After the economic turmoil of 2009, CFOs could be forgiven for trying to relax a bit. But the new year will offer plenty of reasons to stay awake at night, according to a new survey by the Corporate Executive Board (CEB).
The business-research company recently asked finance executives to identify the top “hot spots” for risk in 2010. Heading the CEB’s top 10 list is strategic change management (see below for the complete list). “For the past two years, executives have been in a more defensive posture, but this year they are thinking about how to set the company up for success in the future,” says Kate Guerra, CEB’s research director. “They are really focusing on risks that could stand in the way of their strategic objectives.”
A few of the 10 hot spots are holdovers from past years. Fraud, for example, is a perennial concern, although one that may grow in 2010 as companies shrink their internal-audit and finance staffs. Third-party relationships, number 7 on the list this year, were also among the biggest risk areas in 2008 and 2009 as CFOs watched banks, customers, and suppliers struggle to meet their commitments.
But the prospect of economic recovery creates new risk hot spots, such as capacity: companies face the possibility of being caught short-handed should business suddenly revive. Indeed, in CFO’s most recent Global Business Outlook Survey, conducted each quarter with Duke University, nearly half of all respondents said their companies had taken steps in the past 20 months that they feared could hurt their businesses’ future growth prospects.
The CEB survey also found that more than 40% of companies had reduced their 2009 research and development budgets by more than 5%, potentially harming their future competitiveness. “Some of these big bets that companies make in down cycles are the things that redefine them for the future,” says Guerra. “People are asking themselves whether their companies are appropriately investing in and researching potential new breakthrough products.”
The CEB’s 10 high-risk areas cover so many different parts of a business that it may seem impossible for a finance executive to watch all of them. “Each company’s circumstances will be different,” says Guerra. “You have to really evaluate what you believe the highest risks are for your company and the situation you are in.”
Here are finance executives’ top 10 risk hot spots for 2010:
1. Strategic change management. The upheaval of the past year and the desire to seize opportunities during the recovery will make for a lot of changes, including mergers, acquisitions, and divestitures. These shifts leave a lot of room for controls to fall through the cracks and can create new liabilities.
2. Capacity. Faced with uncertain demand, companies risk both over- and understaffing. Timing capital expenditures, such as new facilities or equipment, will also pose a challenge.
3. Incentive plans. Compensation is under extreme scrutiny in the wake of the recession and could pose a risk for public companies.
4. Human resources. Layoffs have left many companies with skill gaps and possible holes in their compliance structures.
5. Fraud. Widely thought to pick up (or be revealed) in down times, fraud can be easier to commit at companies that are short-staffed and under pressure, which would describe most businesses today.
6. Innovation/R&D. Companies that have cut back in this area during the downturn risk falling behind their competitors.
7. Third-party relationships. The collapse of Lehman Brothers opened CFOs’ eyes to just how careful and far-reaching they need to be in evaluating third parties.
8. Shared services. Under pressure to cut costs, finance executives are exploring new locations for their back-office functions. These changes can affect companies’ control structures and processes.
9. Inflation/Deflation. Currency risk remains an open question for 2010.
10. Tax management. Recession-scarred states are looking to raise funds through new taxes and stricter enforcement of existing tax laws.