business
executives’ sentiment index reveals that 51% of executives foresee higher
revenue growth, with 55% of executives expecting cost pressures to
increase in the next 12 months.
S&P 500 index movement
GDP
Unemployment forecast
Sales growth forecasts
Consumer spending
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•
•
•
•
Financial results
Bad debt/delinquencies
Write-offs
Earnings forecast
Housing market indices
Noted Mitigation Efforts
•
•
•
•
•
Cost Reduction Pressures
Risk Description
Common Indicators Used by Members
•
•
•
•
•
2.
Reduce market exposures
Enter new markets
Re-evaluate staffing
Reduce costs
Differentiate product/service
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•
•
•
•
Improve collections
Reduce inventory
Segment customers
Position brand effectively
Effective cost management
© 2009 The Corporate Executive Board Company. All Rights Reserved.
Common Indicators Used by Members
• Operating/profit margins
• Cash flow
• Budgeting trends
• Competitor benchmarking
• Client feedback in the form of
requests for concessions and
rejection of bids
Noted Mitigation Efforts
• Centralize cost-cutting to maximize
cost-cutting gains
• Cascade cost-cutting objectives
and monitor disaggregated results
• Use shared services
• Benchmark cost-savings
• Evaluate the impact of cost-cutting
on future growth
• Lock in business for longer periods
at reduced prices
• Reduce COGS in addition to SG&A
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FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
3.
Increased Competitive Pressure
4.
Talent Risks
Risk Description
The economic recession has altered consumer behavior, preferences
and spending patterns. With the market for premium goods shrinking,
companies are being pushed into competition with lower-cost players,
thereby increasing overall competitive pressure in the market. In such
times, companies need to be vigilant in sensing changing customer
needs, monitoring competitor’ strategies and modifying their strategy
accordingly. Companies that don’t do so will stand to lose competitive
advantage.
Common Indicators Used by Members
• Competitive research
• Competitors moving into new
markets
• Market share
• Price trends
• Customer base and
revenue growth
• Patent life
• Supply and demand
trends
Noted Mitigation Efforts
•
•
•
•
•
•
Reduce expenses
• Prioritize customer service
Innovate on products
• Improve value proposition
Differentiate brand
• Focus on key competencies
Acquire clients
• Expand product suit
Explore M&A opportunities
Increase product and service awareness
© 2009 The Corporate Executive Board Company. All Rights Reserved.
Risk Description
Last year saw many organizations undergoing reorganizations and
headcount reductions. An average organization faces a 7% productivity
loss resulting from talent loss. While the trend of employee layoffs have
reduced considerably, it has left behind high levels of disengagement.
With the percentage of employees exhibiting discretionary efforts
decreasing, companies that do not monitor and manage attrition and
disengagement levels specifically amongst high-potential employees risk
facing talent gaps.
Common Indicators Used by Members
• Turnover/ headcount
fluctuations
• Compensation
• Absenteeism
• Loss of work ethic
• Productivity levels
• Number of complaints
• Employees exhibiting discretionary
efforts
Noted Mitigation Efforts
• Conduct targeted training
programs
• Focus on succession planning
• Conduct ongoing, systematic
sensing and management of
departure likelihood
• Promote line-led retention
management
• Target tracking and retention
efforts on key/high risk
employees
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FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
5.
Political Trends
6.
Strategic Change Management
Risk Description
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.
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.
Common Indicators Used by Members
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• Protectionism measures by
U.S./Western counterparts
• Government changes
• Country-risk ratings
New laws enacted
Inflation
Trade barriers
News
Lobbyist updates
Noted Mitigation Efforts
• Monitor the changing
landscape (banking
regulations changes, OTS
impact etc.) internally
• Stay informed and involved
through meetings with key
stakeholders
• Review internal organization
structure and placement of
operations
• Modify business strategy on
an as needed basis
• Review country-risk reports
© 2009 The Corporate Executive Board Company. All Rights Reserved.
Common Indicators Used by Members
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•
•
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Performance measures
Market share
Profitability
Market trends
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Compliance surveys
CAPEX
Medium range budget
Industry-wide changes
Noted Mitigation Efforts
• Review change management
process
• Communicate change
honestly and consistently
• Assess employee reaction
and morale
• Utilize consultants to review
strategy
• Train managers on change
management
• Assign responsibility to create
accountability
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FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
7.
Commodity Prices
8.
High Cost of Capital
Risk Description
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 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.
Common Indicators Used by Members
• Commodity price index
• Reducing margins
• Spot and future rate movements
• Price quotes
Noted Mitigation Efforts
• Hedge through forward
contracts, futures contracts,
options and alternate hedges
(Delta, Collar)
• Buy substitute inputs
• Buy and holding more
inventory
• Enter into fixed price contracts
with suppliers
© 2009 The Corporate Executive Board Company. All Rights Reserved.
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.
Common Indicators Used by Members
• Equity risk premium
• WACC
• Interest rates
• Credit ratings
• Treasury bill
Noted Mitigation Efforts
• Optimize working capital
management
• Alter WACC calculations to
reflect market conditions
• Use a target structure that reflects
seasonal variation in debt, and
monitor it on an on going basis
• Optimize banking relationships
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FINANCE AND STRATEGY PRACTICE
RISK INTEGRATION STRATEGY COUNCIL
Overview of Top 10 Emerging Risks
9.
Liquidity Risk
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
•
•
•
•
Cash flow forecasts
Loan repayments
Net new business figures
Decrease in credit line
availability
• Non-renewal of loan
commitments
• Inability to access unsecured
long-term funding
Noted Mitigation Efforts
• Monitor cash flow daily
• Reduce spend
• Focus on working capital
• Sell property at a discount
• Manage Treasury operations
10.
Lack of Investment in Product Innovation
Risk Description
The slowdown has reduced availability of capital and lead 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.
Common Indicators Used by Members
• RD&E* spending as a
percentage of sales
• Number of patents applied
for
• RD&E employee headcount
• Time to market
• RD&E budget allocation
Noted Mitigation Efforts
• Improve cash management
• Set up incubation cell for
ideas
• Identify incremental versus
breakthrough projects
• Reflect on probability of
success for evaluation
*Research, Development and Engineering
© 2009 The Corporate Executive Board Company. All Rights Reserved.
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