The risks for businesses and earning uncertainties are here to stay, a survey by Marsh & McLennan Companies shows. Regulatory uncertainty and increasing competition mean that businesses sometimes need to make decisions without all the relevant facts at their disposal. Techniques to mitigate uncertainties, such as modifying product ranges and creating new partnerships, are seen as ways to offset risks.
In its recently released report “2015 AFP Risk Survey”, supported by Marsh & McLennan Companies, the Association for Financial Professionals (AFP) surveyed its senior level corporate practitioner membership to identify the major risks and uncertainties affecting the financial services industry. The survey finds that two major factors are confounding each other, with earnings uncertainty and risk forecasting remaining an enduring issue for businesses across all industries. That there are risks in business is part of the condition insurance companies continue to profit from on average. The scale and kinds of risks have, however, expanded in recent times and remain persistently uncontrollable, with the development of new ecosystems and their inherent vulnerabilities, seemingly ever more complex strategies are needed to mitigate unfavourable outcomes.
While the report highlights the developing risks born from new technologies, the role of earnings uncertainty continues to be an issue for many companies. 43% of companies indicated that earnings uncertainty had grown over the last three years, with a comparable number indicate the level of uncertainty is unchanged. While the number of respondents that indicate uncertainty has grown is down from its 2013 high of 59%, the number of respondents indicating that their business now has more certainty is at a mere 14%. The results show that 86% of respondents see the same or higher levels of earnings uncertainty, with a similar trend to past years, suggesting, according to the authors, “that earnings uncertainty has become the new normal.”
The road trip to uncertainty
The top factors implicated in presenting uncertainty haven’t changed greatly since the previous years’ surveys. In the 2014 survey the most prominent conditions driving uncertainty were financial factors, cited by 26% of respondents, external factors, cited by 25%, and business/operations factors, cited by 23%. This year the order of the factors changed but the overall picture and relative weights remains close, with business/operations indicated by 25% of respondents, followed by financial factors indicated by 24% of survey respondents and external factors indicated by 20%.
These factors can be further broken down into the specific issues that businesses face. Highest among these is political/regulator uncertainty, with 44% of respondents indicating this as a risk for their future projections. Tougher competition too ranks highly at 38%, while satisfying and retaining customers came in at 37%. Tax risks and natural disasters were the lowest ranked, at 8% and 7% respectively. These risks are also not likely to go away according to the respondents. On being queried about the state of risks in the coming period, the consultancy found that 46% expect the risks to be greater, 38% the same and just 16% see stability at the end of the tunnel.
Given the earnings uncertainty that most firms now exist with on a daily basis, 65% of companies have adopted risk mitigating strategies, hoping to take advantage of opportunities created between their strengths and the business environment. To meet key risk factors, the survey found that companies are focusing on improving their competitive stance and offerings. With 69% said to be adjusting product line offerings, and 62% creating new supply chain partnerships. Further, 59% of companies indicate that they are increasing their capital expenditure, expanding their workforces and re-prioritizing their geographic markets. Increasing insurance covered was seen as a proactive response by 46% of those surveyed, with the lowest ranked divesting business assets at 43%.