Page last updated at 00:06 GMT, Thursday, 2 February 2006

The risk of doing business

By Jeremy Scott-Joynt
BBC News business reporter

What keeps you up at night?

Safe door
Not all assets are this easy to lock away...

On a personal level, there's family, the mortgage, jobs and pensions - all the things which determine whether tomorrow is better, or worse, than today.

For companies and the people who run them, the concerns may be written a little larger, but that basic rule still applies.

What's out there that could make our lives more difficult - or, in the worst case scenario, put us out of business?

Some problems are perennial. But others change from year to year - and 2006 is shaping up to have a particularly knotty set of reasons why we do, indeed, live in interesting times.

Indeed, coping with risk in all its forms looks set to be a determinant of how well a company can attract investors - and keep customers.

For investors, according to a survey by accountants Ernst & Young, evidence that a company takes risk analysis seriously is a key issue.

Intellectual property is gold dust from the point of view of a competitor or an unscrupulous employee
Dan Morrison, Mishcon de Reya

Of 130 major investors in 16 countries, it found 82% would reward good risk management by paying a premium. Conversely, 61% said they would avoid companies that fell short - and almost half, or 48%, said they had actively backed out of investments for this reason alone.

Data at bay

But where do the risks lie? There are of course the "big picture" economic issues - but vulnerability to attack continues to be high on the agenda.

In this field, experts say, one key area for concern in 2006 is the integrity of a company's information.

Inside a corporation's computers lurk huge quantities of data - and from the outside it can be difficult to tell whether it is properly protected.

Hurricane
...and risks are rarely this clear-cut, experts warn

"Intellectual property, from customer lists and personnel files to marketing plans and product details, is gold dust from the point of view of a competitor, or an unscrupulous employee," says Dan Morrison, a partner at London law firm Mishcon de Reya.

"It's not nearly high enough on the radar."

After all, if assets such as money or stock go missing, a careful company with good audits should be able to spot it. Information, on the other hand, can be copied easily - and without good security, no-one will be the wiser till its abuse becomes public.

Criminals are more and more looking to this kind of target, says KPMG fraud expert Hitesh Patel - particularly given the relatively easy pickings it can provide in the fast-growing threat of identity fraud.

"Criminals are looking for easy pickings in data-rich environments," he says. "Organised criminals are moving back (from banks) into corporate environments where there's a lot of data being held."

Follow the money

Aside from the threat to information, the old-fashioned risk of becoming a target of economic crime is also high on the agenda.

The UK's Home Office is currently engaged in a year-long review of fraud, with a view to targeting police and other resources more effectively.

Excessive regulation driven by security concerns will... put sand in the wheels of globalisation
Anais Faraj, Nomura

And in April, the Serious Organised Crime Agency opens for business with the promise that organised criminals' embrace of economic crime, from fraud to money laundering, will be a key priority.

Not a moment too soon, some might say.

On 30 January, accountants KPMG's Fraud Barometer survey revealed that the value of major fraud cases passing through UK courts tripled in 2005 to almost 1bn.

Key to the rise was the threat from insiders, KPMG found. Half the money was allegedly stolen by staff - of which the vast majority of perpetrators were managers.

"Employee skulduggery continues to be one of the biggest concerns," says Dan Morrison.

"Companies are getting more prepared to face up to the risk their own employees can sometimes pose, but they need to be a lot more proactive about assessing just what risks they face in this area - particularly the potential legal risks - and working out how to manage them."

The weight of regulation

With this kind of threat in mind, regulators are upping the burden on firms to stay alert.

Call centre in India
Outsourcing carries risks as well as opportunities

Particularly in the financial sector, more and more is being demanded.

But for smaller firms, says Chizu Nakajima, director of Cass Business School's Centre for Financial Regulation and Crime, regulation can sometimes be a risk in itself.

"In anti-money laundering (in particular), it's OK for the big players - but small ones have the same responsibilities," she says.

And with more and more business happening cross-border, even for small firms, there's the ever-present risk of whether you can trust the people you do business with - or the place where they're doing business.

Increasingly vital business functions - not just data processing, but also human resources and finance - are heading offshore, and businesses need to think carefully about how to make sure their money, and again their information, remains secure.

Big picture

All that sounds serious enough. But there remains the big picture: the economic questions which can make or break a company, and about which there's precious little that they can do.

According to Anais Faraj, economist at Nomura Bank in London, politics-driven questions are the things which really keep him up at night.

There's the risk of a conflagration in the Middle East, as the Israel-Palestine question hots up and Iran's nuclear ambitions accelerate.

There's the "tangible sense of fragility in the euro project", he says, after the upsets of 2005 which set up the possibility that the European Union could come apart at the seams.

Then there's security - of the anti-terror kind.

Scientist testing for bird flu
What damage would a pandemic do to economies and companies?

"Excessive regulation driven by security concerns will not only infringe human and civil rights, but also put sand in the wheels of globalisation," he says. "The pendulum has already swung too far."

Look east

And then there's the really big change in the world economy: the shift of the economic centre of gravity eastward.

Naturally, that creates risks for business which could lose custom to cheaper, more nimble competitors in China and - increasingly - India.

But there's also the blowback from industrialisation and urbanisation.

On the one hand, environmental degradation could turn China into a "dustbowl economy with huge stresses on global commodity demand and social and environmental costs," Mr Faraj says.

On the other, more and more people in the cities, combined with more and more foreign travel, could add to the risk of a pandemic - be it Sars, bird flu or BSE.

Combined with outsourcing, just-in-time stock management and a growing reliance on non-Western overseas markets as Western economies slow, this paints a bleak picture.

But risks also present opportunities. And as E&Y's investor survey points out, companies which really think these things through - and can demonstrate that they do - will stand out from the crowd.

This is the first of a series of articles on business risk. Next: how to make - or break - a reputation.



SEE ALSO
Q&A: Soaring fraud
30 Jan 06 |  Business
Businesses face security threats
09 Nov 04 |  Business
The enemy within
17 May 05 |  Business


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