Risks and risk management
Ixonos’ risk management aims to ensure undisturbed continuity and development of the company’s operations, back up the implementation of the commercial targets set by the company and promote increasing company value.
Risk management principles and responsibilities
Risk management is present in all the company’s core processes, from the Board’s strategy process to customer-specific service provision and the company’s quality system. The CFO is responsible for risk management planning, development, instructions and supervision as well as for developing the risk management methods and processes.
In accordance with the risk management system, each unit in the Group is responsible for identifying, evaluating and preventing the risks related to its own operations. Risk management has been implemented in the normal business planning and monitoring systems of the units as well as in the company’s management systems.
In accordance with the strategy, business planning and budgeting processes, the Board of Directors monitors the implementation of the company’s risk management policy. This supervision has been organized so that the Audit Committee supervises the implementation and development of the company’s risk management program and submits risk management related matters to the Board of Directors when necessary. Significant business risks are always considered by the Board of Directors.
Types of risk
Once a risk has been identified, it is monitored monthly, quarterly, semi-annually or when risk exposure is detected, depending on the type of the risk.
Ixonos has identified the following risk types and risks:
- Operating environment: political, economic and legislative conditions, the competitor situation and customer requirements.
- Service sales and marketing: personal, contract, liability and information-security risks related to the sales and marketing of
services.
- Service provision: personal, contract, liability and informationsecurity risks related to service provision.
- Technical infrastructure: risks related to data processing and information networks.
- Finances: risks related to liquidity, capital adequacy, financing, capital, interest and currencies.
- Abuse: risks caused by incidents involving deviation from legislation, other corresponding external norms or the company’s internal
instructions.
- Strategy: risks related to environmental perception; reporting; decision-making; and strategy implementation.
Major risks and uncertainty factors
Presently, the major uncertainty factors relate to the global financial crisis and its potential ramifications. The general financial insecurity and tightened credit conditions also influence corporate investments and propensity to invest. The current economic uncertainty affects the information systems development investments of Ixonos’ customers too; such investments may be put on hold, or decisions regarding them may be postponed.
Ixonos’ acquisitions, its rapid growth in 2006–2008 and the upswing in its project operations have increased the company’s requirement for working capital. The company manages this need by creating, together with financiers, adequate buffers to ensure sufficient funds as well as by facilitating the circulation of working capital. The company’s balance sheet also includes a significant amount of goodwill. Despite the September 2009 depreciation of goodwill allocated to the Business Solutions unit, the company’s goodwill may be impaired further should either internal or external factors reduce the profit expectations of the company or any of its cash-generating units. Goodwill will be tested during the final quarter of the present year and, if necessary, at other times.
The company’s financial agreements have covenants attached to them. A covenant violation may cause either an increase in the company’s financing costs or a call for swift partial or full repayment of non-equity loans. The biggest risks related to covenant violations are associated with operating profit fluctuation due to the market situation and with a potential need to increase the company’s working capital through nonequity funding. The company manages these risks by negotiating with financiers and by maintaining readiness for various financing methods. Ixonos has access to the cash funds its normal operations require.
Ixonos Plc entered EUR 7.8 million as additional acquisition price in accordance with the share purchase agreement, signed on 4 September 2007, for Cidercone Life-Cycle Solutions Oy (later Ixonos Outsourcing Services Ltd). This amount was based on Ixonos Plc’s view of the additional acquisition price. Negotiations with the selling party didn’t lead to consensus on the amount of the additional acquisition price. To solve the disagreement, arbitration was started at the Arbitration Institute of the Central Chamber of Commerce of Finland in spring 2009. The sellers claimed an additional acquisition price of some EUR 8 million, on top of the additional acquisition price already paid, in their request for arbitration. Based on the arbitrator’s decision in spring 2010, Ixonos Plc had to increase the paid MEUR 7.8 additional acquisition price by MEUR 1.1.
Risks related to financing
The company is exposed to several funding risks in the course of its normal business operations. Risk management aims to minimize any adverse effects that changes on the finance market might have on the company’s profit. The main funding risks of the Ixonos Group pertain to capital adequacy and interest rates. The longterm funding of the Ixonos Group has chiefly been arranged through two main financiers. Later, the company may also decide to issue shares. Should the general economic situation tumble into an exceptionally long decline, this would likely increase the Ixonos Group’s financing costs in proportion to the earnings from the Group’s operations, as the Group’s earning power as well as the cash flow from its business operations presumably would decrease during a general recession.
The circumstances mentioned above might also reduce the availability of external financing for the Ixonos Group and weaken the Group’s financial standing. The financing function of the parent company is responsible for the implementation of risk management and tasked with identifying, estimating and hedging financial risk in cooperation with the business units.