CPA Resources
CPA Resources

Economy leaves its mark on list of biggest business risks for '09

LONDON, Dec. 18, 2008 — Business is increasing its focus on a wide variety of risks as global economic conditions worsen in the aftermath of the credit crunch, according to the 2009 Ernst & Young Business Risk Report.

The annual top-10 ranking, published by leading global professional services organization Ernst & Young in conjunction with strategy consultancy Oxford Analytica, reveals that companies around the world are realizing the importance of a thorough and robust risk management effort across related risk areas.

Report respondents, including more than 100 leading global sector analysts, unsurprisingly ranked credit crunch aftershocks and global recession as some of the most important business risks for 2009, displacing regulation and compliance from the last year’s top spot. Yet the survey also revealed that the shifting balance of power between established and emerging markets and players, redundant business models, and raised concerns over reputational risks have caused a significant re-weighting in risks since last year.

“There has never been a more appropriate time to talk about business risk,’’ said John Murphy, global managing partner – markets for Ernst & Young. “Volatility has increased, and so has business risk.

“That some of these risks landed high in the ranking is not surprising. However, the extent to which executives believe that these risks are working in unison on an unprecedented scale to threaten corporate viability, is really striking,’’ he said. “Many of the economic perils that companies are currently facing are linked, including credit scarcity, compliance and regulation, deepening recession, cost-cutting and reputational risk.”

The 2009 top 10 risk rankings, with 2008 rankings shown in parentheses):

  1. The credit crunch (2)
  2. Regulation and compliance (1)
  3. Deepening recession (new) (This category includes macroeconomic factors, including difficulties companies have in generating income and reducing expenses)
  4. Radical greening
  5. Non-traditional entrants (16) (This category includes companies entering a sector from adjacent markets or distant geographies)
  6. Cost cutting (7)
  7. Managing talent (11)
  8. Executing alliances and transactions (7)
  9. Business model redundancy (new)
  10. Reputation risks (22)

New entrants shake up the field

The risk presented from non-traditional entrants moved up 11 places from the 16th spot for 2008 to the fifth spot for 2009.

New entrants are entering many new industries from different directions and for different reasons, including technical advancements and changes in local regulations and laws. As media, telecoms and technology industries converge, banking, insurance and asset management companies compete for the same customer, and emerging markets become more competitive, some sectors are seeing a swell of new competitors eager to grab market share and challenging industry stalwarts.

“New competition from adjacent industries or distant markets is increasingly seen as a threat and companies are even more vulnerable if they are weakened or distracted by the economic downturn,” said Ernst & Young’s Murphy.

Business models made redundant

For some companies, technological change and industry transitions are making long-established business models obsolete, forcing them to reinvent their corporate strategies and structures. This trend has gathered steam, and the risk it presents is new to the list this year, landing it in ninth place.

“This kind of fundamental change can threaten many of the value drivers,’’ said Karole Lloyd, Americas vice chair of industries at Ernst & Young. “Looking across the sectors, perhaps the most difficult aspect of these new business models is the impact of what were believed to be quite sustainable revenue streams. Think for example, about the media sector, where some players are willing to offer content and services free of charge. This puts the traditional revenue and market share of established players at risk, compelling them to adopt the new model.”

Reputations at risk

The reputation of entire industries is increasingly under threat as public trust weakens, a trend reflected in the rankings. Reputational risk raises 12 places from the 22nd spot to10th. Climate and environmental concerns also continue to pose a direct challenge to firms’ reputations and brands.

“Failure to be seen as responding to climate change could have huge reputational risks for companies in high-carbon sectors and elsewhere, and this is reflected in the rise of radical greening up the risk rankings,” Murphy said. “Talent management, cost cutting, compliance and transactions activity continue to be high risk areas. But it is interesting to witness the shifting risk patterns as companies adapt to the dynamic and challenging environment borne from the financial crisis.”

Because of the multi-faceted and deep impact of the current economic climate, companies need to see the risks not as separate impacts, but as connected, Murphy said.

“Business risks change with market conditions, so it’s important that companies take a strategic view of the risks they are facing and ensure that plans evolve with the current business environment. In volatile times, this discipline is more important than ever.”

The full report is available here.

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