Managing Business Risk Through. and Beyond

Transcription

1 Executive Summary and Report Managing Business Risk Through and Beyond 2009 RESEARCH PARTNERS:

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3 n n n Managing Business Risk Through 2009 and Beyond Introduction In business, risk lurks at every turn: competitor innovations that threaten the viability of your products or services; new players in your market space; adverse trends in commodity prices, currencies, interest rates or the economy. Throw in potential disruptions to supply chains that have been stretched across thousands of miles and country borders by globalization, and the opportunity for something to go wrong is, to say the least, worrisome. It could get even more challenging. A recent study of 500 financial executives in North America and Europe found that the majority expect the severity of their most prevalent business risks to remain the same or intensify through These executives also identified a wide range of emerging risks that, although not among their primary concerns today, look to become more troubling in the years ahead. Here are some key findings from the study: Competition is viewed as the biggest risk to revenue, followed by supply chain disruption and property-related risk. The most broadly cited consequence of disrupting a top revenue driver is a loss of competitiveness. The biggest challenge to implementing a strong risk management program is finding enough time, money and people. For financial executives, these findings suggest a compelling imperative, namely, that companies that have not done so already should begin to develop a holistic risk management program or one that allows them to mitigate and manage risk on a broad front. (See sidebar: Managing Downside vs. Variable Risks. ) As the financial executives interviewed for this report warn, organizations tempted to shortchange their risk management efforts will find the potential consequences can be severe, from a loss of competitiveness to, in the extreme, having to cease operations altogether. This report explores how financial executives in North America and Europe perceive revenue and risk what they see as the top revenue drivers for their business, what risks pose the greatest threat to those revenue drivers, what risks consume the greatest percentage of their time and attention, how those risks can impact their business when left unchecked, and what the biggest hurdles are to managing those risks. Taken together, their insights can serve as a road map for companies seeking to manage risk successfully in the 21st century. n n n

4 Managing Business Risk Through 2009 and Beyond n n n Figure 1 Top Revenue Drivers Involve People and Processes It is easy to imagine that today s most successful organizations are those with the most valuable intellectual property, the latest and most sophisticated information technology, and the fastest communication between company, customer and vendor to perceive, in short, that we operate in a world where financial strength and physical assets are what give companies the leverage they need to trump their competitors. But, according to financial executives collectively, their true top revenue drivers are far less trendy: people and processes. Specifically, they say their company s revenues are driven primarily by the quality of their employees the support and service they are able to provide to their customers and the quality, reliability and efficiency of their manufacturing operations and processes (see Figure 1). Respondents by Organization s Top Revenue Driver Overall North America (United States, Canada) France Germany United Kingdom Personnel and customer support 21% 17% 15% 23% 29% Manufacturing plant, equipment and process 21% 17% 30% 17% 20% Raw material/inventory 12% 16% 13% 13% 8% Delivery/logistics 12% 10% 12% 14% 11% Liquid assets (cash, stock, etc.) 10% 14% 15% 6% 5% IT/telecom systems 9% 6% 8% 10% 11% Intellectual property 8% 10% 5% 9% 9% Miscellaneous 7% 10% 2% 8% 7% Competition, Supply Chain and Property Risks Pose Top Revenue Threats More financial executives view the variable risk of competition a competitor s groundbreaking new product, for example, or the entry of a new and powerful player into their market space as the biggest threat to their revenues. However, they consider two downside risks, specifically supply chain disruptions and property damage, almost as worrisome (see Figure 2). After all, disruptions to a company s supply chain can bring production and sales to a halt. And a factory or office building rendered unusable by fire, flood or other disaster provides neither a place for employees to service customers, nor a space for them to build or assemble the goods that customers want. 2 n n n

5 n n n Managing Business Risk Through 2009 and Beyond Figure 2 Top Five Specific Business Risks That Would Threaten Companies Top Revenue Driver Type of Risk Overall North America (United States, Canada) France Germany United Kingdom Competition Variable 14% 10% 15% 18% 14% Supply chain Downside 13% 17% 5% 14% 14% Property (fire/explosion, mechanical/electrical breakdown, natural disaster) Downside 12% 16% 8% 9% 14% Economy Variable 10% 15% 7% 10% 10% Pricing and currency Variable 7% 3% 10% 12% 4% Miscellaneous* Mix 43% 39% 50% 37% 43% Don t know/no reply - 1% 0% 6% 0% 1% * Includes: Pandemic (two percent overall) and terrorism (one percent overall) Managing Downside vs. Variable Risks Not all risks are created equal. Some risks, such as those related to supply chain or property, only have downside consequences. There s never a benefit to running out of a key component because your supplier can t get his or her hands on critical raw material, or losing a manufacturing facility to a fire or flood. Other risks the economy, competition, currency trends, client demand are best described as variable, because they may have positive or negative consequences. The economy can reduce demand for your product or service during a recession, but it also can stimulate demand during an expansion. Similarly, a new technology could either threaten the viability of your business model (if you re one of the last to embrace it) or give you an advantage over the competition (if your company is an early adopter ). Downside risks, while seen by a majority of financial executives as the most likely to impact their top revenue driver (see Figure 3), tend to be easiest to manage, because companies can take proactive measures to minimize or mitigate them, such as building redundancies into their supply chain or installing fire protection systems in offices and manufacturing plants. In contrast, companies have little control over variable risks. That doesn t mean companies shouldn t attempt to manage variable risks; indeed, successful organizations often get that way by using their skills in forecasting, planning, marketing, and research and development to leverage variable risks to their own advantage. What it does suggest, however, is that companies should focus on eliminating as many downside risks as possible so they can maximize the time spent managing and exploiting variable risks work that adds real value to the business. n n n

6 Managing Business Risk Through 2009 and Beyond n n n A majority of financial executives report downside risks, overall, are more likely to threaten their top revenue driver than variable risks, by a margin of 53 percent to 45 percent. Financial executives in North America and the United Kingdom, it seems, are particularly concerned with downside risks. Respondents in those locations were more likely to cite property-related risk among their top threats than their counterparts in France and Germany (See Figure 3). Figure 3 Types of Business Risks That Would Threaten Companies Top Revenue Driver Type of Risk Overall North America (United States, Canada) France Germany United Kingdom Downside risks 53% 63% 44% 45% 60% Variable risks 45% 37% 50% 55% 39% Don t know/refused 2% 0% 6% 0% 1% The importance that financial executives ascribe to supply chain risk reflects the significant changes companies have made, during the past few decades, to the way they procure raw material and produce goods. Where many companies once operated principally in their own country, with highly vertical business models, companies today outsource non-core activities, locate facilities in distant countries, and rely on just-in-time inventory and other lean manufacturing techniques all of which makes the margin for supply chain error significantly smaller. n n n

7 n n n Managing Business Risk Through 2009 and Beyond Top Risks Seen Rising, New Threats on Horizon Financial executives are keenly aware that competition risk is not only here to stay, but is also likely to intensify. Fully 62 percent of financial executives say they expect competition risk to increase through 2009, while only four percent expect it to decrease (see Figure 4). Twenty-four percent expect supply chain risk to increase through 2009, and only eight percent expect it to decrease. The story changes, however, when they take into account property risk. While it ranks as one of their top three concerns, only seven percent of financial executives expect property risk to increase through 2009, while 10 percent anticipate it will decrease. Figure 4 Top Five Business Risks Through 2009 Increase Remain the Same Decrease Don t Know Competition 62% 33% 4% 1% Supply chain 24% 64% 8% 4% Property (fire/explosion, mechanical/ electrical breakdown, natural disaster) 7% 83% 10% 0% Economy 31% 55% 12% 2% Pricing and currency 38% 53% 6% 3% Miscellaneous 34% 57% 7% 2% Figure 5 When asked to identify the emerging risks they believe will threaten their business through 2009, financial executives again cite competition as their biggest concern. Beyond that, they cite government and regulatory developments (downside risks), pricing volatility and variable client demand (variable risks), and political threats (downside risks) as likely to come to the fore through 2009 (see Figure 5). Top Five Emerging Threats Through 2009 Emerging Threat Overall Type of Risk Change in competition 29% Variable Government/regulation 10% Downside Pricing volatility 7% Variable Variable client demand 7% Variable Political threat 6% Downside * Terrorism (three percent overall), pandemic (two percent overall) n n n

8 Managing Business Risk Through 2009 and Beyond n n n Outlook May Be More Challenging than Financial Executives Perceive It is fair to ask whether a deteriorating risk forecast is a realistic outlook for the future. Certainly, it is reasonable to believe that, for most companies, competition risk will either remain the same or increase. In a world where the Internet, and instant messaging have dramatically increased the speed at which people communicate, the entire pace of business has accelerated, too. That means competition could spring up in new and unexpected places a fact many makers of portable music players, cellular telephones and portable Internet devices can already attest to, having seen computer manufacturer Apple Inc. announce its iphone would be capable of taking on competitors in all three of those product categories simultaneously. By contrast, the rather benign outlook for property risk, while encouraging on the surface, is out of sync with actual developments in the property insurance marketplace. This is especially true for companies that have been outsourcing manufacturing activities or acquiring manufacturing operations in other parts of the world. North America-based companies, for example, operate in an environment where public expectation and law have made some property risk control methods, such as the use of fixed sprinkler systems and adherence to building codes, common practice. When such companies move offshore, by contrast either through acquisitions or joint ventures they can find themselves in locales where the idea of taking proactive measures to prevent property loss is far less ingrained than it is in Canada or the United States, possibly putting them at a competitive disadvantage in that local market. This can be true not only in developing countries in Asia, Latin America, Eastern Europe or Africa, but also in some Western Europe countries. For example, while it is rare to find a supermarket or factory in Canada or the United States that does not have a fixed fire protection system, outside those countries, it is more of the exception, rather than the rule, to find commercial, industrial and institutional buildings protected by automatic sprinklers. Expanding a company s operations into many developing countries also can bring with it increased legal and political risk, as well as increased exposure to natural disasters. Taken together, these factors are affecting the risk profiles of many large companies seeking to reap the benefits of globalization. Unfortunately, companies that are willing to relax their property-related risk management standards also run the very real possibility of increasing their supply chain risk. After all, offshore facilities knocked out of commission by fire, natural disasters or other destructive events will not be available to help meet production goals. It is possible that, if financial executives knew just how much their moves to offshore locations were increasing their property risk, more than the reported seven percent would be expecting property risk to increase through 2009; and more than the reported 24 percent would be looking for increased risk on the supply chain front as well (see Figure 4). n n n

9 n n n Managing Business Risk Through 2009 and Beyond One reason financial executives are not unduly concerned may be simply that they just are not looking hard enough. In a recent survey of 443 manufacturing executives by consulting firm Deloitte Touche Tohmatsu, only about one-half said their firms conduct a very rigorous risk review before entering an emerging market. While 57 percent assess security risk, only 51 percent consider geopolitical risk, and just 30 percent look at terrorism and the impact of natural disasters. Among those that do conduct very rigorous risk assessments, the Deloitte survey shows 86 percent are highly confident in their ability to manage that risk. Where risk assessments are less rigorous, only 68 percent of respondents felt highly confident in their risk management abilities. 1 The Impact of Risk Realized Financial executives at companies that fail to appreciate and prepare for the increased risks facing their top revenue driver concede that, if those threats materialize, the consequences could be significant. Beyond the obvious hit to revenue, 54 percent of financial executives warn of a loss of competitiveness, which can translate into both a loss of market share and a reduction in their company s valuation. Another 23 percent report that disruption of their top revenue driver could result in the laying off of employees and/or an adverse impact on the local economy. Other leading potential consequences they cite include having to exit a line of business (or cease operations altogether), undergo leadership changes, see their company s credit rating downgraded, or face regulatory scrutiny or legal action (see Figure 6). Figure 6 Effects of a Disruption to a Company, Beyond a Loss of Revenue (Multiple responses accepted) Impact of Top Risks on Top Revenue Driver: Overall North America (United States, Canada) Loss of competitiveness (market share, company valuation) France Germany United Kingdom 54% 56% 37% 59% 62% Layoffs and local economy impact 23% 28% 18% 17% 28% Business disruption (exit a line of business, company ceases operations) Leadership change (management changes, shareholder action) 14% 15% 9% 6% 24% 11% 5% 2% 17% 21% Credit downgrade 9% 7% 2% 12% 14% Regulatory scrutiny 4% 6% 0% 4% 6% Legal liability 2% 0% 1% 1% 5% No impact 10% 6% 20% 4% 10% Don t know/no reply 5% 5% 10% 3% 2% 1 Innovation in Emerging Markets: 2007 Annual Study, Deloitte Touche Tohmatsu. On the Web at: n n n

10 Managing Business Risk Through 2009 and Beyond n n n Figure 7 Challenges Abound Whatever the potential benefits of a strong risk management program, many financial executives see plenty of challenges to implementing one. Through 2009, the biggest risk management challenge expected, by far, will be obtaining adequate resources, namely, time, budget and people. Fifty-six percent of financial executives overall cite it as their top concern. After that, they worry about attaining organizational consistency being able, that is, to apply the same risk management standards and processes across the enterprise. They also expect new risks may be introduced to their enterprises through the development of new products, the introduction of new technology, and changes attributable to merger and acquisition activity. Not surprisingly, more than one-third of financial executives say getting senior management to make risk management a top priority is a significant challenge (see Figure 7). Experience has shown that, when leadership at the top of an organization does not embrace a culture of risk management, risk improvement initiatives can be doomed from the outset. Top Risk Management Challenges Through 2009 (Multiple responses accepted) Obtaining adequate resources (time, budget, people) Overall North America (United States, Canada) France Germany United Kingdom 56% 72% 50% 36% 66% Attaining organizational consistency 43% 59% 46% 23% 44% New product development 42% 49% 39% 30% 51% New technology 39% 57% 34% 18% 48% Mergers and acquisitions 39% 53% 40% 29% 34% Making it a top priority for senior management 35% 54% 29% 18% 38% New geographic expansion 33% 42% 28% 26% 35% Miscellaneous 4% 0% 1% 4% 9% Don t know 2% 0% 5% 2% 2% None 2% 3% 1% 2% 0% n n n

11 n n n Managing Business Risk Through 2009 and Beyond Even after bringing together the requisite resources, companies need to make sure they develop risk management programs that work. (See sidebar below: Five Characteristics of a Strong Risk Management Program. ) Beyond addressing both variable and downside risks on an enterprise-wide basis, such programs should incorporate systems and processes for preventing, not just insuring against, common risk factors. Indeed, insuring against the downside impact of risk factors should be a company s last not first line of defense. Five Characteristics of a Strong Risk Management Program Senior management champions 1 the program. As with so many business initiatives, the success of a risk management program depends on the active support of senior management. They are inclusive. Effective 2 risk management programs do not rely on the work and resources of any single person or group within the organization. While often led by a risk management officer, the best programs draw on the input and cooperation of every part of the organization. They are transparent. Risk management programs work best and 3 companies reap the greatest possible benefit from them when their goals, processes and results are shared with all the company s stakeholders. They are holistic. The best risk 4 management programs not only address all the risks to which modern corporations are susceptible; they also consider how these various risks can affect the company s stakeholders and operations. They are proactive. Effective 5 risk management programs do not merely insure companies against downside risks; they also include proactive systems and processes to minimize or eliminate downside risks, and to maximize the opportunities presented by variable risks. n n n 9

12 Managing Business Risk Through 2009 and Beyond n n n Differing Country Views North America Given the threat of natural catastrophes in the United States from a hurricane, tornado, flood, earthquake and snow/freeze, it may come as no surprise that a higher percentage of financial executives (63 percent) are more concerned about downside risks (specifically those related to supply chain and property) than their European counterparts, who tend to focus more on risk related to competition (see Figure 3). Additionally, because more global companies are headquartered in North America than in other parts of the world, more respondents in this region indicated that supply chain risk pose a major threat to their top revenue driver. And, financial executives in North America are more likely than those based in Europe overall to cite obtaining adequate resources (see Figure 7) as a risk management challenge, perhaps because their portfolio of downside risks is greater than that of their European counterparts (see Figures 2, 3 and 7). France Supply chain-related risk appears to be more significant to financial executives in North America, the United Kingdom and Germany than to respondents in France. Only five percent of financial executives in France rank supply chain disruptions as their most prevalent business risk, compared with an average of 15 percent of financial executives located in the other three countries surveyed. And while, on average, 59 percent of financial executives in other countries, say a loss of competitiveness is the most serious consequence of a risk affecting their top revenue driver, only 37 percent of France s financial executives feel the same way (see Figures 2 and 6). Germany Financial executives in Germany tend to view risk much as their peers do in North America, France and the United Kingdom, with a few significant exceptions. For example, while nearly two-thirds of executives in North America and the United Kingdom cite downside risks as posing the most prevalent threats to their revenue, the same applies to only 45 percent of Germany respondents (see Figure 3). Additionally, Germany s respondents, in general, indicate they face fewer significant risk management challenges than their counterparts in other countries (see Figures 3 and 7). United Kingdom When asked to list the consequences of a disruption to their top revenue driver, U.K.-based financial executives routinely express more pessimism than their counterparts elsewhere. For example, 62 percent worry about a loss of competitiveness, versus 51 percent of all other respondents. Twenty-four percent of U.K.-based respondents say a disruption can lead to exiting a line of business or ceasing business operations altogether, and 21 percent say it can lead to leadership changes. By contrast, only 10 percent of all other financial executives worry about exiting a line of business or ceasing operations, and only eight percent worry about leadership changes (see Figure 6). 10 n n n

13 n n n Managing Business Risk Through 2009 and Beyond Conclusion: Charting a Course to Responsible Risk Management Making a sound business case for having a strong risk management program has long been an elusive challenge at many organizations. How much value should be placed on preventing loss from a disaster that might never happen? On the other hand, financial executives broadly agree that the consequences of risk management failure can be dire. Given that financial executives expect the severity of their companies most prevalent business risks to either remain at current levels or increase through 2009, there is a clear imperative for many such organizations to develop a strong, consistent, enterprise-wide risk management program. In pursuing this goal, companies, now more than ever, would do well to begin by identifying their top revenue drivers, then pinpointing the top threats to those revenue drivers, and distinguishing between those that are predominately downside risks and those that are predominately variable risks. While both categories of risks deserve attention, companies may discover the effectiveness of their risk management programs are most effective if they devote more of their attention to controlling risk than transferring it to insurance companies. And the risks that can be most directly controlled (even, in some cases, eliminated) are downside risks the very ones, the study data show, that financial executives collectively consider most likely to threaten their top revenue drivers. When downside risks are dealt with first through prevention and control, it enables senior management to deal more aggressively with variable risks. In short, they become more proactive and strategic with their risk management approach. Finally, because financial executives indicate they expect having trouble finding the time, budget and people necessary to implement or maintain a strong risk management program, senior management must demonstrate leadership in championing and funding this initiative. Justifying the commitment should not be difficult. As the financial executives surveyed for this report agree, the number one consequence of poor risk management is loss of competitiveness. By implementing an effective risk management program, companies protect their ability to compete. Nothing is more fundamental to business success. n n n 11

14 Managing Business Risk Through 2009 and Beyond n n n Research Methodology Respondents by Country Headquarters Number of Respondents North America (United States, Canada) 125 France 125 Germany 125 United Kingdom 125 Data for this study were collected by Opinion Research Corporation on behalf of commercial and industrial property insurer FM Global. Opinion Research Corporation was responsible for the quality of the data collected and FM Global was responsible for the data analysis and reporting. This study was conducted by telephone in late 2006 with 500 financial executives at major companies around the world. Random samples were created using both third-party and proprietary lists of companies with at least US$500 million in annual revenue. Detailed break-outs by region, annual revenue and industry are shown below. Data were not weighted. Therefore, the results reflect the views of only those executives surveyed. In theory, with samples of this size, one could say with 95 percent certainty that the results for the overall sample have a sampling error of plus or minus 4.3 percentage points overall (or 8.6 percent by region). The sampling error for the various sub-sample results is higher and varies. Respondents by an Organization s Annual Revenue US$500 Mil - $999 Mil Mil EUR 255 Mil 509 Mil US$1BN - $4.9BN 749 Mil 3.7BN EUR 509 Mil 2.5BN US$5BN+ 3.7BN+ EUR 2.5BN+ Overall North America (United States, Canada) France Germany United Kingdom 53% 0% 79% 59% 74% 38% 82% 19% 33% 19% 9% 18% 2% 8% 7% Respondents by an Organization s Industry 12 n n n Overall North America (United States, Canada) France Germany United Kingdom Manufacturing 30% 26% 35% 30% 29% Service 14% 14% 12% 10% 19% Finance, Insurance, Real Estate 14% 19% 8% 18% 11% Wholesale/Retail Trade 22% 23% 29% 18% 18% Transportation, Communications, Utilities 14% 12% 8% 16% 19% Agriculture, Forestry, Mining, Construction 5% 6% 3% 5% 4% Diversified 0% 0% 0% 1% 0% Miscellaneous 1% 0% 5% 2% 0%

15 Additional Information For an electronic copy of this executive summary, please visit For additional information, please contact: Steven Douvas Assistant Vice President FM Global 1301 Atwood Avenue Johnston, RI USA +1 (1) , ext About the Research Partners FM Global ( is an insurance organization with a unique risk management focus. For more than 170 years, leading corporations around the world have benefited from FM Global s superior insurance capacity, risk assessment services and proven property loss prevention engineering expertise and research. FM Global helps its clients better understand the nature of their risks and develop sound property loss prevention solutions that can effectively improve their risk profile. Headquartered in Johnston, R.I., USA, with offices worldwide, FM Global is rated A+ (Superior) by A.M. Best and AA- (Very Strong) by Fitch. Opinion Research Corporation ( founded in 1938, is a research and consulting firm that helps organizations worldwide in both the private and public sectors make a definitive difference in their performance. By providing objective, fact-based decision support and implementation, grounded in rigorous research, we earn our clients confidence with our fresh ideas and perspectives. The company conducts commercial marketing research programs as Opinion Research Corporation in the United States and as ORC International outside the United States. It also operates through ORC Macro, which specializes in social research programs for government agencies.

16 P07078 Printed in USA (5/07) 2007 FM Global. All rights reserved.