llllllllllllllllllllllllllllllllllllllllllllllllllllllllll ...€¦ · mixed across organizations. The Chief Financial Officer continues to lead risk management at many organizations,

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2013 AFP Risk SurveyReport of Survey Results

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Association for Financial Professionals4520 East-West Highway, Suite 750Bethesda, MD 20814Phone 301.907.2862 Fax 301.907.2864 www.AFPonline.org

2013 AFP Risk SurveyReport of Survey Results

February 2013

Underwritten by

Entering A New Age of Earnings Uncertainty:Companies that make risk-adjusted decisions will be industry leaders

Developing a sustainable competitive advantage in an increasingly uncertain environment is the most

challenging issue facing businesses today. More than half (53 percent) of senior financial professionals say

they have greater difficulty anticipating risks to their companies’ earnings today than they did before the

financial crisis. Worse, most (86 percent) believe these challenging circumstances are here to stay, according

to results from this year’s Association for Financial Professionals Risk Survey, sponsored by Oliver Wyman.

Many of the variables that companies consider when making strategic decisions have become increasingly

unpredictable. At the same time, risks outside of the traditional purview of treasury and finance are having a

more immediate and meaningful impact on corporate performance.

Uncertainty creates opportunity. Those companies that understand how risks inherent in their inputs, outputs,

and operations will explicitly impact their financial results are more likely to seize on new opportunities. Last

year’s survey revealed that a majority of treasurers and chief financial officers were concerned about financial

risks such as credit and liquidity. As companies have amassed more than $1 trillion of cash on their balance

sheets and their access to corporate credit has improved, many senior financial professionals have turned

their attention to those issues more directly linked to growing the overall business, primarily strategic and

operational risks.

To combat these risks and gain a competitive advantage, the 2013 AFP Risk Survey results illustrate that

companies are embarking on a myriad of strategies ranging from information technology investments to

diversification into new markets to product innovation. More than half of respondents are also conducting more

reviews of emerging risks at a senior level.

While these efforts are commendable, the speed at which risks are reshaping industries requires a significant

upgrade in tools and competencies. Most financial professionals believe their forecasting capabilities are not

keeping up with rapidly evolving markets and the accompanying risks that impact their firms. Yet only

13 percent have significantly changed the way they forecast critical variables over the last five years.

Survey respondents who anticipate a more uncertain future are re-examining their risk appetites, changing

their strategic decision-making processes and enhancing their analytic capabilities at a disproportionately

higher rate than those at other organizations. We believe the firms that take this more proactive risk management

approach in the current environment will be able to capitalize on strategic opportunities that will clearly

differentiate them from their competitors.

Oliver Wyman is pleased to partner with the AFP in providing its members with information that will support

their ability to make risk-adjusted strategic decisions. The risk agenda for treasury and finance executives

is broadening at a time when it is more important than ever for senior financial professionals to measure and

manage the impact of shifting risks on their companies’ earnings. We hope readers will find the results of our

second annual risk survey informative and useful.

Alex WittenbergPartner, Oliver Wyman Group

Alex Wittenberg is a New York-based Partner in Oliver Wyman’s Global Risk & Trading Practice and head of Oliver Wyman’s Global Risk Center. He has more than 20 years of cross-industry experience in risk management advisory and risk transfer solutions. Alex specializes in integrating risk into strategic decision making and financial performance, designing risk governance for boards and management, and developing risk assessment, mitigation, and analytical frameworks.

www.AFPonline.org ©2013 Association for Financial Professionals, Inc. All Rights Reserved 1

2013 AFP Risk Survey

IntroductionVolatility, interdependence, the increasing speed of change and what in the past were only-once-in-100-year long-tail events (or black swans) are now, more than ever, defin-ing the operating environment for business. Financial professionals at many organiza-tions are faced with the challenge of forecasting earnings in a new era of uncertainty. Few financial professionals will be surprised to learn their peers report these dynamics are accelerating, not abating. Consequently, risk management is becoming more vital to every organization.

Recognizing the urgency of managing risk and earnings uncertainty in such an environment, the Association for Financial Professionals (AFP) and Oliver Wyman have partnered together to produce a series of annual surveys to study the risk land-scape for treasury and finance functions specifically, and for organizations as a whole.The inaugural survey in this series, conducted in October 2011, examined the key risks that were of paramount concern to organizations: financial, macroeconomic, business/operations, external risks and commodities. The current survey was conducted in November 2012, and focuses on how organizations are addressing these risks through a risk-adjusted framework: forecasting, risk culture, organizational structure, metrics and other solutions. The survey questionnaire was sent to AFP’s senior level corporate practitioner membership and generated responses from 547 financial professionals at a range of organizations, large and small, public and private, across North America.

Even as the troubled tides of the 2008-2009 financial crisis continue to recede, more than half of this year’s survey respondents still expect the forecasting of critical variables to become more difficult in the next three years. Three risk factors that survey respondents rate the most significant and difficult to forecast fall outside the traditional purview of treasury and finance: customer satisfaction/retention, regulatory risk and geo-political risk. Moreover, many financial professionals indicate their organizations fall short in their forecasting and risk management capabilities, with a large share pointing to challenges involving data capture, integration and analysis even more so than to a lack of resources or support.

Despite such ongoing uncertainty, financial professionals are responding with a strategic investment of time, energy and resources. They are elevating the importance of risk within their organizations through greater levels of awareness and senior-level oversight, wider testing of assumptions, investments in IT, dashboards, advice and insight. Some organizations are recalibrating their risk management structure, roles, reporting lines and internal partnerships, as these are decidedly mixed across organizations. The Chief Financial Officer continues to lead risk management at many organizations, with the role of Chief Risk Officer emerging at relatively few others. The structure of risk management is just one of many questions this report addresses.

Readers are invited to compare the 2013 AFP Risk Survey findings and data against their own organization’s norms and practices and to stress test their own individual risk assumptions.


Political risk

28%

Energy pricevolatility

44%

37%

Regulatory risk Labor and HR issues

16%

7%

18%

Natural catastrophe

35%

GDP Growth

BY THE

NUMBERS

Customersatisfaction/retention

Risk factors expected to have the greatest impact on organizations’ earnings in the next three years, the 2013 Association for Financial Professionals Risk Survey, sponsored by Oliver Wyman.

(Percent of survey respondents)



Political risk

28%

Energy pricevolatility

44%

37%

Regulatory risk Labor and HR issues

16%

7%

18%

Natural catastrophe

35%

GDP Growth

BY THE

NUMBERS

Customersatisfaction/retention

Risk factors expected to have the greatest impact on organizations’ earnings in the next three years, the 2013 Association for Financial Professionals Risk Survey, sponsored by Oliver Wyman.

(Percent of survey respondents)

Increased Earnings UncertaintyMore than half of financial professionals report that their organizations are exposed to more earnings uncertainty today than five years ago (59 percent). Fewer than one in eight believe their organizations are operating under conditions with less uncertainty than five years ago. Twenty-nine percent of survey respondents indicate the level of uncertainty has not changed.

A higher percentage of survey respondents at publicly traded companies than at privately owned organizations – over two-thirds – report that their organizations have greater exposure to earnings uncertainty currently relative to the pre-recession period. This may reflect, in part, a more active risk agenda. For example, SEC enforcement has become more aggressive in the aftermath of the financial crisis, issuing “early warning” disclosure guidance in 2010 for organizations’ management to identify and reassess risks for financial reporting.

Many companies also consider a broader spectrum of risks and risk time frames, taking into account emerging risks and long-tail events. This reflects, in part, the fact that companies have greater exposure to international risks as the world continues to become a more unified and interdependent marketplace. Sixty percent of respondents say their companies have some portion of international exposure, and 45 percent of companies have increased their international activities over the past five years. As a result, even though the U.S.-based financial crisis may be coming to an end, the European sovereign debt crisis is almost as debilitating.

Change in Exposure to Uncertainty in Earnings Relative to Five Years Ago(Percentage Distribution)

Exposed to the same level29%

Exposed to less 12%

Exposed to more59%

4 ©2013 Association for Financial Professionals, Inc. All Rights Reserved www.AFPonline.org


So, what do financial professionals identify as the most influential drivers of increased earnings uncertainty? Responses were mixed. The largest share of survey respondents (30 percent) cites macroeconomic factors – such as GDP growth – as the most influential ones. Financial factors (e.g., credit, liquidity) were the second most-cited category, followed by external factors (such as regulatory risk) and factors surrounding business/operations. Eleven percent of respondents indicate that commodities are the primary driver in increasing exposure to earnings uncertainty.

Results differed, however, depending on the type of organization. Those respondents from publicly traded organizations were more likely than others to indicate that commodities were the primary driver of increasing earnings uncertainty. Conversely, commodities were the least influential driver for privately owned companies while financial factors were the most frequently cited driver for these organizations. In addition, business operations are a more influential driver for privately owned organizations than publicly owned ones or, indeed, for organizations as a whole.

The rank order of these five drivers for all organizations also differs from the 2012 AFP Risk Survey results. Financial factors appear to have declined in relative importance, from 33 percent in 2011 to 23 percent in the 2012 survey. Among many possible influences, this shift may reflect sustained accommodative monetary policy at the Federal Reserve. The fact that companies have amassed more than $1 trillion in cash on their balance sheets could also have had some impact.

Primary Driver of Increase in Exposure to Earnings Uncertainty (Percentage Distribution of Organizations that Have Experienced Greater Earnings Uncertainty)

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% All Publicly Traded Privately Owned

Macroeconomic

Financial

External

Business/Operations

Commodities

11

17

19

23

30

23

13

20

17

27

7

22

13

33

24



Forecasting RiskConsistent with increased earnings uncertainty, more than half of financial profes-sionals report that it is more difficult to forecast risk today relative to five years ago (before the financial crisis). This result is consistent across all types of organizations – large or small and public or private. Fewer than one in five respondents indicate that forecasting risk is currently easier.

While a majority of financial professionals – 53 percent – indicate that risk is more difficult to forecast today, an almost identical share (52 percent) expect this trend to continue. Thirty-six percent anticipate the same (elevated) level of forecasting dif-ficulty as exists currently. In short, financial professionals perceive difficult conditions for forecasting risk as a new norm, even if they do not expect greater challenges in the future. A slim 12 percent of survey respondents foresee forecasting risk to become easier three years from now.

The main reason why organizations are struggling to forecast risk is that senior financial professionals find that many of the risk factors that are toughest to forecast are having the greatest impact on their earnings. Many also expect these risk factors will continue to influence their financial results in the future.

The three risk factors financial professionals expect will have the greatest impact on their organizations’ earnings over the next three years are customer/satisfaction reten-tion (cited by 44 percent of respondents), regulation (37 percent) and GDP growth (35 percent). These risks are followed by political risk (28 percent), interest rates (21 percent) and credit risk (21 percent).

Survey respondents from organizations with revenues under $1 billion cite customer satisfaction/retention more frequently (46 percent) than do their peers at companies with revenues above $1 billion (41 percent). Regulatory risk is cited by the same share of organizations (37 percent), regardless of size. Financial professionals from publicly traded companies and organizations with revenues over $1 billion are more likely than those from other companies to report exposure to earnings risk from GDP growth will have the greatest impact over the next three years (47 percent each compared to 26 percent at smaller companies and 32 percent at privately owned organizations).1

Difficulty of Forecasting Risk Today Relative to 5 Years Ago (2007)(Percentage Distribution)

Anticipated Difficulty of Forecasting Risk Today Versus 3 Years from Now (2015)(Percentage Distribution)

1. Regulatory risk and GDP growth were also cited as significant risk factors in the 2012 AFP Risk Survey. Customer satisfaction was not explored in the 2012 AFP Risk Survey.

Easier

Same

More Difficult

60% 50% 40% 30% 20% 10% 0%

53%

29%

18% 12%

36%

52%

0% 20% 40% 60%



Regulatory risk is the second highest rated factor expected to have the greatest impact on organizations’ earnings in the next year. Regulatory risk is also cited as the second most difficult risk to forecast, ranking just behind natural catastrophe risk. (Sixty-seven percent of survey respondents rated regulatory risk forecasting as “very difficult” or “difficult.” Seventy-two percent hold this view with regard to natural catastrophe risk.)

Political risk is another risk factor for a majority of organizations, with 62 percent of survey respondents indicating it as a risk – and relatively few organizations forecast-ing political risk. Information technology risk also ranks near the top of the list, with more than half of respondents rating it difficult to assess (56 percent), particularly threats such as those from cyberattacks and systems malfunctions.

Risk Factors Expected to Have the Highest Impact on Companies’ Earnings and to be Difficult to Assess

The Top Five Risk Factors for Each Category(Percentage of Organizations)

Risk factors with high impact

Customer satisfaction/retention

Regulatory risk

GDP Growth

Political risk

Interest Rate

All Respondents

44%

37

35

28

21

Risk factors difficult to forecast

Natural catastrophe

Regulatory risk

Product liability

Political risk

Commodity (non-energy) price volatility

Ranked high-impact risk factor 5 or 4 in difficulty

72%

67

67

62

58



These top potential risk factors and forecasting challenges share a common character-istic – they are external factors that are to a large degree outside of a company’s control. By contrast, those risks that are traditionally forecast within the treasury and finance functions – including credit risk and interest rate risk – are seen as easier to assess. Credit risk, for example, ranks at the bottom of the list in terms of its difficulty to forecast. In fact, credit-risk forecasting ranks even lower than does interest-rate risk forecasting. This may be due to the fact that interest rates have remained extraordinarily low and stable under current policies of the Federal Reserve. Likewise, survey respondents report that liquidity risk is also easier to forecast than are many other types of risk. This may also be an indication of the fact that since the financial crisis, many companies have built up and currently maintain large amounts of cash and investments on their balance sheets.

In the wake of the financial crisis, companies had to develop more accurate forecasts and ensure adequate access to capital. It is possible these assessments of risk and risk forecasting reflect the increasing distance from the specific challenges financial professionals faced during the financial crisis, or the degree to which tools, limits and controls have been put in place to assess and forecast credit and liquidity risk effectively.

Nevertheless, given both the breadth and depth of risk challenges, most financial professionals indicate their organizations’ forecasting capabilities need improvement. Forty-seven percent of respondents believe their companies should strengthen their forecasting capabilities, while ten percent rate their capabilities as “weak to non-existent.” Less than half of respondents (43 percent) are relatively confident in their organization’s capabilities in forecasting critical variables. Financial professionals from publicly traded companies tend to feel more confident than those from privately owned companies (54 percent providing a top-two score versus 39 percent). This may reflect the fact that public companies are more responsive to regulatory requirements. It may also point toward current market demands: public companies have more at stake when they fail to manage Wall Street expectations and avoid negative surprises in earnings announcements.

Assessment of Organization’s Capabilities at Forecasting Critical Variables (Percentage Distribution)

5% 40% 43% 11%

3% 7% 51% 32% 7%

3% 7% 47% 35% 8%

1-Weak to non-existent 2 3-Needs improvement 4 5-Robust

Public

Private

All

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%



Organizations face many challenges in forecasting key metrics. Chief among them is data and analytics. This includes capturing relevant data within the company (rated an impediment by 52 percent of respondents), integrating risk and forecasting data into strategic decision making (47 percent), and capturing relevant data from external (non-company) sources (44 percent). Collectively, these factors may fall under the heading of big data, reflecting the difficulty organizations have in capturing, managing, and processing tremendous amounts of data in an actionable timeframe. Forecasting and analytical skills within the organization are also cited by about one-third of respondents as key challenges (36 percent). It is worth noting, however, that resources and execu-tive management support are much less common challenges in relation to forecasting metrics (ranging from 22 percent to 31 percent).

Data capture is even more of an impediment at large organizations and publicly traded companies than at smaller companies and privately owned ones. This is likely to be expected, given their greater size and complexity. Executive management support is a greater concern for respondents at privately owned organizations than at publicly traded ones (27 percent versus 16 percent).

While the time horizons that organizations use for forecasting out risk are difficult to generalize, one year appears to be the most common time frame. For a large number of organizations, relatively few risks are forecast out less than one year. Liquidity and currency/foreign exchange (FX) risk may be forecast out quarterly by about one in five organizations, while others may extend the forecast out three years or more. Some companies elect not to forecast out liquidity risk at all.

Almost half of all organizations – 48 percent – do not currently forecast natural catastrophe risk. Just under a third do not forecast out political risk (29 percent), infla-

Challenges to Organizations’ Ability to Accurately Forecast Metrics (Percent of Organizations)

Capturing relevant data from within the company

Integrating risk and forecasting data to strategic decision making

Capturing relevant data from external (non-company) sources

Forecasting and analytical skills in organization

Corporate resources

Corporate IT resources

Executive management support for forecasting

0% 10% 20% 30% 40% 50% 60%

52%

47%

44%

36%

31%

29%

22%



tion risk, intellectual property risk or product liability (27 percent for each). Interest-ingly, although customer satisfaction and retention are expected to have the greatest impact on organizations’ earnings, one in four financial professionals indicates their organizations do not forecast these at all. Relatively few financial professionals forecast out risks more than a year or two given the difficulty amid change and volatility.

Period of Time Risk is Forecast Out (Percentage Distribution of Organizations that Cite Risk as Having Great Impact on Earnings)

One Three Not quarter Six One Two or more As currently and less months year years years needed forecasted

Commodity (non-energy) price volatility 13% 17% 35% 12% 18% 3% 3%

Country risk 5 2 30 >1 29 14 20

Credit 10 3 28 12 21 10 16

Currency/FX 22 7 36 11 7 4 14

Customer satisfaction/retention 6 3 29 6 18 12 25

Energy price volatility 8 13 25 10 23 6 15

GDP Growth 2 4 28 9 27 9 20

Inflation 3 4 33 8 18 7 27

Information technology risk (e.g., cyber security or systems failure) 3 7 25 10 18 16 22

Intellectual Property 3 8 16 5 35 5 27

Interest Rate 11 4 24 20 23 11 7

Labor and HR issues 6 9 26 4 21 10 24

Liquidity 22 12 28 11 16 4 8

Natural catastrophe 3 3 7 3 21 14 48

Outsourcing 9 4 17 17 >1 35 17

Political risk 2 3 19 12 22 12 29

Product liability 7 13 27 >1 20 7 27

Regulatory risk 6 7 15 13 20 15 26

Supply chain disruptions 19 11 34 2 6 11 17

Tax risk 7 9 28 6 25 10 16



Responses to Current and Emerging Business RiskMany organizations are taking actions designed to outperform their peers in an uncertain environment by improving efficiencies and expanding into new markets. Among the most common initiatives is increasing investment in IT systems (cited by 57 percent of respondents). More companies are turning to automation in their financial processes, focusing interest on treasury systems and technology in order for treasury to provide real-time access to information. Others are increasing revenue growth targets (53 percent) and focusing on risk awareness and culture within the organization (52 percent).

Expanding into new markets and launching new product lines/offerings, which diversify revenue streams, are steps taken by 51 percent and 49 percent of organizations, respectively, according to respondents. Nearly two out of five respondents are increasing capital expenditures (39 percent) and considering mergers and acquisitions (43 percent).

Despite the range of actions to increase organizational activities, and consistent with our survey results in 2011, relatively few financial professionals indicate their organization is expanding the size of its workforce (29 percent). Instead, one third of organizations are reducing the number of their workers.

Actions Taken in Response to Current and Emerging Business Risks

Investment in IT systems

Revenue growth targets

Focus on risk culture and awareness with organization

Geographic markets served

Product lines/offerings

Margin growth targets

M&A activity

Capital expenditures

Use of external resources/experts

Size of organization workforce

40% 30% 20% 10% 0% 10% 20% 30% 40% 50% 60% 70%

8%

20%

6%

6%

12%

22%

18%

25%

17%

33%

57%

53%

52%

51%

49%

45%

43%

39%

39%

29%

Decreased Increased

Percentage of Organizations



Looking more closely at changes in risk management activities, we see that the or-ganizational response to current and emerging risks starts at the top at many organiza-tions. The most common management response to current and emerging risks (cited by 63 percent of respondents) is greater executive review of strategy/assumptions. An increase in specific risk analysis occurs at 46 percent of organizations, as does “report-ing up” through increasing risk reporting to management (44 percent). These most often-cited actions center on increased attention and focus on risk.

In response to current and emerging challenges, less than one quarter of organiza-tions have increased risk mitigation through hedging or insurance, according to survey results. Other activity appears to center on gaining business advice/guidance and insight from external consultants and professional associations. The percentage of organizations that appears to solicit risk guidance proactively from banks is the same as the percentage that takes no steps at all (13 percent).

Increasing specific risk analysis appears slightly more common at publicly traded organizations than at private ones (53 percent versus 41 percent). A larger share of those companies that are both publicly traded or with annual revenues of more than $1 billion are increasing risk reporting to management (50 percent each) compared to 41 percent of privately owned companies and 42 percent of organizations with annual revenue under $1 billion that are doing the same.

Changes in Risk Management Activities in Response to Current and Emerging Risks (Percent of Organizations)

Greater executive review of strategy assumptions

Increasing specific risk analysis

Increasing risk reporting to management

Increasing risk forecasting

Re-examining its risk appetite

Increased risk mitigation mechanisms-e.g., hedging

Increased risk transfer mechanisms-e.g., insurance

Increasing risk management guidance from external consultants

Increasing use of insights from professional associations

No changes to strategic decision making process

Increasing risk management guidance from banks

0% 10% 20% 30% 40% 50% 60% 70%

63%

46%

44%

33%

31%

23%

21%

18%

17%

13%

13%



Risk Management Structure and CultureThe risk management structures of the organizations surveyed range from highly centralized to decentralized models. A significant proportion of survey respondents say their companies operate under fully centralized processes and execution, as with many enterprise risk management functions (28 percent). Large companies and private companies are more likely than smaller ones and publicly traded ones to maintain this centralized structure (35 percent). At the other end of the spectrum, some (12 percent) have fully decentralized or “siloed” risk management structures where operating units look at their risks separately.

Still, most rely on a federated risk management structure. A majority of organizations – 60 percent – follow a centralized process/decentralized execution model for risk man-agement, and an even higher share of large and publicly traded companies (68 percent) embrace this structure. Such centralized “monitoring” of risks would have reporting and systems at headquarters, but the execution of the management is carried out by experts. The advantage of a federated model is that it permits business units to nimbly respond to risks, while a centralized process enables a company to evaluate and manage how seemingly isolated risks could impact the risk profile of the organization as a whole.

In order for this risk management structure to work, however, there needs to be a high degree of coordination between central functions and business units. It must also be customized to fit an organization’s pre-existing culture, structure and risk management goals. For example, one organization may try to limit the impact of a risk mismanaged at a division’s level by giving its business units more risk manage-ment responsibilities and building ring fences around them. Another may choose to introduce more centralized risk reporting processes to exert more direct control. Factors considered in reaching these important decisions include the complexity of a company’s business structure and how different its business units are, as well as how their risk profiles compare to the organization’s appetite for risk overall.

Risk Management Structure Primary Responsibility for Organization’s Risk Management

Fully centralized process and execution28%

Fully decentralized 12%

Centralized process/decentralized execution60%

CEO/COO28%

Management-level Risk Committee14%

Treasurer11%

Chief Risk Officer9%

CFO38%



Most respondents identified the CFO as the individual responsible for the entire organization’s risk management (38 percent). The Treasurer is cited by 11 percent of respondents while only nine percent of organizations rely primarily on the Chief Risk Officer. At smaller companies, the Chief Executive Officer is more commonly the primary risk contact than at larger ones (36 percent versus 19 percent). Privately owned companies are slightly more likely to rely on the CFO than are publicly traded ones (42 percent versus 32 percent).

Financial professionals indicate the level of importance of risk assessment is highest at the executive management level and lower within business units and departments. Executive management and the Board of Directors have a strong focus on risk, uncertainty and the impact on business performance: 86 percent of financial professionals indicate risk management is “important” or “very im-portant” at the executive management level and 82 percent report this to be the case at the Board of Directors level.2

The ranking of importance in risk assessment drops to 68 percent at the department level, possibly reflecting a difference in expectations, accountability or a broader risk culture within operating units. The observed decline that tracks with organizational hierarchy is most pronounced at privately owned organiza-tions. This may be due to the absence of mandated disclosures of risk factors as required for publicly held enterprises.

2. This data is consistent with survey research among Boards of Directors. For example, the annual surveys of public and private companies by the National Association for Corporate Directors reveal that “risk oversight” has been a top-ranked Board governance priority for the past four years. For more, please visit: www.nacdonline.org.

Level of Importance of Risk Assessment within the Organization(Percent of Organizations Rating Risk Assessment “Important” or “Extremely Important”)

The executive team is the main partner outside the treasury function to reassess risk assumptions, as noted by 82 percent of respondents. The second most commonly cited partner is legal (47 percent). Many organizations involve other functions as well. Financial planning & analysis (FP&A) and tax functions are very commonly involved, reassessing assumptions at about half of large organizations and publicly traded companies.

At the executive management level

At the Board of Directors level (e.g., Audit Committee)

Within business unit

Within department

0% 20% 40% 60% 80% 100%

86%

82%

75%

68%



The CFO is the business partner to whom treasury most often reports changes in risk assumptions, according to 72 percent of financial professionals, followed by the CEO (43 percent). Because treasury usually reports to the CFO, it is also common for the CFO to interface directly with an organization’s Board of Directors regarding risk assumptions. In a quarter of companies, the Treasurer also receives such reporting. Only 15 percent of survey respondents indicate that changes in risk assumptions are reported to a CRO. This result points to the limited presence of the C-level role as part of enterprise risk structures across organizations.

The CFO is even more likely to assume the role of reviewing risk assumptions at large publicly traded companies, whereas a higher percentage of smaller organizations see both CEOs and Boards of Directors taking on the risk oversight function. Treasurers similarly take on more risk responsibility at organizations with annual revenue of more than $1 billion and at publicly traded companies (39 percent and 37 percent, respectively) compared to smaller organizations or privately owned enterprises (14 percent and 13 percent, respectively).

Key Partners Outside of Treasury Who Reassess Key Assumptions for Risks (Percent of Organizations)

Executive Team

Legal

Tax

FP&A

Sales

Investor Relations

Other

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

82%

47%

37%

30%

17%

13%

8%

Partners to Whom Treasury Reports Changes in Risk Assumptions (Percent of Organizations)

72%

43%

28%

25%

24%

21%

15%

CFO

CEO

Board of Directors

Treasurer

Board Audit Committee

Management-level Risk Committee

Chief Risk Officer

COO

Other Management Committee

0% 10% 20% 30% 40% 50% 60% 70% 80%

9%

14%



Risk Management Advisory SupportMany financial professionals report their organizations rely on an extensive network of external professionals to assist with risk management. Among those external experts, consultants are the most popular source of expertise (cited by 62 percent of respondents), followed by banks (53 percent) and auditing firms (50 percent). Forty-four percent of survey respondents indicate their organizations turn to professional associations for assistance while just over one-third gain some form of assistance from a trade association.

While consultants are the leading source of expertise on risk management, large orga-nizations are more likely to turn to consultants than are smaller ones (69 percent versus 57 percent) as are publicly traded ones compared to privately owned ones (65 percent versus 55 percent). The same pattern is seen with the use of banks as expert sources on risk management, with even greater differences seen based on organization size and own-ership structure. Auditing firms may be more common sources of expertise for publicly traded companies than for privately owned ones as well (55 percent versus 45 percent).

External Experts Assisting Organization with Risk Management (Percent of Organizations)

62%

53%

50%

44%

35%

Consultants

Banks

Auditing Firms

Professional Associations

Trade (industry specific associations)

Think-tanks

Other

0% 10% 20% 30% 40% 50% 60% 70%

5%

9%



Responsiveness of Banking Partners in Helping Organization Better Understand and Assess Risk(Percentage Distribution)

In the wake of the financial crisis, however, many corporate practitioners have mixed feelings about banking partners helping them to better understand and assess risk. Only one in ten survey respondents rate their banking partners as “very responsive.” A plurality rate them “somewhat responsive” while 22 percent rate their banking part-ners as “not very responsive” or “not responsive at all.”

Financial professionals from privately owned organizations are almost three times as likely to give banks the lowest rankings as respondents from publicly traded compa-nies (31 percent versus 11 percent). At the other end of the spectrum, 46 percent of publicly traded companies give their banking partners a top-two rating (out of five) on responsiveness, versus 29 percent of privately owned organizations.

45%

40%

35%

25%

20%

15%

10%

5%

0%

8%

14%

42%

26%

10%

Not responsive Not very Somewhat Responsive Very at all responsive responsive responsive



Performance MetricsDespite widespread views about increased uncertainty, financial professionals report varying levels of change in their forecasting of critical variables relative to five years ago. While 37 percent of respondents report they are forecasting critical variables “somewhat” differently, only 13 percent believe they have made a “significant” adjustment. Smaller organizations in particular appear to believe they have made greater modifications than their peers at larger companies (45 percent of companies with annual revenue under $1 billion versus 26 percent of those with annual revenue over $1 billion).

Level of Change in Organization’s Forecasting of Critical Variables Relative to 5 Years Ago (Percentage Distribution)

Organizations monitor and forecast a variety of metrics in their risk management activity. More than nine in ten organizations forecast sales, margins, cost of goods sold and EBIT, according to financial professionals. Capex/R&D and EPS are also common metrics for at least four in five organizations. Two-thirds calculate the return on capital, even though an additional 20 percentage points more indicate that they would like to forecast this.

*Calculations exclude respondents who provided a “not applicable” response on a given metric.

40%

35%

25%

20%

15%

10%

5%

0%

18%

9%

37%

23%

13%

1-Little-to-no change 2 3-Somewhat different 4 5-Significantly different

Status of Metrics Organizations Forecasts

Sales

Margins

Cost of goods sold

EBIT

Capex/R&D expenditures

Earnings per share

Interest per share

FTEs (organization wide)

Inventory

Debt-to-earnings

A/R balance

Return on capital

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Percentage of Organizations

Currently forecasts Would like to forecast

96%96%

93%97%

91%96%

91%97%

86%95%

80%86%

79%91%

77%89%

76%89%

76%89%

75%90%

68%88%



3. CTC Guide: Treasury Metrics: Scorecards and Dashboards. See http://www.corporatetreasurers.org/

Number of Key Performance Indicators Tracked on Executive Dashboards(Percent of Organizations that Maintain an Executive Dashboard Tracking KPIs)

Fully 90 percent of publicly traded organizations maintain executive dashboards. The number and nature of the key performance indicators (KPIs) that should be tracked in a dashboard at an executive level varies greatly depending on the complexity of a business, the key concerns, and the specifics of a major project. The pursuit of too many metrics can produce contradictory results and fail to capture management’s attention. AFP research suggests that treasuries should aim for simplicity and impact: a focus on eight-to-ten measures is probably sufficient to be effective.3

Among public companies, 43 percent track six to ten key performance indicators (KPIs). Another 38 percent use between 11 and 20 indicators. By comparison, only one quarter of privately owned organizations track more than 10 KPIs. Nearly one-third of small companies (those with annual revenue less than $1 billion) track between one and five KPIs compared to only 17 percent of companies with annual revenue over $1 billion.

0 10 20 30 40 500% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Num

ber

of k

ey p

erfo

rman

ce in

dica

tors

1 to 5

6 to 10

11 to 15

16 to 20

All

Revenues Under $1 Billion

Revenues Over $1 Billion

Publicly Traded

Privately Owned

24%31%

17%19%

28%

44%46%

42%43%

47%

18%14%

22%20%

14%

13%9%

19%18%

11%



ConclusionIn a business environment where long-tail events are more common, markets more volatile and the speed of change faster, anticipating risk events is increasingly challenging. The phrase “risk management” itself may be overly ambitious if it suggests a formulaic process or solution for such unknowns rather than measuring and managing the impact of risks on operations and earnings.

Nevertheless, it is clear that earnings uncertainty and the risks associated with them – both qualitative and quantitative – will only continue to have a more immediate and meaningful impact on corporate performance. Regulatory risk and geo-political risk, to say nothing of natural disasters and other risk factors, remain difficult for many organizations and their treasury and finance functions to forecast.

The big question is: how can organizations best operate within this environment and mitigate risk in the areas that are controllable? That question generates others. What risk structures are well-suited to what organizations? Are centralized processes and decentralized execution models serving organizations well? Amid their multiplicity of responsibilities, do CFOs continue to represent the best source for risk reporting and coordination?

Then there are the procedural and analytical challenges. How can organizations improve their data capture, integration and analysis so integral to risk management? What investments, in IT and otherwise, generate the best return for risk management? Who are the trusted advisors in this space? How can an organization develop a risk culture and instill a risk-conscious approach in its entire staff? Amid wide variation in metrics and reporting, which KPIs are predictive and more risk-sensitive? Which ones provide only noise? How much forecasting is needed and how far out?

A wide-ranging survey on risk and earnings uncertainty surely generates more questions than it answers, but so too does the risk management enterprise itself. Awareness, dialog and the continued reexamination of organizational norms and assumptions may be the surest direction forward, as financial professionals navigate their business through a new era of earnings uncertainty.



About the SurveyIn November 2012, the Research Department of the Association for Financial Professionals (AFP) surveyed its senior level corporate practitioner membership about uncertainty and how 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 3,936 surveys sent to this group generated 327 responses. The resulting response rate—adjusted for undelivered email—was eight percent. AFP also sent surveys to non-members with similar job titles, generating an additional 220 responses. The total 547 responses are the basis of this report. The respondent profile closely models that of AFP’s membership. A demographic profile of the survey respondents is presented below.

AFP thanks Oliver Wyman for being a valued partner on the AFP Risk Survey. In addition to its underwriting support, Oliver Wyman provided AFP with subject mat-ter expertise for the design of the questionnaire and for the final report. The Research Department of the Association for Financial Professionals is solely responsible for the content of this report.

Annual Revenues (USD)(Percentage Distribution of Organizations)

Under $50 million 19%

$50-99.9 million 8

$100-249.9 million 11

$250-499.9 million 9

$500-999.9 million 9

$1-4.9 billion 22

$5-9.9 billion 10

$10-20 billion 5

Over $20 billion 7

Level of International Revenue (Percentage Distribution of Organizations)

0% of revenue 41%

1-25% of revenue 26

25-50% of revenue 18

50-75% of revenue 9

75-100% of revenue 5

Change in International Activities Over Last Five Years (Percentage Distribution of Organizations)

Increased 45%

Remained the same 46

Decreased 9

Ownership Type (Percentage Distribution of Organizations)

Publicly owned 36%

Privately held 44

Non-profit (not-for-profit) 12

Government (or government owned entity) 8



Industry Sector (Percentage Distribution of Organizations)

Agriculture 3%

Air Transport 1

Automotive 2

Chemicals 2

Communications 3

Consumer products 7

Energy 10

Financial services 19

Government/ Not for Profit 11

Healthcare provider 3

Media/professional services 4

Mining and metals 2

Pharmaceuticals/Biotechnology 1

Retail 4

Surface Transport 1

Technology 8

All other manufacturing 6

Other industry 14



Appendix: Survey Data Tables

Table 1: Change in Exposure to Uncertainty in Earnings Relative to Five Years Ago*(Percentage Distribution)

Revenues Revenues Under Over Publicly Privately All $1 Billion $1 Billion Traded Owned

Exposed to more 58% 60% 64% 68% 59%

Exposed to the same level 29 29 25 22 26

Exposed to less 12 12 11 10 15


Macroeconomic (GDP growth, inflation, consumer price index (CPI)) 30% 26% 28% 27% 24%

Financial (credit, liquidity, interest rate, currency/FX) 23 30 21 17 33

External (country risk, regulatory, natural disaster) 19 18 21 20 13

Business/Operations (supply chain disruptions, production interruptions, litigation, labor, outsourcing, IT) 17 20 11 13 22

Commodities (energy, agricultural, non-agricultural) 11 6 20 23 7

Table 2: Primary Driver of Increase in Exposure to Earnings Uncertainty (Percentage Distribution of Organizations that Have Experienced Greater Earnings Uncertainty)

Table 3: Difficulty of Forecasting Risk Today Relative to 5 Years Ago (2007) (Percentage Distribution)


Easier 18% 19% 17% 18% 18%

Same 29 26 30 25 27

More Difficult 53 55 54 57 55

Percentages may not sum to 100 percent due to rounding. “All” column numbers may fall outside of sub-segments displayed due to incomplete reporting of revenue and organization type.



Table 4: Anticipated Difficulty of Forecasting Risk Today Versus 3 Years from Now (2015 (Percentage Distribution)


Easier 12% 13% 11% 15% 11%

Same 36 34 37 34 36

More Difficult 52 53 52 51 53

Table 5: Assessment of Organization’s Capabilities at Forecasting Critical Variables (Percentage Distribution)

Weak to Needs Non-existent Improvement Robust (1) (2) (3) (4) (5)

All 3% 7% 47% 35% 8%

Revenues Under $1 Billion 4 7 49 34 6

Revenues Over $1 Billion 1 8 45 38 9

Publicly Traded 1 5 40 43 11

Privately Owned 3 7 51 32 7



Table 6: Level of Difficulty in Assessing and Forecasting Risk (Percentage Distribution of Organizations that Cite Risk as Having Great Impact on Earnings )

Very Somewhat Not Difficult (4) Difficult (2) Difficult

Natural catastrophe 64% 8% 16% >1% 12%

Regulatory risk 49 18 27 4 1

Political risk 49 13 31 4 3

Country risk 43 8 37 10 2

Information technology risk (e.g., cyber security or systems failure) 43 13 31 7 6

Commodity (non-energy) price volatility 38 20 33 8 1

Currency/FX 36 19 30 7 7

Energy price volatility 36 13 37 8 5

Tax risk 33 19 36 8 5

Intellectual Property 32 14 46 3 54

Supply chain disruptions 32 16 42 5 5

Customer satisfaction/retention 29 19 40 7 4

GDP Growth 27 23 38 8 4

Product liability 27 40 20 7 7

Inflation 27 13 48 3 9

Liquidity 23 16 39 14 8

Labor and HR issues 20 12 57 8 3

Interest Rate 20 17 42 8 13

Outsourcing 17 9 39 22 13

Credit 13 20 51 11 5



Table 7: Risk Factors Expected to Have Greatest Impact on Organization’s Earnings over Next 3 Years (Percent of Organizations)


Customer satisfaction/retention 44% 46% 41% 42% 47%

Regulatory risk 37 38 38 39 36

GDP Growth 35 26 47 47 32

Political risk 28 29 29 26 19

Interest Rate 21 24 15 18 22

Credit 21 27 11 16 26

Liquidity 18 22 13 15 22

Energy price volatility 18 14 25 20 19

Inflation 17 20 11 11 19

Commodity (non-energy)price volatility 17 14 24 24 20

Labor and HR issues 16 20 11 9 16

Currency/FX 15 14 19 20 16

Tax risk 15 13 16 15 16

Information technology risk (e.g., cyber security orsystems failure) 15 19 13 14 14

Supply chain disruptions 14 13 17 18 17

Country risk 13 10 14 15 11

Intellectual Property 8 8 8 6 9

Natural catastrophe 7 7 6 4 9

Outsourcing 5 5 4 5 5

Product liability 3 3 4 5 3



Table 8: Challenges to Organizations’ Ability to Accurately Forecast Metrics (Percent of Organizations)


Capturing relevant data from within the company 52% 45% 60% 58% 49%

Integrating risk and forecasting data to strategic decision making 47 49 44 49 44

Capturing relevant data from external (non-company) sources 44 47 41 47 45

Forecasting and analytical skills in organization 36 35 38 33 38

Corporate resources 31 29 32 29 33

Corporate IT resources 29 28 29 35 25

Executive management support for forecasting 22 25 18 16 27

Table 9: Actions Taken in Response to Current and Emerging Business Risks (Percent of Organizations)

Increased Same Decreased

Investment in IT systems 57% 35% 8%

Revenue growth targets 53 27 20

Focus on risk culture and awareness within organization 52 42 6

Geographic markets served 51 43 6

Product lines/offerings 49 40 12

Margin growth targets 45 33 22

M&A activity 43 39 18

Capital expenditures 39 36 25

Use of external resources/experts 39 44 17

Size of organization workforce 29 39 33



Table 10: Changes in Risk Management Activities in Response to Current and Emerging Risks (Percent of Organizations)


Greater executive review of strategy/assumptions 63% 65% 62% 66% 62%

Increasing specific risk analyses 46 48 45 53 41

Increasing risk reportingto management 44 42 50 50 41

Increasing risk forecasting 33 34 32 34 33

Re-examining its risk appetite 31 31 30 34 30

Increased risk mitigation mechanisms - e.g., hedging 23 22 25 28 24

Increased risk transfer mechanisms - e.g., insurance 21 22 19 21 20

Increasing risk management guidance from external consultants 18 18 16 18 16

Increasing use of insights from professional associations 17 22 13 15 16

No changes to strategic decision making process 13 10 14 12 13

Increasing risk management guidance from banks 13 10 14 15 7

Other 1 1 <1 <1 1

Table 11: Risk Management Structure (Percentage Distribution)


Fully decentralized 12% 12% 11% 10% 14%

Centralized process/decentralized execution 61 53 68 71 52

Fully centralized process and execution 28 35 20 19 35



Table 12: Primary Responsibility for Organization’s Risk Management (Percentage Distribution)


CFO 37% 37% 38% 32% 42%

CEO/COO 28 36 19 24 32

Management-level Risk Committee/other management committee 14 10 18 20 9

Treasurer 11 7 15 13 9

Chief Risk Officer 9 8 10 11 8

Table 13: Level of Importance of Risk Assessment within the Organization(Percent of Organizations Rating Risk Assessment “Important” or “Extremely Important”)


At the executive management level 86% 82% 89% 88% 82%

At the Board of Directors level (e.g., Audit Committee) 82 75 88 86 79

Within business unit 75 68 80 83 67

Within department 68 64 74 77 60



Table 14: Key Partners Outside of Treasury Who Reassess Key Assumptions for Risk(Percent of Organizations)


Executive Team 82% 84% 79% 81% 82%

Legal 47 42 55 49 45

Tax 37 31 46 49 38

FP&A 36 23 53 53 31

Sales 17 15 19 22 19

Investor Relations 13 9 16 23 5

Other 8 6 11 11 5

Table 15: Partners to Whom Treasury Reports Changes in Risk Assumptions(Percent of Organizations)


CFO 72% 63% 84% 82% 66%

CEO 43 53 34 40 45

Board of Directors 28 35 19 20 28

Treasurer 25 14 39 37 13

Board Audit Committee 24 21 28 33 12

Management-level Risk Committee 21 16 28 34 12

Chief Risk Officer 15 12 18 22 10

COO 14 17 9 15 15

Other management committee 9 9 8 7 12



Table 16: External Experts Assisting Organization with Risk Management(Percent of Organizations)


Consultants 62% 57% 69% 65% 55%

Banks 53 47 63 63 48

Auditing firms 50 49 51 55 45

Professional associations 44 45 41 44 40

Trade (industry specific associations) 35 37 33 34 33

Think-tanks 9 8 9 7 9

Other 5 7 4 4 6

Table 17: Responsiveness of Banking Partners in Helping Organization Better Understand and Assess Risk(Percent of Organizations)


Very responsive 10% 9% 11% 15% 8%

Responsive 26 25 29 31 21

Somewhat responsive 42 40 44 43 40

Not very responsive 14 16 12 8 20

Not responsive at all 8 10 4 3 11

Table 18: Level of Change in Organization’s Forecasting of Critical Variable Relative to 5 Years Ago (Percentage Distribution)

Little-to Somewhat Significantly no-change Different Different (1) (2) (3) (4) (5)

All 18% 9% 37% 23% 13%

Revenues Under $1 Billion 16 9 30 27 18

Revenues Over $1 Billion 21 8 45 19 7

Publicly Traded 18 10 41 23 9

Privately Owned 20 7 32 23 18



Table 19: Status of Metrics Organization Forecasts (Percentage Distribution)

Would like to Does not forecast, Currently forecast, but does not forecasts currently does not anticipate doing so

Sales 96% 2% 1%

Margins 93 4 3

Cost of goods sold 91 5 4

EBIT 91 6 3

Capex/R&D expenditures 86 9 5

Earnings per share 80 6 13

Interest coverage 79 12 9

FTEs (organization wide) 77 12 11

Inventory 76 13 11

Debt-to-earnings 76 13 11

A/R balance 75 15 11

Return on capital 68 20 13

*Calculations exclude respondents who provided a “not applicable” response on a given metric.

Table 20: Number of Key Performance Indicators Tracked on Executive Dashboards(Percentage of Organizations that Maintain an Executive Dashboard Tracking KPIs)


1 to 5 24% 31% 17% 19% 28%

6 to 10 44 46 42 43 47

11 to 15 18 14 22 20 14

16 to 20 13 9 19 18 11

AFP Research

AFP Research provides financial professionals with proprietary and timely research that drives business performance. The AFP Research team is led by Managing Director, Research and Strategic Analysis, Kevin A. Roth, PhD, who is joined by a team of research analysts. AFP Research also draws on the knowledge of the Association’s members and its subject matter experts in areas that include bank relationship management, risk management, payments, and financial accounting and reporting. AFP Research also produces AFP EconWatch, a weekly economic newsletter. Study reports on a variety of topics, including AFP’s annual compensation survey, and AFP EconWatch, are available online at www.AFPonline.org/research.

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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 Oliver Wyman’s rigorous analytical approach to risk management with leading thinking from research partners.

For more information, please contact:Alex WittenbergPartner in the Global Risk & Trading Practice at Oliver Wyman and the head of Oliver Wyman’s Global Risk [email protected]

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