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Whether an overseas supplier fails to ship product, labor unrest erupts, regulations tighten or a natural disaster hits a major trading center, nothing affects corporate earnings like financial uncertainty. So say finance executives in a new survey released today by the Association for Financial Professionals (AFP).
The 2012 AFP Risk Management Survey asked CFOs, corporate treasurers and other senior finance executives about risks that worry them now, those most likely to cause uncertainty in the next three years, and actions they are taking to mitigate those risks. It is the first in a series of annual risk-management surveys to be published with collaboration from the Global Risk Center of the Oliver Wyman Group.
Three quarters (72 percent) of responding organizations said their top to concern is managing financial uncertainty, including the risks associated with credit, liquidity, interest rates and currency/foreign exchange. Respondents also cited risks associated with macroeconomic conditions—such as the pace of economic growth and inflation (38 percent)—and business/operations risks such as supply chain and/or production disruptions, litigation, labor and outsourcing (36 percent). External risks (country, regulatory, natural disaster) and commodity risks (power/heat, crude oil & distillates, agricultural and metals) are also concerns for a significant share of organizations, but to a lesser degree. A full 41 percent of respondents expect even more earnings uncertainty in the coming years.
"Uncertainty is here to stay," said Jim Kaitz, AFP's president and CEO. "One way organizations can take control of rising uncertainty in their earnings is by adopting a new mindset and making more risk-adjusted decisions. The ones that do this effectively will have a competitive advantage.”
“Most of the critical variables that companies need to consider in developing their short and long-term strategies are becoming increasingly difficult to forecast,” said Alex Wittenberg, Oliver Wyman Partner and head of Global Risk Center. “This survey illustrates that long-term macroeconomic and environmental trends such as those discussed in the 2012 Global Risks Report are already having a significant impact on companies’ strategies.”
The 2012 Global Risks Report is produced by the World Economic Forum in collaboration with the Oliver Wyman Group division of Marsh & McLennan Companies and other partners. It will be the focus of special sessions at the World Economic Forum Annual Meeting 2012 in Davos, Switzerland, taking place on 25-29 January.
More than half of organizations that view financial-related risks as a major concern identify liquidity and credit risks as having the most significant potential impact on their earnings over the next three years. Forty-six percent have similar concerns about interest rate risk. Just over a quarter (27 percent) believes that currency/foreign exchange risk will have a significant impact on their earnings.
Liquidity risk is a bigger concern for smaller organizations than for those with annual revenues greater than $1 billion, even though larger organizations tend to have greater earnings exposure from currency/foreign exchange risk. This could be due to larger organizations’ longer supply chains and larger international customer base.
MITIGATING/MANAGING RISKS
Executives surveyed cite lack of data and tools to interpret it as barriers to mitigating risks. In fact, nearly half of organizations surveyed have invested in IT system upgrades as a risk mitigation strategy. Meanwhile, to moderate the risk of earnings uncertainty, 31 percent of organizations have increased their use of hedging and 30 percent have increased their use of contractual risk transfer (including through the use of insurance).
When managing risk exposures, the two most important factors that executives cite are cash flow predictability (74 percent) and performance forecasts (65 percent). Other considerations are the organization’s reputation (45 percent), solvency (29 percent), preservation of bond covenants (25 percent) and preservation of debt rating (22 percent).
ABOUT THE SURVEY
In October 2011, AFP surveyed its senior level corporate practitioner membership about uncertainty and the way their organizations manage risk. The survey was sent to AFP members with job titles of CFO, treasurer, controller, vice president of finance and assistant treasurer, along with member subscribers to AFP’s Risk! newsletter. The 4,436 surveys sent to this group generated 365 responses. AFP also sent surveys to non-members with similar job titles, generating an additional 71 responses for a total of 435 responses.
Read the 2012 AFP Risk Management Survey (PDF): www.afponline.org/risksurvey
ABOUT AFP® (afponline.org )
The Association for Financial Professionals (AFP) is the daily resource for a network of more than 16,000 treasury and finance professionals. Headquartered outside Washington, DC, AFP provides members with news, economic research and data, treasury certification programs, networking events, financial analytical tools, training, and public policy representation before legislators and regulators.
AFP's global reach extends to over 150,000 treasury and financial professionals worldwide, including AFP of Canada; London-based gtnews, an on-line resource for the treasury and finance community; and bobsguide, a financial IT solutions network.
About Oliver Wyman
With offices in 50+ cities across 25 countries, Oliver Wyman is a leading global management consulting firm that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, organizational transformation, and leadership development. The firm’s 3,000 professionals help clients optimize their businesses, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is part of Marsh & McLennanCompanies [NYSE: MMC]. For more information, visit www.oliverwyman.com
About the Global Risk Center
The Global Risk Center is Oliver Wyman's research institute dedicated to analyzing increasingly complex risks that are reshaping industries, governments, and societies. Its mission is to assist decision makers to address these risks through research and insights that combine our rigorous analytical approach to risk management with leading thinking from research partners.
The 2012 AFP Risk Management Survey asked CFOs, corporate treasurers and other senior finance executives about risks that worry them now, those most likely to cause uncertainty in the next three years, and actions they are taking to mitigate those risks. It is the first in a series of annual risk-management surveys to be published with collaboration from the Global Risk Center of the Oliver Wyman Group.
Three quarters (72 percent) of responding organizations said their top to concern is managing financial uncertainty, including the risks associated with credit, liquidity, interest rates and currency/foreign exchange. Respondents also cited risks associated with macroeconomic conditions—such as the pace of economic growth and inflation (38 percent)—and business/operations risks such as supply chain and/or production disruptions, litigation, labor and outsourcing (36 percent). External risks (country, regulatory, natural disaster) and commodity risks (power/heat, crude oil & distillates, agricultural and metals) are also concerns for a significant share of organizations, but to a lesser degree. A full 41 percent of respondents expect even more earnings uncertainty in the coming years.
"Uncertainty is here to stay," said Jim Kaitz, AFP's president and CEO. "One way organizations can take control of rising uncertainty in their earnings is by adopting a new mindset and making more risk-adjusted decisions. The ones that do this effectively will have a competitive advantage.”
“Most of the critical variables that companies need to consider in developing their short and long-term strategies are becoming increasingly difficult to forecast,” said Alex Wittenberg, Oliver Wyman Partner and head of Global Risk Center. “This survey illustrates that long-term macroeconomic and environmental trends such as those discussed in the 2012 Global Risks Report are already having a significant impact on companies’ strategies.”
The 2012 Global Risks Report is produced by the World Economic Forum in collaboration with the Oliver Wyman Group division of Marsh & McLennan Companies and other partners. It will be the focus of special sessions at the World Economic Forum Annual Meeting 2012 in Davos, Switzerland, taking place on 25-29 January.
More than half of organizations that view financial-related risks as a major concern identify liquidity and credit risks as having the most significant potential impact on their earnings over the next three years. Forty-six percent have similar concerns about interest rate risk. Just over a quarter (27 percent) believes that currency/foreign exchange risk will have a significant impact on their earnings.
Liquidity risk is a bigger concern for smaller organizations than for those with annual revenues greater than $1 billion, even though larger organizations tend to have greater earnings exposure from currency/foreign exchange risk. This could be due to larger organizations’ longer supply chains and larger international customer base.
MITIGATING/MANAGING RISKS
Executives surveyed cite lack of data and tools to interpret it as barriers to mitigating risks. In fact, nearly half of organizations surveyed have invested in IT system upgrades as a risk mitigation strategy. Meanwhile, to moderate the risk of earnings uncertainty, 31 percent of organizations have increased their use of hedging and 30 percent have increased their use of contractual risk transfer (including through the use of insurance).
When managing risk exposures, the two most important factors that executives cite are cash flow predictability (74 percent) and performance forecasts (65 percent). Other considerations are the organization’s reputation (45 percent), solvency (29 percent), preservation of bond covenants (25 percent) and preservation of debt rating (22 percent).
ABOUT THE SURVEY
In October 2011, AFP surveyed its senior level corporate practitioner membership about uncertainty and the way their organizations manage risk. The survey was sent to AFP members with job titles of CFO, treasurer, controller, vice president of finance and assistant treasurer, along with member subscribers to AFP’s Risk! newsletter. The 4,436 surveys sent to this group generated 365 responses. AFP also sent surveys to non-members with similar job titles, generating an additional 71 responses for a total of 435 responses.
Read the 2012 AFP Risk Management Survey (PDF): www.afponline.org/risksurvey
ABOUT AFP® (afponline.org )
The Association for Financial Professionals (AFP) is the daily resource for a network of more than 16,000 treasury and finance professionals. Headquartered outside Washington, DC, AFP provides members with news, economic research and data, treasury certification programs, networking events, financial analytical tools, training, and public policy representation before legislators and regulators.
AFP's global reach extends to over 150,000 treasury and financial professionals worldwide, including AFP of Canada; London-based gtnews, an on-line resource for the treasury and finance community; and bobsguide, a financial IT solutions network.
About Oliver Wyman
With offices in 50+ cities across 25 countries, Oliver Wyman is a leading global management consulting firm that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, organizational transformation, and leadership development. The firm’s 3,000 professionals help clients optimize their businesses, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is part of Marsh & McLennanCompanies [NYSE: MMC]. For more information, visit www.oliverwyman.com
About the Global Risk Center
The Global Risk Center is Oliver Wyman's research institute dedicated to analyzing increasingly complex risks that are reshaping industries, governments, and societies. Its mission is to assist decision makers to address these risks through research and insights that combine our rigorous analytical approach to risk management with leading thinking from research partners.
