This report, published by Ernst & Young, compiles views of industry commentators, sector experts, and Ernst & Young practice professionals as to the major business risks facing “leading global firms” on a sector-by-sector basis.  The risks identified as the top ten risks for global business in 2009 were rated as having the greatest impact across the largest number of sectors, and these risks will likely do the most to influence markets and drive corporate performance in the coming year. 

Ernst & Young has a model that divides risks into compliance, financial, operations, and strategic risks.  This report summarizes the key risks along these four dimensions.  Strategic and operations risks comprise the majority of the top ten risks identified as global business risks.  However, at least one top ten risk was identified in each of the four risk areas underscoring the need for businesses to take a broad view of risk issues.  To create and protect shareholder value, corporate resources should be allocated efficiently and key risks should be aligned to business objectives and value drivers to drive the allocation process and support improved performance.  For each risk highlighted, the crucial value drivers for firms in responding to that risk are also identified.

1. The Credit Crunch

The credit crunch rose from the number two risk in the 2008 report to number one in 2009 both because of the magnitude of its impact and the unpredictability of its evolution.  The credit crunch has forced some leading global companies in the asset management and insurance and banking sectors into insolvency and is undermining business activity in other sectors due to the lack of available credit.  This contributes to volatility in financial, currency, and property markets and will be a severe financial management challenge in the coming year.  The result of the credit crunch is an overall conservation of capital.  Some companies are using this as a time to eliminate duplications and inefficiencies in their systems and to take advantage of existing opportunities.  To respond to this risk, companies can develop safeguards to minimize the effects of low frequency, high impact risks on their financial well being.  In the short-term, organizations can adapt business plans to be more capital oriented and focus on obtaining cash rather than on growth.  A Program Management Office that includes programs to cut costs, improve cost management, upgrade the financial competence of the company, and enhance lending relationships can also be part of the approach to managing risks related to the credit crunch.

2. Regulation and Compliance

Regulation and compliance fell from the number one risk on the 2008 list but remains important due to the widespread impacts of regulatory intervention across a company’s value drivers, its ability to grow and profit, and its competitive situation.  Companies in highly regulated sectors and those moving to more regulated areas are most vulnerable.  Companies can respond to this risk by adopting a proactive stance, prioritizing it appropriately as a strategic issue and responding appropriately to the breadth of the risk.  In sectors with a high degree of regulatory uncertainty, firms also need to perform scenario analysis of future regulatory possibilities and prepare plans of engagement with regulatory authorities to influence policy outcomes.

3. Deepening Recession

This risk is new to the top ten list this year as the global financial crisis has impacted consumer confidence and caused capital flight from emerging markets, increasing the possibility of a truly global recession.  The economic downturn creates heightened trade credit risks and threatens revenues, profitability, and valuations across the global economy.  Deflation could take hold in major economies due to competitive exchange rate devaluations and a “flight to cash”, driving further debt defaults and losses from falling asset prices.  Companies can respond to this risk by developing a major investment strategy based on future scenarios with consistent and comparable assumptions.  Geographical diversification is important since countries operate at different points in the market cycle.  Balance is also key as companies that successfully emerged from previous downturns focused on reducing expenses without sacrificing their long-term health.

4. Radical Greening

Radical greening rose from ninth on the 2008 list as strategic pressures from environmental concerns and the threat of climate change have increased, especially in carbon-intensive industry sectors.  A change in the U.S. administration has also increased the possibility of major policy changes and government regulation in this area, which could impact financial performance.  Increased public concern about the climate and environment can also pose risks to firms’ reputations and brands if a company is viewed as failing to respond to these concerns.  Companies can respond to this risk by adopting a collaborative approach.  Taking a leading role in radical greening can also serve to enhance corporate brand and reputation.  Companies should undertake an evaluation of their exposure to the green agenda to understand the environmental impacts of their business activities and to understand stakeholders’ expectations.

5. Non-Traditional Entrants

The risk of non-traditional entrants moved up from sixteenth on the 2008 list because competitors from distant geographies and adjacent industries are becoming challengers to leading multinationals in some sectors.  These challengers sometimes have an advantage due to a deep knowledge of the customers or ability to keep established companies from acquiring customers and raising prices, forcing innovation among the established players.  There are several steps companies can take to address this risk.  The threat should be taken seriously now rather than expecting it will be able to be dealt with in the future.  Companies should focus on threats in new market segments because that is where emerging players often gain a foothold.  Companies should also review and identify sources of strategic advantage, with established players possibly focusing on loyalty program design.

6. Cost Cutting

Cost cutting rose from the number eight risk in the 2008 report as it is becoming crucial for survival in many sectors as the global economy slows.  While a slowing economy can ease inflationary pressures, cost containment is still important as companies facing falling revenues and price wars struggle to beat competitors’ prices and maintain margins.  One response to this risk is to match current and emerging customer opportunities with strategic sales and marketing plans and to identify market entry or growth opportunities.  Companies should perform a detailed assessment of business processes to improve revenue collection.  A detailed assessment of cross-border contracts should be performed to assess risk exposure and monitor contract performance.  Performing a procurement process analysis can often improve savings.  Companies can also reengineer IT processes to identify improvement ideas to manage costs and improve quality of IT services.  A strategic analysis of the real estate portfolio can also be helpful in aligning current operating needs and long-term business strategies.

7. Managing Talent

Managing talent has risen from eleventh on the 2008 list and this risk has become more complicated, now encompassing attracting talent, retaining key talent during a downturn in order to keep key competencies of the organization, and aligning compensation structures with risk management and long-term returns.  Risks associated with managing talent also include potential difficulties in securing high quality board members as litigation and reputational risks increase.  To respond to this risk, companies can develop training and recruitment programs and leadership and coaching skill programs to control a decline in employee quality.  Companies should also formulate a systematic response to human capital risks to effectively compete for talent. 

8. Executing Alliance and Transactions

This risk fell from seventh on the 2008 report as mergers and acquisitions have lessened with tightening credit conditions.  However, strategic alliances and partnerships are a crucial component of many companies’ business strategies.  Strategic transactions are often conducted in a very high pressure, time-constrained environment that can create risks of value erosion and post-merger integration.  To manage this risk companies should invest in understanding the target’s strategy, business model, and risk profile and focus on well-executed integration to maximize synergies.  Ernst & Young’s principles for transaction integration center on purpose, planning, process, price, pace, and people.  Companies should also focus on creating value and managing risk throughout the investment cycle.

9. Business Model Redundancy

Business model redundancy is new to the list this year and is becoming a concern for several sectors as long-established business models are becoming obsolete and need to be reinvented.  This type of risk threatens many of a firm’s value drivers and can put the revenue and market share of established players at risk, compelling change to a new business model to mitigate risks as well as to grow sustainably and survive.  Companies can respond to this risk by taking an approach allowing experimentation and innovation in business units, while retaining a strong central management to allocate investments and monitor successes and failures.  Expanding in emerging markets can help manage this risk as established business models can still be successful in emerging markets without need for immediate reinvention.  Finally, maintaining sound controls is important when testing new business models because risks will appear using a model for the first time that need to be identified and managed quickly. 

10. Reputation Risks

Reputation risks rose from number twenty two on 2008’s list to the top 10 and the trend of increasing compliance requirements enhances the importance of this risk as compliance failures are a common source of reputational damage.  The credit crunch has shown how much reputation is linked to market capitalization and maintaining company reputation is important to keep credit and capital available and affordable.  To manage this risk companies can perform an assessment of external views regarding the company’s reputation and identify perceptions within the company’s control.  It is also a good idea to institute a formal reputational risk policy and overall governance policy.  Major business decisions should be assessed against their impact on public perception.  Financial information should be communicated in a clear, accurate, balanced, and timely manner that complies with regulatory reporting frameworks.

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ERM Enterprise Risk Management Initiative 2009-01-01