What is Turn risks and opportunities into results about?
This Ernst & Young report, which is published every two years, explores the top 10 risks and opportunities facing companies around the world.
It is based on a 2011 study built on insights drawn from a panel of sector commentators and more than 700 senior executives across 15 countries (25% of whom were CFOs). Since the 2011 study, in light of economic and political upheaval, we have gone back to retest these findings among a smaller base of 150 respondents from a range of sectors and regions to see how perceptions have changed over the last 12 months. Eight out of ten risks, and seven out of ten opportunities, are believed to be greater by these 2012 respondents.
Top 10 risks and opportunities, in rank order:
*Risks and opportunities which 2012 survey respondents believe to be even greater than those surveyed in 2011.
|Risks ||Opportunities |
|1. Regulation and compliance* ||1. Improving execution of strategy across business functions* |
|2. Cost cutting* ||2. Investing in process, tools and training to achieve greater productivity* |
|3. Managing talent* ||3. Investing in IT* |
|4. Pricing pressure* ||4. Innovating in products, services and operations* |
|5. Emerging technologies ||5. Emerging market demand growth* |
|6. Market risks* ||6. Investing in cleantech* |
|7. Expansion of government’s role* ||7. Excellence in investor relations |
|8. Slow recovery/double-dip recession* ||8. New marketing channels* |
|9. Social acceptance risk/CSR* ||9. Mergers and acquisitions |
|10. Access to credit ||10. Public-private partnership |
Key themes for CFOs
Of the top 10 risks and opportunities, those below are some of the most relevant to the CFO:
Pressure on margins will remain acute
Cost cutting and pricing pressure are key risks to the business agenda. The pressure to cut costs comes not only from internal pressures to preserve margins, but also from external sources. As companies in both the private and public sector pursue cost cutting programs, they will seek increasing efficiency from their suppliers and partners. This will feed through into downward pressure on prices, which is also being exacerbated by falling household incomes in many developed countries. Although cost cutting will remain a priority, it will be important for CFOs to consider the implications on the long-term health of the business. A balance between short-term gains and potential impact on overall capabilities must be struck.
The external environment will continue to pose severe risks for companies
A key theme that emerges from this report is that the financial crisis is far from over. The threat of a double-dip recession remains real as long as the Eurozone crisis persists. The banking sector expects credit to tighten, with higher capital and liquidity requirements (Basel III) and sovereign debt issues front of mind. Business leaders continue to worry about market risks, including volatility in equity prices, currencies and commodities. CFOs will play a crucial role in monitoring and mitigating these risks through financial hedging and strategic diversification. They will also need to adopt a strategic approach to investor relations to ensure that they continue to access debt and equity finance against a backdrop of strong competition for capital.
Government and regulatory scrutiny is on the rise
Regulation and compliance has been the number one risk in this survey for the past five years. The fallout from the financial crisis means that this pressure is intensifying as governments seek to protect revenues and keep certain sectors — particularly financial services — under tighter control. In addition to encouraging more intense and intrusive regulatory scrutiny, governments are playing a bigger role in business more generally.
For CFOs, government and regulators represent just some of the many stakeholders with whom constructive relationships must be nurtured. The mitigation of regulatory and compliance risk requires a combination of rigorous compliance processes and the “softer” skills of building relationships with regulators and government bodies.
Many companies struggle with managing these risks and few change their business strategies to reflect the shifting balance of power between public and private sector.
Despite a difficult environment, there are opportunities for investment
Business leaders may be deeply concerned about the external environment and the role of government and regulation, but they continue to perceive opportunities for investment. These can be broken down into two categories.
First, there are opportunities for greater efficiency and execution. Companies recognize that, in the current environment, they need to do more with less and maintain a relentless focus on efficiency and cost control. This will require up-front investment in new processes, skills, tools and IT infrastructure, but the benefits to the bottom line can be substantial. With their unique perspective over the company, CFOs can play an important role in evaluating these investments and in managing their performance through key performance indicators and incentives structures.
Second, there are new opportunities for growth. Despite a downturn in M&A activity, respondents expected deals to pick up. Demand continues to grow in emerging markets, and many companies are increasing their allocation to these markets to take advantage of them. But these can be difficult markets to crack. CFOs must ensure that there is a realistic assessment of the scale of this opportunity and that sufficient attention is paid to the risks and hidden costs. Talent risk is also an issue to be considered, particularly when investing in unfamiliar markets. CFOs should work with HR functions to ensure that talent management processes are robust and meet the need for skills and talent in the long-term.
Companies also perceive opportunities from new innovations. A recent Ernst & Young report looks at the growth potential presented by innovating for the rising middle class in rapid-growth markets. These opportunities to innovate and capture new markets will be crucial to future growth prospects but require careful execution and rigorous processes. CFOs should ensure that they participate in assessing initiatives and put in place processes and metrics to manage the performance of the innovation pipeline.
For a copy of the full report, please visit www.ey.com/top10challenges