With the sudden end of a decade of economic growth and prosperity, dramatic changes in the macro-economic climate through 2008 have left companies facing several new risks which must be managed carefully to ensure medium and long term sustainability.
Based on its Risk Radar, the 2009 Ernst & Young Business Risk Report highlights ten of the most pressing challenges facing global business. Replacing the risk posed by regulation and compliance, and somewhat unsurprisingly, the top challenge faced by companies in the new year is the credit crunch, says Celestine Munda, director: Risk Advisory Services at Ernst & Young.
Less surprising is the depth of the impact that this risk has on global business: a further three of these risks are directly related to the credit crunch.
Ernst & Young's Business Risk Report is based on interviews with over 100 industry commentators across 11 vertical market sectors and 20 academic disciplines. It provides insights into the perceptions of the top risks faced by leading global firms in 2009, assessed on Ernst & Young's Risk Radar, a device which assesses risk in terms of Financial Compliance, Strategic and Operations axes.
"The risks presented are by no means exhaustive and serve as thinking points to support the risk management process which should happen at company level," Munda says. She adds that it is advisable to conduct an annual risk assessment which defines and weights key risks and the potential impact on business drivers. "The information presented in the Global Risk Report provides the start of this process," she notes.
Risks facing businesses in 2009, from greatest to smallest, are: the credit crunch; regulatory compliance; a deepening recession; radical greening; non-traditional entrants; cost cutting; managing talent; executing alliances and transactions; business model redundancy; and reputational risks.
In the short period of one year, Munda points out that the risk landscape has changed considerably. "The credit crunch has wide ranging and far reaching implications for global business; many of these implications are valid for companies operating on the local level, too," she says.
Singling out related risks, Munda says the deepening recession, driven by house price deflation and weak consumer confidence, means lower sales for many organisations. Meanwhile, cost cutting becomes an imperative as companies must adjust their operations to remain profitable.
"Cost cutting has to be managed shrewdly to ensure that reputation remains intact. Simultaneously, the process must take into account a medium and longer term view of the company prospects to ensure sustainability," she notes.
With the squeeze on existing markets, directors are looking to diversify income streams. Non traditional entrants therefore enter the top ten risks for the first time.
Munda notes that, while unrelated to the credit crunch, a groundswell of consumer opinion is putting pressure on companies to ensure that their operations are more environmentally friendly.
"In these tumultuous market conditions, there are substantial changes in perceptions of the risks that companies face. In working through scenarios and impact analysis, companies may find many opportunities to tighten processes and controls which can make them more agile and able to operate more effectively regardless of market conditions," says Munda.
She believes more should be done by directors, in particular to manage strategic risks. "It is apparent that a body of leading risk management practice is emerging, but many companies are still doing too little in this regard. Our research shows that while strategic risks have become more pressing, companies have been focusing on the easier to manage areas of operational risks."
And, while its report highlights top risks, it is by no means prescriptive. "In looking to general practice, the implications for different sectors can be blurred. The challenge faced by one company may constitute market opportunity for another. Even within each sector, the risks for each company may vary substantially," Munda explains.
Risk management must therefore be carried out at the company level. "Directors should consider and question the top ten risks as identified by Ernst & Young against their own experience and within the context of their own organisational situation and challenges," she says.
Such assessments should go beyond financial and regulatory risk to consider the wider environment in which the organisation operates and the full extent of its operations. "Scenario planning for major risks identified allows directors to develop operational responses should these risks manifest," says Munda.
Finally, she says the unexpected is always a factor. "The dramatic change in risks faced from one year to the next confirms that we live in an uncertain world – therefore, keeping an open mind about where risk lies is highly advisable."