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The 2009 Ernst & Y oung business risk report The top 10 risks for global business In collaboration with: “Risk management is About this report based on the notion that Ernst & Young continues to be heavily engaged around the world in seeking to identify leading practices in the area of risk management. Properly approached, the process of risk history repeats itself, management can add value even if, fortunately, the feared events never happen. In working through scenarios and impact analysis, companies may find many opportunities to tighten but not quite.” processes and controls that can make them more agile and able to operate more effectively, in whatever market conditions arise. Peter L. Bernstein Our work with companies around the world suggests that there is a body of leading risk management practice emerging, but that many companies are still doing too little in this area. Our research has shown that, while strategic risks have become more important, companies have been focusing on the easier-to-manage areas of operational risks. In looking to general practice, the implications for different sectors can be blurred. One person’s challenge is frequently someone else’s market opportunity. Even within each sector, the risks for each company may vary. Risk management must be carried out at the company level. We have consulted widely but this is not an exhaustive list of risks. Inevitably it is a snapshot of the risks we see at this time. We encourage you to read this report in a questioning manner. Do you agree with the risks? How do they impact you? We hope that some of the risks identified surprise you and some of the weightings that we attached to them in the rankings differ from those that you would apply. You should have your own equivalent of a risk radar and your own ongoing dialogue around this, within your own organization. We believe that company leadership must: • Conduct an annual risk assessment that defines key risks and weights probability and impact on business drivers. The risks in this report can provide the start of that process • Such a risk assessment needs to go beyond financial and regulatory risk to consider the wider environment in which the organization operates and the full extent of its operations • Conduct scenario planning for the major risks that they identify and develop a number of operational responses (possibly as part of the planning cycle) • Evaluate the organization’s ability to manage the risks that they identify — in particular ensure that the risk management processes are linked to the actual risks that the business faces • Have effective monitoring and controls processes to give both earlier warning and improved ability to respond • Keep an open mind about where risks can come from. Sometimes, of course, the risks that we fear actually come to pass. Few of the risks that have devastated the financial services sector and badly hurt the wider economy were unpredictable — economic bubbles generally burst. It is now, in the hardest of times, when seeking to gain opportunity from adversity, that we will see the evidence of effective risk management and those companies which mastered it. The 2009 Ernst & Young business risk report — The top 10 risks for global business Contents Introduction 2 The Ernst & Young business risk radar 4 Executive summary — the global top 10 5 Scanning the sectors 7 Identifying the global top 10 10 Methodology 10 Starting a conversation 10 Risk impact matrix 10 The Ernst & Young organizational value framework 11 The top 10 business risks 12 1. The credit crunch 12 2. Regulation and compliance 14 3. Deepening recession 16 4. Radical greening 18 5. Non-traditional entrants 20 6. Cost cutting 23 7. Managing talent 25 8. Executing alliances and transactions 27 9. Business model redundancy 29 10. Reputation risks 31 What’s below the radar? 33 Below the radar — the next five 34 Appendix: Participants 36 Contacts 37 The 2009 Ernst & Young business risk report — The top 10 risks for global business Introduction Risk in a volatile world 2008 was a traumatic year for the global economy. A decade of global economic growth has come to a sudden, grinding halt. The financial services sector has been forever transformed through collapse, write downs and forced government intervention. The flood of credit and funding to fuel the global economy has dried to a drip. Property has seen boom and now bust. Energy prices have hit new heights before crashing, and currencies and interest rates have tumbled almost overnight. Even the engines of the emerging markets have spluttered and slowed. In such a market, it can seem trite to talk about business risk. After all, a risk is not a risk if it has happened. To us, however, there has never been a more appropriate time to talk about business risk. Indeed perhaps now, more people will be inclined to listen and participate in this critical debate. Each of the events that has happened in the past 12 months could, and might, repeat itself. Another global financial institution could crash. The enacted and planned solutions could fail to work. The present recession could turn into a future slump. The world is no more predictable now than it was in 2007, indeed volatility has increased. Business risk has consequently increased. It is also worth remembering that risk is never static. It is in a constant state of evolution. Risk management must always be seen against the business objectives that are sought. The risks to business today are clearer and fewer than the risks arising next week. They are also different. The massive government interventions in the financial sector may have, for now, prevented even more calamity but the consequent regulation brings a new set of risks. History teaches us that consequences can often be worse than the cause but the lessons will differ and may well be new. And since performance is always relative, management action matters. In a fast growing market, annual growth in double digits can rightly fail to impress whilst in a falling market, maintaining last year’s performance can be the mark of business genius. A rising tide may float all boats but not all ships run aground when the tide retreats. Companies might focus on cost containment and cash management but not all will perform equally well. For every distressed sale, there must be a buyer and there are few more effective competitive actions than to buy your competitor. There are companies, funds and individuals who cashed out at the peak, who paid down their debt and who are well-positioned to take advantage. Winners often make their own luck. 2 The 2009 Ernst & Young business risk report — The top 10 risks for global business In the current climate, it is imperative for companies to form a strategic view of the risks Risk management that they are facing and develop their thinking about the necessary action required should the event they fear actually happen. Risk management needs to be taken back from the compliance function into the boardroom. Companies need to enhance their capability to In leading organizations, proactively identify these risks with a rigorous and disciplined approach. Management risk management is viewed not needs to be alert and nimble, prepared to define their risk appetite and tolerance, and as a process, but rather as a monitor it. It should be cautious and focused. And it must take action. After all, we must ‘management competency’ — all cross the road; the mistake is to stand still when you see the headlights. a discipline that adds rigor and Many people have been involved in developing this report. As we did for the 2008 report, enables the enhanced management we have taken a bottom-up approach to our work, asking each of our global sector groups of uncertainty and volatility, and the analysts from Oxford Analytica to form a view of the major risks that face their effectively minimizes threats sectors. These will be produced in separate sector reports. They also, however, provide and capitalizes on opportunities. the foundation for this report. Work started in July 2008 and we were in the midst of Companies at the height of compiling our overall assessment of business risk when the events of September 2008 performance in their respective happened and the financial landscape was transformed. We have taken our own medicine industries have embedded this and subsequently gone back to our sector groups and analysts and refocused our views. competency into their business Recognizing the current pace of change and continually responding and adapting practices to effectively manage risk to it, is an integral part of the risk management process. across the continuum — moving beyond a traditional focus on What follows is not a prediction for the global economy in 2009. That is neither the controls and compliance, to create purpose of this report nor how it should be used. The 10 risks we highlight and those a competitive advantage. that fall just under the radar were selected through the frequency with which our sector groups and analysts identified them. We recognize that at the time of writing, economies are in a state of flux. These risks may not turn out to be the top 10 risks to the global economy, and they almost certainly will not be the top 10 risks for any particular company, but we hope that they serve to fuel the discussion about risk that needs to happen in each company, now more urgently than ever. The 2009 Ernst & Young business risk report — The top 10 risks for global business 3 The Ernst & Young business risk radar The Ernst & Young risk radar is a simple device that allows us to present Risk weighting and a snapshot of the top 10 business risks across the 11 industry sectors risk prioritization we covered. The risks at the center of the radar are those that the analysts we interviewed thought Phase 1: would pose the greatest challenge to industry-leading global businesses in the years ahead. • We interviewed more than 100 The radar is divided into four sections that correspond to the Ernst & Young Risk industry commentators representing 11 sectors and more than 20 Universe™ model. Compliance threats originate in politics, law, regulation or corporate academic disciplines, asking each governance. Financial threats stem from volatility in markets and the real economy. Strategic threats are related to customers, competitors, and investors. Lastly, Operational interviewee to identify the top threats impact the processes, systems, people and overall value chain of a business. business risks for 2009. We asked the panelists to focus on risks for the “leading global firms” in their sector. We also asked each expert to The top 10 business risks Key to symbols provide commentary on why each risk was important, how each risk Up from 2008 had changed since last year, and which of a company’s value drivers C Down from 2008 each risk might impact. l o m cia pl New entry • Based on these interviews we drew n ia up ‘long lists’ of between 20 and 40 ina nc F e risks for each sector. Phase 2: The credit crunch • In order to prioritize the top risks Regulation and for each sector, we interviewed Deepeningrecession compliance panels of sector experts including CEOs, strategy planning executives, Cost cutting analysts, journalists in trade Non-traditional publications, advisors and our entrants own Ernst & Young practice Business professionals. We asked each model redundancy Radical greening Managing panelist to provide their own ranking talent of the top 10 risks for their sector, St ns as well as up to five ‘below the radar’ra io risks that may emerge to threaten te Executing at g i alliances and er the performance of industry- c transactions Reputation O p leading firms in the years ahead. risks The panelists’ ratings were aggregated to select the final top 10 risks for each sector. • The risks that were rated as having the greatest impact across the largest number of sectors were identified as the top 10 risks for global business in 2009. 4 The 2009 Ernst & Young business risk report — The top 10 risks for global business Executive summary — the global top 10 The top 10 Aggregating our interview results worldwide and across the sectors, Ranking from 2008 in brackets the top 10 business risks for multinational firms that are leaders in their industries are: 1 The credit crunch (2) 1 The credit crunch 2 Regulation and compliance (1) 3 Deepening recession (New) The credit crunch and its aftershocks pose existential threats to leading global firms in asset management, real estate, insurance and banking, while capital-intensive sectors 4 Radical greening (9) such as life sciences and power and utilities are under pressure from a tighter credit environment. (Rising from Number 2 in the 2008 report.) 5 Non-traditional entrants (16) 6 Cost cutting (8) 7 Managing talent (11) 2 Regulation and compliance 8 Executing alliances and transactions (7) Regulatory risk — last year’s number one threat — remains near the top of the list. This risk may not have such an obvious impact as the global credit crunch, but regulatory risks 9 Business model redundancy (New) continue to be keenly felt at leading firms in sectors such as life sciences, telecoms, oil and 10 Reputation risks (22) gas and power and utilities. Furthermore, uncertainty regarding the regulatory response to the global financial crisis has caused this risk to become more important in asset management, banking and insurance. (Falling from Number 1.) 3 Deepening recession The global financial crisis and house price declines have delivered a shock to consumer confidence and sparked capital flight from emerging markets, raising the specter of a retraction in developed economies becoming a truly global recession. (New this year.) 4 Radical greening Environmental and sustainability challenges continue to escalate, most dramatically in carbon-intensive sectors such as automotive, real estate, oil and gas, and power and utilities. The change of administration in the US raises the possibility of concerted government regulation. (Rising from Number 9.) The 2009 Ernst & Young business risk report — The top 10 risks for global business 5 Non-traditional entrants 8 Executing alliances and transactions New competitors are emerging from adjacent markets and distTightening credit conditions have lessened the pace of M&A geographies. National oil companies now compete with the maactivity. Yet alliances and partnerships remain crucial to the in oil and gas; banking, insurance and asset management companiesbusiness strategies of leading firms in sectors such as telecoms, now compete for the same customers; as do internet, telecomlife sciences, utilities and media. Furthermore, the financial crisis media companies; and emerging market companies are more has led to sudden and dramatic ‘rescue mergers’ for which due competitive in the automotive sector. (Up from Number 16.) diligence must be undertaken after the fact. (Falling from Number 7.) 6 Cost cutting 9 Business model redundancy With the global economy slowing, cost containment is now crucial to survival in sectors such as automotive, media, and consuIn sectors such as asset management, life sciences, media, products. It is impacting both suppliers and consumers. (Riand telecoms, technological change and industry transitions from Number 8.) are making long-established business models obsolete, forcing industry-leading firms to reinvent their corporate strategies and structures. (New this year.) 7 Managing talent 10 Reputation risks What was the “war for talent” is now more complicated: attracting talent is still important, but so is retaining key talent during a downturn and (especially in banking) the intensifying debatNot only the reputations of firms but those of entire industries are over compensation structures that are misaligned with risk increasingly under threat. Environmental and climate concerns management or longer-term returns. (Rising from Number 11.)threaten oil and gas and utilities companies; pressures to provide wider access to life-saving drugs threaten funding for innovation in life sciences; and the credit crunch is weakening public trust in banking and asset management companies. (Up from Number 22.) 6 The 2009 Ernst & Young business risk report — The top 10 risks for global business Scanning the sectors We present (overleaf) the results of our scan of business risks for each of the 11 core sectors. In order to make the results more comparable, we asked the analysts we interviewed to focus on the challenges faced by the leading global multinationals in their respective sectors. Even with this focus on the largest companies, we expected and found dramatic variation in the most important business risks from sector to sector, region to region, and of course, from firm to firm. This variation is indeed evident in the risk radars for 2009. Consider the extent to which regulatory and compliance risk (our number two risk in this report) varies from sector to sector. Leading oil and gas companies face “political constraints” on access to reserves as well as “uncertain energy policy,” while life sciences firms struggle to manage “pricing/ reimbursement pressures,” and asset management firms are vulnerable to “geopolitical, macroeconomic, or regulatory shocks”. In a similar vein, risks stemming directly from the credit crunch (risk one) appear as “significant shifts in the cost/accessibility of capital” for utilities, “capital access and capital allocation” for life sciences, “responding to the market crises” in asset management and, simply, “global financial shocks” in banking. Indeed, this variation extends to the impact that the same developments can have for a sector. Global economic fluctuations are primarily a financial risk for the real estate sector but seen as a strategic risk for media and entertainment, for example. Scanning the sectors, most risks are concentrated in the ‘strategic’ and ‘operations’ segments of the radar — indeed, in most sectors, at least seven out of the top 10 risks are in these areas. Only in banking, real estate, and oil and gas are as many as four of the risks located in the other two quadrants. These sectors are heavily exposed to uncertainties resulting from either the global financial crisis, regulatory intervention, or both. Still, it is notable that in every sector, at least one of the top 10 risks falls in each of the four quadrants. This highlights the importance of taking a broad view of risk issues — which could emerge from any part of the enterprise and its activities. Leading organizations scan the environment to identify emerging risk issues. They expand the scope of consideration throughout the value chain to suppliers, customers, business partners and key stakeholders to identify and define emerging risks and opportunities. The 2009 Ernst & Young business risk report — The top 10 risks for global business 7 The Ernst & Young industry sector risk radars Asset management Automotive Banking Co Co C o ial m p il m p il Corporate m p nc ia nc ia n c governance ia a n a n a and internal n i Competition from e i Impactof e in Shifts inownership: control failures ce F other areas of F currencyvolatility F consolidation, ﬁnancial services private equity andSWFs Geopolitical, Credit crisis Compliance risks Regulatory and macroeconomic or and liquidity Global ﬁnancial shocks compliance risk Accelerated pace regulatory shocks of change in Rapid shifts in the industry Dealing with the consumer preferences Costcontrol Geopolitical and Over reliance market crisis Risk macroeconomic shocks on ﬁnancial Model risk of doing Managing risks models Prolongedreduction Industryrestructuring, business in across the Reputation risk in investors’ Poor execution transaction integration emerging value chain risk appetite Threatsto of globalization and globalcapacity markets Poor executionthe reputation strategies re-alignment Competition from IT risks S of M&A of the industry s S Inability to s S non-banks offering s tr n t Selecting attract and n r banking services n a ti ra alternative retain knowledge i a Humancapital risks, tio teg ra te propulsion andkey rat teg including misaligned ra ic Missing growth pe gic systems competencies e ic compensation structures pe opportunities O during the O p O industry transition Consumer products Insurance Life sciences Co m Co m C om ial p il p il p nc ia nc ia n c Protecting and ia na nc na Legal risk nc na capturing thevalue nc Fi Capital market Legal and e Fi e Fi of intellectual property e andforeign regulatory threats Financial shocks anda currencyimpact continuation of the credit crisis Radical greening, sustainability and climate change Capital access Demonstratingvalue Regulatory intervention and capital allocation amid pricing/ Consumer demand shifts Climate change reimbursement pressures Demographic shifts andcatastrophic Speed ofthe in core markets events Safe products Increased new product R&D productivity Global retailer Pricing pressures development supply consolidation and increasing process Emerging markets Model risks Enabling access chain raw material costs Geopolitical shocks Managing the integrity underwriting cycle Lossof reputation Revolutionizing S Marketing s S s S business models s tr and branding n r n r n at Failure ofM&A White label ti at ti at tio eg growth/private ra eg Channel management ra eg Sustaining a culture ra ic label growth pe ic pe ic of innovation pe O O O 8 The 2009 Ernst & Young business risk report — The top 10 risks for global business Media & entertainment Real estate Oil and gas Co Co Co al m a l m a l m ci pi ci pi ci Price volatility pi an an an an an an i Corporate governance ce in Pricing uncertainty e in e F and internal controls F F Global economic and Worsening ﬁscal terms Climate and Allocating investments between market ﬂuctuations environmental concerns traditional/mature media and new/emerging media Asset exploitation and Continued uncertainty Uncertain energy protection (including piracy and impactof Economic vulnerability policy Consumer and IP rights) the credit crunch andregulatory risks Accesstoreserves: Shifting advertising demand in developing markets political constraints shifts Monetization ofnew and competitionfor dollars business models and Impactof aging Globalwar proven reserves managing the or inadequate for talent Humancapital deﬁcit New market M&A activityand infrastructure infrastructure Increasing Overlapping service entrants and the entryof private equityto support them energy costs offerings for IOCs impact on the and oilﬁeld value chain Changing Inability to service companiesCostcontainment S Economic downturns s S demographics ﬁnd and s S Supply shocks s ta andresultant ion ta exploit global in ta in te costcontrol and at te non-traditional at te at g i reduction efforts er g i opportunities er g i Aging oil er c O p c Green revolution, O p c and gas O p Emerging markets sustainability and infrastructure climate change Telecoms Utilities C C l om l om cia pl cia pl an an an ian i Privacy and c i Compliance and c F Inaccuracy in security risks e F Signiﬁcant shifts regulatory risks e forecastingreturns in the cost/accessibility from technology of capital and infrastructure investments Regulatory risks Political intervention in power and Inability to utilities markets Inability to Failure togenerate respondto market Implementing manage consolidation Losing ownership sustainable cash liberalization/deregulation low-carbontechnologies and M&A of the client ﬂows from new Accessto business models competitively priced long-term fuel supplies Inability tocontain Poorly-managed andreducecosts strategic partnerships Inability toachieve Expanding,renewing sufﬁcient scale and maintaining network S s S infrastructures tra Attracting on tra on te and managing Inappropriate t e ti g talent and processes and e r g Managing era ic intellectual capitalystems to p ic planning Pressure on the p support newO and public power generation O business strategies acceptance riskequipment supply chani The 2009 Ernst & Young business risk report — The top 10 risks for global business 9 Identifying the global top 10 Instead, this list should be interpreted as a part of an ongoing Methodology By aggregating the findings of our research in 11 sectors, conversation about business risk — a conversation that has been ongoing for several years. This conversation is about how we have produced a list of the 10 most important business risks across the sectors — concerns that will be common to the companies approach risk management. How frequently are companies scanning their horizons and with what scope? Consider leading firms in many industries. These top 10 risks are the focus of this report. the risks we highlight in this report, and the sector reports and compare them to the top risks facing your firm. Are the risks on The table below shows the relative importance of the top 10 the global list similar to those you are monitoring? Are they the business risks across the 11 sectors that we studied, and thus the top risks? Have the analysts missed anything important? method we used to select and rank the risks. The risks at the top of the chart are those that are expected to have the greatest impact Our research suggests that, not surprisingly, the global financial across the largest number of sectors. According to the analysts we crisis was the most important strategic risk development of 2008, interviewed, these risks will do the most to influence markets and and that the resulting credit crunch will continue to be the top risk drive corporate performance in 2009 and beyond. driver for 2009. A review of the impact matrix shows why this is the case. Unsurprisingly, global financial shocks feature directly as the top risk in banking, insurance and real estate. The credit Starting a conversation This list should not be interpreted as a financial or quantitative crunch is also indirectly responsible for higher regulatory risks in the financial services sectors. Similarly it is also the underlying analysis of the risks facing an ‘average’ global firm. Indeed, there is no such thing as an ‘average’ firm: risks vary from sector source of the risk of a deepening recession, which is rated as risk two this year. Indeed, the direct and indirect impacts of the crisis to sector and from firm to firm and are dependent on a company’s objectives. To cite just one example, the top risks facing a major are large enough to feature in the top 10 in almost every sector. state-owned oil company are very different from the risks facing In the following section, we explore the global top 10 risks that an international oil company, even if both are of comparable size have emerged from our study, and we share the thinking of some and are leaders in the same sector. of the leading analysts to whom we have spoken. Risk impact matrix Industries maAnssgAumenBankioductsInsu fe enMedia andeil anleca UtilitImpact scale t motiv nsumra sciert al Critical g nc ainment om s r e s s High e es Medium Moderate 1 The credit crunch 2 Regulation andcompliance 3 Deepening recession 4 Radical greening s5 Non-traditional entrants R6 Costcutting 7 Managing talent 8 Executing alliances and transactions 9 Business modelredundancy 10 Reputation risks 10 The 2009 Ernst & Young business risk report — The top 10 risks for global business The Ernst & Young organizational value framework In the current market environment, scarce corporate resources should be allocated on the most efficient basis in order to create and protect shareholder value. The Ernst & Young value framework presents a structure to align key risks to business objectives and value drivers to drive such an allocation process. The framework is intended to support a sustainable and embedded management discipline to drive focus on the key risks and support improved performance against business objectives. We asked the analysts we interviewed to apply this framework to identify the value drivers that will be most crucial for firms responding to the risks identified in the report. This commentary appears in the risk narratives that follow. Business objectives and value drivers 2009 top 10 business risks Expand product offering Revenues and Credit crunch market share Expand into new markets es Regulation andcompliance Deepening recession s Deliver superior customer service risk Radical greening Reputation and brand to business objeciv Provide high s to Non-traditional entrants quality products ve the risktcutting obofcti ss e Maximize return on capital nc Managingtalent Asset and ca capital management Executing alliances and transactions Maximize beneﬁts from technology investments Link busine the signiﬁess modelredundancy te Reputation risks Optimize operating efﬁciency alua Earnings and Ev Achieve costoptimization operating margins Attract and retain top talent 11 The 2009 Ernst & Young business risk report — The top 10 risks for global business The top 10 business risks 1 The credit crunch Point of view Several of the insights from analysts we interviewed in Spring Steps companies can take to respond to this risk include: 2007 (for last year’s Business Risk Report) were remarkably • Developing safeguards to minimize the effect of tail risk prescient in anticipating the evolution of the global financial crisis — high loss, low frequency outcomes — on the financial during 2008. One analyst, anticipating the problems of counter well being of the organization. Any realistic analysis of party risk that would, more than a year later, compel US regulators the credit crisis must incorporate the failure of models to nationalize the insurer AIG, wrote in our 2007 report that: adequately to capture and anticipate the impact of the “A crisis in CDO/structured finance markets could lead to potential credit crunch. The crises offer a chilling reminder that systemic problems.” In a similar vein, anticipating the bailout for tail risk and how to correlate it to a business model are the US banking system that took place in Fall 2008, Jens not well understood. Approaches must be developed that Tholstrup, Executive Director and Director of Consulting at Oxford provide distributions of outcomes that can be used to Analytica, wrote that “the failure of one or more major financial assess exposure to tail risk. institutions remains a real worry and could turn the crisis into • In the near-term, changing business plans to obtain systemic failure in the year ahead.” cash on the balance sheet in order to trade on higher Over the course of 2008, the impacts of the credit crunch multiples. That is to say, adopting a capital oriented continued not only to deepen but also to spread. The financial business plan and focusing on obtaining cash rather contagion moved from sub prime mortgages, to the banking than growth. sector, to monoline insurers, to investment banks, to the insurance • Setting up a Program Management Office as part of sector, to credit derivatives and beyond. At the time of writing this a systematic approach to managing risks related to the report, the chain of escalating crises that had threatened to cause credit crunch. Specific program aspects can include: a systemic collapse in the global financial system appears to have been interrupted by aggressive bank recapitalization programs cost cutting, improving cost management, upgrading the financial competence of the company and enhancing pursued in countries worldwide. However, the credit crunch itself is lending relationships. expected to continue to pose a serious threat, as banks continue to reduce lending. (As to where the financial crisis might spread next, the most frequently expressed concerns of analysts we interviewed this year were a sudden loss of value of the US dollar or a severe collapse in the hedge funds sector.) The credit crunch ranks as the top risk this year because of its extraordinary and direct impact as well as its unpredictable evolution. The credit crunch and attendant crises in property and financial markets have posed existential threats to firms in asset management, insurance and banking, forcing some of the leading global companies in these sectors into insolvency. In many other sectors, lack of credit is undermining business activity: “Lack of credit has paralyzed the transaction sector of the real estate industry,” as one analyst noted. In addition to contributing to volatility in the financial, currency and property markets, for many companies, the credit crunch will be felt as a severe financial management challenge in the year ahead. “The ability to secure capital can dictate a company’s business model, ultimately impacting its capital structure and asset efficiency,” as Yali Friedman, Managing Editor of the Journal of Commercial Biotechnology, noted. 12 The 2009 Ernst & Young business risk report — The top 10 risks for global business A B / Navigating the credit crunch have become increasingly complex. The survey indicated that there will be In addition, a number of complicated more pain ahead, and that industry ‘alternative asset’ classes, such as privateprofessionals across the board are going equity and infrastructure have emerged. to feel it. Although the majority of respondents believed that the credit A Michael Straneva, Ernst & Young The problem associated with some of the Mike is the Americas Director of the complex securities and debt structures is markets will begin to emerge during 2009, the implication is that the process Ernst & Young’s Transaction Real Estate that we don’t fully know what all the risks of restoration could take months longer. group. With more than 25 years of are. This has created an environment of experience, Mike focuses on real estate uncertainty, which has virtually brought Respondents expected commercial real appraisals and valuation, transaction estate values to decline — by perhaps as lending to a stand still. The restrictions much as 20% or more but at least by 10%. due diligence, portfolio analyses and on the availability of credit and the structuring, project feasibility and market short-term inability to deploy capital Implications analyses, and litigation support services. at acceptable levels of return have The current crisis is negatively impacting B Richard Sinkuler, Ernst & Young paralyzed the transaction sector — residential and commercial asset values, Rick is the Global Markets leader for as transaction volume around the world company liquidity, and availability of the Real Estate sector group. He has has skidded to a halt. credit. Everyone is trying to conserve more than 20 years of real estate capital. Companies are also taking industry experience, including valuation, No matter where you reside, world market analysis, financial restructuring, economies are finding out that they advantage of opportunities that exist. are much more highly correlated to When things are going really well, it tends litigation support, and transaction due to mask organizational inefficiencies. diligence work. each other than originally anticipated — particularly during tough economic times. Smart companies are asking how they The economic landscape Other global trends are putting additional can eliminate the duplications and The world economy has entered some inefficiencies inherited when growth pressure on businesses and consumers, new and precarious territory. No region including rising energy costs, was strong. As things turn around, will be fully immune. The fallout from globalization, increased regulation they can then be in a position to hit the the US credit crisis has spread to ground running. and risk of political and social unrest. housing markets around the world. As a result, consumers have retreated. With unprecedented challenges, come Global house prices fell for the first time Global economic forecasters have historical opportunities…for some. Smart on record towards the end of 2008, revised their GDP estimates downward. lenders will be looking to move real estate underlining the extent of the downturn. Governments are now working together related assets off their books very quickly Fears about rising default rates and to restore confidence and get consumers while forward-thinking companies will declining property values, which engulfed and businesses moving again. develop strategies to take advantage of the home mortgage market at the start distressed asset and debt situations. of the credit crisis, are spreading to the Reality check survey Ernst & Young and Globest.com, an Overall, there may be a lot of capital commercial real estate market; many feel waiting to deploy when the time is right. the worst is yet to come with respect to Incisive Media Website, polled clients Consolidation will likely take place as the commercial real estate values. and subscribers (15-17 October, 2008) to take their pulse on a number of industry reshapes itself in response to There is no question that the global changing global economic and market significant real estate issues now in play. conditions. Whether you’re an owner, impact of the subprime meltdown More than 2,300 global real estate exceeded most expectations. Debt executives responded. investor or developer, now is the time to structures and investment vehicles get your house in order. The 2009 Ernst & Young business risk report — The top 10 risks for global business 13 “The impacts of regulatory intervention are spread across a firm’s value drivers — which in part accounts for the risk’s continued high ranking in our global list.” 2 Regulation and compliance Point of view Regulation and compliance, the second-greatest risk for 2009, Steps companies can take to respond to this risk include: encompasses many issues: the increasing political restrictions that • Prioritizing this risk appropriately. “This is a strategic prevent oil and gas firms from gaining access to proven reserves, issue when it results in certain companies being treated regulatory intervention into pricing in power and utilities and unequally. [Telecoms companies] have not been very telecoms, and the regulatory response to the current banking good at handling regulatory issues, leaving them to crisis, which will affect the operational and competitive lawyers and not seeing them as a strategic issue,” environment for the financial services industry. wrote one Ernst & Young panelist. Regulatory and compliance risk was the top global cross-sector • Adopting a proactive stance. Regulatory and compliance risk in the 2008 report. For 2009, although the credit crunch risks are usually narrowly defined and technical, dominated the headlines, regulatory risks continued to rise in and there are few experts in these areas within most organizations. Hence there is a tendency for companies importance in many sectors. The political and regulatory response to the credit crisis has already been extraordinarily far-reaching, to be reactive to these risks, except in the most well including banking nationaliza
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