The Group supplies a wide range of consultancy services in many markets and countries, which gives rise to a range of risks that need to be identified, assessed and managed.
The management of risk is not separated from the business and is treated as an integral part of our culture and the way we operate. Our operating Boards consider the risks to which they are exposed and their mitigation on a continuous basis at each of their regular meetings and for which purpose a structured reporting framework is in place. Against the background of reporting from this level, the Group Executive Committee oversees the operational management of the principal risks to which the Group as a whole is exposed. In turn the Group Board receives regular reporting from the Executive Committee in relation to principal risks and their mitigation. The Group’s systems of planning, budgeting, performance review and internal control assist with this process. In considering and challenging this information the Group Board has undertaken a robust assessment of the principal risks facing the Group including those that would threaten its business model, future performance, solvency or liquidity.
The history of the Group demonstrates that by far the greatest negative impact on performance results from external events which are normally related to significant economic changes. This was clearly demonstrated following the global financial crisis in 2008 and the international recessions which followed it and the 2015/16 oil price collapse and the reduced volume of work available to our Energy and oil and gas exposed businesses. Adverse economic changes may cause clients to cancel, postpone or reduce projects as well as increasing risks associated with the recovery of debt and work-in-progress.
Although these macro-economic changes are beyond our control our exposure to a wide range of markets and geographies serves to mitigate overall risk. Economic conditions in our various markets are closely reviewed in order that pre-emptive action can, as far as possible, be taken as circumstances change. Our contracted order book is monitored regularly in comparison to the productive capacity of our fee earning staff and necessary actions are taken to reduce or increase costs as and when required.
Retention of Key Personnel
Internally, experience shows that the biggest risk we face is from losing the personnel who are responsible for managing both client relationships and teams of staff. The Group’s services are performed by well-qualified and professional employees with expertise across a wide range of areas. A failure to recruit and retain employees of appropriate calibre will, accordingly, affect our ability to meet our clients’ expectations and correspondingly to maintain and develop our business. In addition a failure to anticipate management succession issues adequately may lead to discontinuity in the Group’s operations and a corresponding diminution in performance.
As described on pages 15 and 16 the Group maintains competitive remuneration and incentive structures which are reviewed and adjusted on a regular basis. It also maintains an environment that is supportive of professional development through training and career opportunity. Board level succession planning remains under review by the Nomination Committee.
The development of the Group’s business continues to be supported by acquisitions. The main risk is the failure of the acquired business to deliver the profit and cash flow anticipated. This could occur if we fail to understand market conditions and potential changes in the sector, or to identify liabilities. There is also a risk that we fail in motivating or retaining staff, especially key staff and that integration takes longer or is more expensive than anticipated.
Detailed due diligence is performed on all potential acquisitions drawing upon both internal and external resources and designed to prevent the above. This will include an assessment of the ability to integrate the acquired business within the Group and its control environment; it cannot, however, identify macro events which occur some years later. The integration of the acquisitions made in 2015 has been successful and work in relation to that made in 2016 is proceeding well.
The change and uncertainty arising from political events may have an impact upon the markets in which we operate and our ability to deliver our services to clients. The most significant political risk we have faced for many years arises from the popular vote to leave the European Union. During 2016 we benefited from the weakness in sterling that the leave vote caused, although the impacts we might experience in 2017 and 2018 seem more likely to be negative if inflation or uncertainty take hold. It is not, however, possible to provide any meaningful assessment of the likely impact on Group profits and cash flow.
The US presidential election in 2016 also appeared to produce a significant change of direction. How this will impact the markets in which we operate in the US or internationally is also unclear; again this could produce both positive and negative impacts.
The significant majority of the Group’s services are provided in relatively stable and predictable liberal democracies. This coupled with the range of markets and geographies that we serve operates to limit the impact of adverse political developments in particular countries. In so far as changes can be foreseen, measures can be taken to match costs to anticipated workload. The other principal risks faced by the Group, as listed below, are usually of significantly less importance in terms of the scale of impact they might have on profit.
Environmental and Health Risks
Adverse occurrences of this type may affect our ability to deliver our services and our clients’ demand for them. Our operations have previously been affected by environmental events such as Macondo oil spill in the Gulf of Mexico. No events of this type have materially affected us in 2016.
Whilst it is impossible to predict events of this type, the wide range of geographies and markets that we serve should limit the impact of adverse occurrences in any specific country or region.
A lengthy failure or discontinuity in our IT systems could have a significant impact upon our operations.
The Group’s IT systems are centrally managed with certain specific functions carried out locally. An annual Group plan is produced which includes measures designed to ensure reliability and resilience of the Group’s systems as well as appropriate disaster planning. The Group has operations in a large number of locations, which would enhance its ability to withstand any individual failure or malfunction. The Group has never experienced a significant failure of its systems.
A successful cyber-attack upon our system could result in loss of data, disruption to operations or direct financial loss. The Group regularly experiences attempts of this nature but has never suffered any significant loss due to the effective operation of systems and controls in place. We continue to invest in better IT systems, adjust our processes in response to perceived threats and have recruited a Security Officer. The vigilance of our finance staff is important and we regularly communicate with them about our experience of attack and the importance of undertaking basic checks such as identity verification and checking to hard copy data.
Health and Safety
The Group’s activities require the monitoring and management of the health and safety of its employees as well as subcontractors, client personnel and the general public. A failure to manage this risk correctly could expose our employees and these other groups to dangers as well as exposing the Group to potential liabilities and reputational damage.
Detailed health and safety policies and procedures are in place throughout the Group which are designed to identify and mitigate risk. These are subject to regular review to ensure that any emerging risks are identified and managed. Policies and procedures incorporate a structured reporting process which aims to ensure that when incidents do occur they are properly investigated and appropriate corrective action taken. The Group’s approach to the management of health and safety is described in more detail on page 16.
Market Position and Reputation
The Group’s reputation for project delivery relies upon its public portrayal and the perception of existing and prospective clients. A major failure of project management or delivery could, accordingly, impact our ability to win future work.
The Group operates quality control systems, many of which are externally accredited and are designed to enable our employees to provide a consistently high standard of work.
Claims and Litigation
A failure to deliver our services in accordance with our contractual obligations may lead to a risk of the Group becoming involved in litigation. In addition, as the contracting environment has evolved, clients in some of our businesses have sought to transfer certain risks to the consultants it engages.
The internal review processes operated by the Group seeks to ensure that contractual risks are properly scrutinised and mitigated as far as possible, whilst the management and quality control systems highlighted above minimise the risk of shortfalls in performance that may give rise to claims against the Group. Notwithstanding this, from time to time the Group receives claims from clients against which appropriate professional indemnity insurance is maintained..
The Group is subject to a range of taxation and legal requirements across the various jurisdictions in which it operates. A failure to comply with these obligations could give rise to regulatory intervention, financial penalty and reputational damage.
The Group has in place appropriate internal controls to deal with such matters and employs appropriately qualified employees through whom it monitors and responds to the regulatory requirements of the countries in which it operates.
The availability of sufficient and appropriate funding through the Group’s bank facilities is important to support the Group’s acquisitions.
The Group’s principal bank facility is a committed multi-currency revolving credit facility of £150m expiring in 2020 as provided by Lloyds and HSBC. In 2014 the Group issued seven year US private placement notes of US$34m and £30m repayable in 2021 under a facility provided by Prudential Investment Management Inc.
Financial Risk Management
In addition to ensuring the availability of sufficient funding the Group faces a number of other financial risks which are fully described in note 29 to the Group Financial Accounts on page 72.
Long Term Viability Statement
In accordance with the requirements of the UK Governance Code the Board has assessed the long term viability of the Group. This was done over a three year period taking account of the risks above as well as the Group’s current position, its strategy and the Board’s risk appetite. A three year period was chosen as a realistic term over which to assess viability. The Board considered profit and cash flow models based upon a range of assumptions relating to trading performance and other outflows including those associated with the principal risks the Group faces occurring individually and in combination; this included severe but plausible scenarios. Based on this assessment the Directors have a reasonable expectation that the Group will continue in operation and be able to meet its liabilities as they fall due over the period to 31 December 2019.