Way back in January 2020, before the world seemed to change every day, corporations kept careful track of risks and their tolerance and appetite for them. Everything from cyberthreats to politics, climate change to labour issues – boundaries were set as to how much risk businesses were willing to accept. If a risk’s impact on the organization (including its likelihood of occurring and how effective mitigation strategies prove to be) falls outside of the level deemed acceptable…?
Then came the pandemic and, for a time, risk profiles changed almost daily. It looked like things were calming and there was a period of relative peace. We were even considering returning to the office before the Omicron variant threw everyone back into uncertainty. COVID-related risks are again increasing, as are geopolitical, climate, cyber, ESG… Today’s global risk profile is enough to turn actuaries into artists.
So how do corporations react? Is it possible to strategise a way through a pandemic? And what would be the one factor that could help reduce your global risk profile? Here, Raimundo Diaz, our Head of International Corporations, explores today’s risks and how outsourcing can help.
Today’s risks
Risks can be loosely categorized as political, security, cyber, operational and reputational – and all have the innate potential to drastically affect global business. Let’s take a look.
Political
This includes factors like the U.S.’s renewed domestic focus and tensions with China, China’s increasingly tense foreign policy, Russian military build-up in the Ukraine, Brexit, and how Germany’s post-Merkel leadership transition will affect the EU. 2022 also holds a French presidential election, possibly providing more EU instability. This category also includes global inflation and economic pressures.
Security
Risk consultancy firm, ControlRisks, predicts the rise of ‘dysfunctional, vulnerable, and fragile states’ in the wake of COVID-19, thanks to the pandemic both causing and exposing ‘political and institutional fragility’. Whether this seems optimistic or pessimistic, it’s undeniable that COVID has had a massive effect on the world, and we’re still in the middle of it. Bundle the pandemic with things like restrictions on population, inflation, political tension, and supply chain issues – the opportunity is clearly there for increased population disruption and enhanced security risks.
Cyber
The threat of cyber-attacks has increased purely due to pandemic-related home working requirements, and will probably continue to rise as offenders continue to go unchecked; government support in defending against and identifying bad actors can lag. IBM’s Data Breach Report 2021 states that, besides the obvious operational and reputational damages involved, the average financial cost of a cyber breach is US$4.2 million. Cyber risks and data security should be a major consideration to all businesses.
Operational
Here we include the immediate effects of COVID-19, supply chain issues, the EU’s energy challenges, delivery risks, and climate events. It remains to be seen how much the operational environment will change in the wake of national promises made at COP26, but it’s undeniable that extreme weather events and natural disasters are increasing, and all hold the potential to drastically affect production and ongoing operations. Operational risk also includes regulatory and legislative risks involved in your day to day functions.
Reputational
Reputational risk definitely includes ESG-related factors, which have quickly become a key component of competitive analysis. This section also includes the risks involved in supply chains – since, for example, purchasing carbon credits doesn’t offset or hide the fact that your primary supplier/manufacturer is using child labour. All sections of the business, including vendors and partners, should be considered for reputational risk.
Financial
Liquidity, credit or default risks, government defaults, asset-backed risks, transactional, foreign investment, equity, market volatility, inflation, currency – the list of finance-based risks can seem huge. Though the financial risk category can also be considered operational, it can have a massive impact on its own. As evidenced in 2008, financial risk can have global consequences.
Dun & Bradstreet’s Global Risk Report Q4 2021 lists the top ten business risks as: global inflation, US-China competition, resurgent COVID-19 waves, China’s economic slowdown, supply chair difficulties, EU politics, Europe’s energy challenge, political polarization, climate policies, and fiscal worries in emerging markets.
All of these risks are external to the company itself, but all could greatly affect international corporations and also could trickle to affect domestic businesses. And, listed together like that, the risks can seem insurmountable.
What’s the response?
So, how do businesses cope with so many risks and possibilities open at once? Well, in essence, they jump in and set limits.
Risks can’t be avoided and, though some may not happen, they must all be considered. Strategies, processes and mechanisms should be prepared, ready to be triggered if the need arises.
Companies should be evaluating just how much appetite they have for risk – as operating in a completely risk-free environment is almost impossible and maintaining is not moving forward. Fixing and agreeing a level of risk appetite sets boundaries that help companies consider how much is too much.
Once defined, though, your risk appetite should be narrowed further so you have a definitive risk tolerance. As demonstrated here, risk appetite covers a broad range of unquantifiable possibilities; while risk tolerance sets measurable and trackable standards.
APPETITE:
“We don’t accept risks that could result in a significant loss of revenue.”
TOLERANCE:
“We don’t accept risks that could cause revenue from our top 10 customers to drop by more than 1%.”
Gartner recently reported that 57% of Boards of Directors are increasing their risk appetite going into 2022, citing “economic uncertainty (38%), disruptive business models from competitors (35%) and cost inflation due to supply shortages (28%) as the top risks to business performance.” As Gartner reports, Boards realize that they have to become comfortable in a higher-risk business world.
This is supported by joint research from the Global Network of Director Institutes (GNDI) and MarshMcLennan: “…most directors anticipate incorporating a new set of broader risks into scenario planning over the next year.”
After all, standing still isn’t an option and, let’s face it, the chances of the world reverting to pre-pandemic ‘normality’ gets slimmer every day. So, too, risk strategies, risk appetites and risk tolerances must also adjust to a high-risk business fabric.
How outsourcing can help
First and foremost, outsourcing partners assume some of your risk.
For example, your outsourcing partner will have done the tech investment, removing your need to upgrade and manage your own systems, and removing the need to recruit staff who can understand and effectively maintain it. Upgrades through an outsourcing partner are automatic and trauma-free, managed entirely by your outsourcing partner. Your risk is reduced.
What’s more your outsourcing partner will also have the knowledge, experience, and defined procedures in place to help reduce your regulatory and legislative risk. Their professionals will effectively be your professionals, bringing their expertise to bear your business and ensuring your international compliance, without recruitment-related downtime. Your risk is reduced.
And, perhaps most essentially, outsourcing’s biggest benefit: time.
The GNDI/MarshMcLennan report also says: “Two-thirds of directors surveyed reported that over the past year their time commitment increased by 50 percent or more, with the highest-ranked issue related to time spent with management to recalibrate strategy in response to short- and long-term changes in the COVID-19 operating environment.”
In these turbulent times, reducing pressure on your in-house teams and freeing them (and their minds) from routine time-sucking tasks can be a game changer for effective strategizing. An outsourcing partner can help you do that.
Your outsourcing partner will have done the tech investment, removing your need to upgrade and manage your own systems, and removing the need to recruit staff who can understand and effectively maintain it.
Yes, even with outsourcing, risk does remain – which is why effective due diligence should be conducted on prospecting outsourcing partners. This process shouldn’t be hurried; you should give it as much care and attention as you would an M&A or massive project. Put together a complete list of tasks you want to outsource, build an RFP (Request for Proposal) that answers all the questions you have, then research and create a shortlist of prospective partners. Look for partners in the regions you want, with the experience and the technology to produce both the reporting you need for your regulators, and the reporting your stakeholders require.
Outsourcing takes routine tasks off your shoulders, reducing your workload and freeing up time. It gives you access to a bank of professionals in a range of locations, offering your fledgling international business their local expertise and skills.
And, if you choose Auxadi as your outsourcing partner, our unique and market-leading technology provides you real-time access to the accounting, payroll and reporting of all your international locations. Backed up in the cloud and using our own fortified servers, our tech was built in partnership with Microsoft, bringing best practice to your data security. Your risk is reduced further.
Whatever the jurisdiction, with Auxadi you can be sure you’ll receive the same level of excellent service, and the same excellent output – our processes ensure it. To find out exactly how Auxadi can make your life easier, simply get in touch.
Contact our team today to find out exactly how we can help you
Local Knowledge – International Coverage
Founded in 1979, Auxadi is a family-owned business working for multinational corporations, private equity funds and real estate funds. It’s the leading firm in international accounting, tax compliance and payroll services management connecting Europe and the Americas with the rest of the world, offering services in 50 countries. Its client list includes many of the top 100 PERE companies. Headquartered in Madrid, with offices in US and further 22 international subsidiaries, Auxadi serves 1,500+ SPVs across 50 jurisdictions.
All information contained in this publication is up to date on 2022. This content has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this chart without obtaining specific professional advice.No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this content, and, to the extent permitted by law, AUXADI does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this chart or for any decision based on it.