Risk Management: What is on the Minds of CEOs?

By Patricia Van Arnum - DCAT Editorial Director

June 2, 2015

Risk management is on the agenda of CEOs across all industries, but what do they perceive as threats and what measures are they taking to mitigate these risks? DCAT Value Chain Insights (VCI) share perspectives from within and outside the pharma industry. 

Risk management and related mitigation are an important part of company's strategy and operations. But how effective are companies' risk-management plans and how does supplier risk management factor into the overall equation? Recent executive studies offer perspective.

Through the CEO lens: risks to business growth
PwC's 18th Annual Global CEO survey, released in March 2015, surveyed 1,322 CEOs in 77 countries to provide a perspective on what CEOs felt were the greatest opportunities and risks to their businesses. Overall, 31% of CEOs see more opportunities than threats and 29% saw more threats than opportunities while 30% see both greater opportunity but also greater threats. Overall CEOs are less optimistic than they were a year ago about global economic growth prospects. Thirty-seven percent think the outlook will improve over the next 12 months compared with 44% last year while 17% (more than twice than in 2014) think the outlook worsen. These mixed views are further divided depending on the growth prospects for a geographic market. CEOs are broadly upbeat about establihsed markets, notably the United States, and the US has overtaken China as CEO's most important overseas growth market. Thirty eight percent of CEOs iin 2014 (compared to 33% in 2014) said that the US was the most important for their overall growth prospects over the next 12 month followed by China (34% in 2015 compared to 30% in 2014). Rounding out the top 10 growth markets cited by CEOs, Germany was cited as the most important growth market by 19% of CEOs, the UK (11%) and Brazil (10%) followed by India (cited by 9% of CEOs), Japan (cited by 8% of CEOs), Russia (cited by 6%), Indonesia (6%), and Australia (6%), according to the PwC study.

Facing mixed prospects for growth, CEOs point a number of risks to business growth, with over-regulation cited as the chief concern, cited by 78% of CEOs, up 6% compared to the 2014 PwC Annual CEO Survey. Overall the average number of CEOs expressing concerns over risks has increased steadily since 2012, when 47% of CEOs cited concerns to 62% of CEOs in 2015. These risks involved over-regulation, availability of key skills, government response to fiscal deficit and debt burden, increasing tax burden, shifts in consumer spending and behavior, high or volatile energy costs, protectionist tendencies of national governments, new market entrants, and basic infrastructure and supply-chain disruption. The top five risks cited by CEOs in 2015 were over-regulation (78%), availability of key skills (73%), government response to fiscal deficit and debt burden (72%), geopolitical uncertainty (72%), and increasing tax burden (70%). Other risks cited by CEOs included cyber threats, including a lack of data security (61%), shifts in consumer spending and behaviors (60%), social instability (60%), speed of technological change (58%), and new market entrants (54%).

CEOs see the risks that would disruption to business operations and growth prospects greatest from external factors. Looking at the pharmaceutical and life sciences industries specifically, 59% of CEOs cited changes in distribution channels as a risk, and 56% cites changes in consumer behavior as a risk. Sixty-four percent saw increases in the number of significant and indirect competitors (traditional and new) as a risk, and 82% cited changes in regulation as a risk

An important finding from the PwC study is the value that CEOs are placing on collaborative networks, either through joint ventures, strategic alliances, or informal collaborations. Topping the list are collaborations with suppliers with 69% of CEOs saying that they are engaged or considering to be engaged in collaborative supplier relationships, higher than any other stakeholder group, even surpassing customers with 66% of CEOs citing that they have such strategic relationship.

More complex global supply chain networks
Across all industries, more than half of CEOs (56%) think that cross-sector competition will become more common, meaning that their organization will increasingly complete in new sectors other than their own over the next three years. Twenty-six percent thought such cross-competition is unlinkely As complexity in global supply-chain networks continues to increase, less than one-third (26%) of business executives are using data analytics tools and processes to help manage third-party relationship risks, according to information from a recent Deloitte executive polling of than 2,600 professionals from consumer and industrial product industries, the public sector technology, media and telecommunications industries, and financial services industries. rThirteen percent of those polled are still learning how to use analytics software and 22% use no data analytics at all.

"Many market leading companies leverage advanced data analytics tools and forensic accounting to identify anomalies in their transactional data," said Mark Pearson, principal, Deloitte Financial Advisory Services LLP, in recent press statement. "Using a forensic mindset when analyzing Big Data can provide value to an organization by adding context to suppliers and transactions, potentially adding to increasing profits and mitigating the risk of fraud, waste and abuse."

Nearly one-third (31%) of business executives surveyed said their organization has faced supply chain fraud, waste,or abuse in the past 12 months. Forty percent of these executives have a program in place to detect and thwart supply-chain abuse while 28% of respondents indicated their organizations do not have a program in place. Additionally, 23% of respondents monitor their third-party relationships less than once a year (13%) or not at all (10%).

"Globalization, regulation, and economic volatility are some of the top issues adding to the complexity of today's supply chain," said Larry Kivett, partner, Deloitte Financial Advisory Services LLP. "Failure to adequately and actively monitor supply-chain relationships can substantially increase a company's risk of significant financial losses, as well as exposure to legal and regulatory investigations, civil and criminal litigation, and reputational damage." Respondents said the biggest challenge to their organizations' supply chain fraud detection capabilities was acquisition of a new entity (25%).

Another Deloitte study, the 2015 Compliance Trends Survey report, gauged the scope and complexity of the modern corporate compliance function to answer a common question: how do compliance functions efficiently and effectively manage the risks associated with the increasing demands of numerous stakeholders and position themselves for success in the future?

The Delotte study found that 82% of organizations undertake some sort of enterprise-wide compliance risk assessment; nearly two-thirds said they conduct such an assessment at least annually, if not more often. That risk assessment gets done in a variety of ways: as a stand-alone exercise, in conjunction with internal audit's risk assessment, or as part of a larger assessment of all organization risks (respondents divided equally, one-third for each approach). One potentially concerning trend carried over from the 2014 and prior surveys relates to the oversight of third-party relationships across the extended enterprise. Third-parties' compliance risks continue to be the single biggest worry for surveyed compliance professionals, and proactive management of risks within the third-party population appear to remain inconsistent, according to the survey. Forty two percent of respondents indicated that they always audit compliance with policies or regulations; 38% always perform extensive background checks; and 32% always require training or certification.

Senior executives and leading industry experts will discuss their companies' risk management process for supplier selection, qualification, and evaluation and related metrics and implementation strategies at DCAT's Sharp Sourcing 2015, July 16, at the Hyatt Regency Hotel in New Brunswick, NJ. See below for more information. 


 
De-risk Your Pharma Manufacturing Supply Chain

Learn from leading experts from J&J, Pfizer, and DuPont on best practices in risk management, at DCAT's Sharp Sourcing 2015, an education program and networking event for pharma sourcing, procurement, and supply professionals. Sharp Sourcing will feature:

Supply Assurance and Risk Management Roundtable:  Experts from within and outside the industry discuss risk management processes, metrics, and implementation strategies. The roundtable features:

  • J&J: Joseph Agresta, Vice President, Johnson & Johnson Supply Chain Procurement Excellence;
  • Pfizer: Ron Perry, Vice President, Global Procurement, Pfizer Global Supply and Global Operations;
  • DuPont: Sidney Goldberg, Ph.D., Sourcing Compliance Manager;
  • Ernst & Young (EY): Niul Burton, Principal, Advisory Services
  • Leaders from Academia: Joseph Sandor, Hoagland-Metzler Endowed Professor of Purchasing and Supply Management, Michigan State University.

Plus presentations from Bristol-Myers SquibbMerck & Co.,  Biogen, and Shire on category management, single versus dual sourcing, and supplier relationship management as well as insight on value-based metrics for supplier performance.    

For more information, including how to register, go to DCAT Sharp Sourcing 2015.