Top 10 risks for global business in 2009

By Rober Cullen

2008 has been a traumatic year for the global economy where the financial services sector has been radically transformed through multiple collapses, write-downs and government interventions.

Two months into 2009, and the pressures of a downward-spiraling global economy remain. Obviously, business risk has increased with greater volatility in the markets. The fact that risk is never static and constantly evolving means that businesses have to be nimble and vigilant in meeting the challenges of tomorrow. The paradox is that you can never be fully prepared for the unknown; yet you can’t afford to be caught unaware. What’s clear is that risk awareness and management is critical, and must always be seen against your business objectives. The growing uncertainty today makes it even more essential for companies to view the risks that they are facing strategically and think about their action plans should any of the risks materialize. What this means is that risk management must be taken from a pure compliance function into the boardroom. Companies need to enhance their abilities to proactively identify the risks that matter to their businesses, and determine mitigating courses of action.

A recent study undertaken by Ernst & Young and Oxford Analytical sought to form a view of the top 10 major risks faced across 11 industry sectors in 2009. Comparing the rankings from the same study conducted in 2008, the findings were a reflection of the current market conditions. Having said that, given the fluidity of current circumstances, this is by no means a prediction for the global economy; and it almost certainly will not be the top 10 risks for any particular company. But this should fuel the much-warranted risk management discussions that need to happen in each company, now more urgently than ever.

The top 10

1. It is no surprise that the credit crunch was regarded as the most critical risk by the analysts surveyed, given its direct impact and its unpredictability. Banking and capital market sectors continue to suffer from the aftershocks of the credit crunch, while capital intensive sectors face increased pressures as credit remains dry. In the near term, it would be prudent for companies to adopt a capital-oriented business plan and focus on obtaining cash. Setting up a program management office that looks into aspects including improving cost-management and enhancing lending relationships as part of a systematic approach to managing risks, can help to position the company better in tackling exposures to the credit crunch.

2. On a related note, the uncertainty surrounding the regulatory response to the global financial crisis has placed greater spotlight on regulatory and compliance risk for financial sectors. Other examples of regulatory concerns in other sectors include increasing political restrictions on access to oil and gas reserves, and regulatory interventions into pricing of power, utilities and telecommunications. Regulatory and compliance risk needs to be viewed seriously, as its impact on the operational and competitive environment can be far-reaching.

3. As developed economies show signs of contraction, the concern over deepening recession emerges as a new risk this year. This is of greatest concern in cyclical industries, such as automotive and media, and industries with direct exposure to the global financial crisis, including banking, asset management and real estate. Companies should consider diversifying geographically into the emerging markets which are gaining a larger share of global economic activity to cushion the slowdown in developed markets. Also, to ensure business sustainability, companies must strike a balance between reducing short-term expenses and investing in strategic opportunities for long-term health.

4. Another risk – unrelated to finance – that has surged in importance is the rise of radical greening. Environmental and sustainability challenges, as well as consumer pressures, are expected to escalate, most dramatically in carbon-intensive sectors such as automotive, real estate, oil and gas, power and utilities. Failure to respond to the “call for green” can affect a company’s brand and reputation; the converse can offer strong competitive edge. Companies can respond by innovating and enhancing their corporate reputation, and gain an understanding of their environmental impact along their value chain vis a vis the expectations of stakeholders on green issues.

5. Non-traditional entrants – new competitors from adjacent markets and distant geographies – is recognized as one of the top risks as existing players may be weakened or distracted by the global economic downturn. Interestingly, there are others who may view this as a diminishing cause for concern given that companies tend to focus on their core business instead of new ventures during uncertain times. Regardless, companies should review their own sources of strategic advantage and focus on retaining existing businesses, while trying to understand the dynamics of the new market segments or niches that new entrants may be moving in on.

6. In 2009, while cost inflation is likely to abate, cost cutting is a challenge for many as they navigate the downturn. Companies can deliberate measures like performing a procurement process analysis to reduce discretionary spending, consider shared services or outsourcing options to streamline costs and operations, while focusing on customer churn and product innovation.

7. Another perennial risk that companies face is in talent management – both attracting and retaining them – even in a downturn. Tackling this human capital risk requires companies to be systematic and implement structured hiring and retention policies. Companies operating in emerging economies should also be aware that the talent pools in these markets are relatively small. This means many mid-level to senior people would have spent time with a number of competitors and thus many companies understand each other’s so-called “competitive advantage”.

8. In 2009, the challenges associated with executing alliances and transactions are expected to fall in importance as the credit crunch eases the pace of mergers and acquisitions (M&As). Yet alliances and partnerships remain crucial to business strategies of leading firms in sectors such as telecommunications, life sciences, utilities and media. Furthermore, the financial crisis has led to sudden and dramatic “rescue mergers” for which due diligence must be undertaken. Companies involved in M&As should invest in understanding the target, in terms of its strategy, business model and risk profile. This is to maximize synergy, because many acquisitions fail due to poorly executed integration.

9. The unprecedented market conditions have resulted in growing concerns over the risk of business model redundancy. Existing business models for some sectors may have become obsolete, forcing leading firms to reinvent their corporate strategies and structures. This necessitates companies to develop business models that allow business units to be innovative, while a strong central management allocates investments and monitors success and failures closely.

10. Finally, as evidenced by the global financial crisis, a company’s financial reputation can be damaged overnight and have enduring impact on the company’s survival. As such, reputational risk has been elevated to the global list of top 10 risks from 22nd spot last year. To mitigate this risk, companies need to recognize the impact on their business decisions on public perception. They should also be committed to high standards of corporate governance and transparent communication of financial information in order to win the trust of stakeholders, especially in today’s volatile markets.

Your risks are unique

More often than not, the risks described above are inter-related and interacting with one another to form an even more complex web of challenges. One person’s business challenge is frequently someone else’s market opportunity. It is expected that even with knowing these top 10 business risks, there will be variations in the most important business risks from sector to sector, region to region and firm to firm.

It is imperative that each company assesses its own unique circumstances and challenges, and the mitigating actions that need to be taken. Indeed, there is no one-size-fits-all approach to managing business risks. What really matters is whether you are able to effectively turn your risk awareness into a competitive business advantage.

The writer, Robert Cullen, is Ernst & Young’s Asean Practice Leader for Business Risk Services.