Operative Risks and Risk Management
Eniro defines risk as the uncertainty that an event could occur that would affect the company’s ability to achieve its established business objectives within a given period. Risks are a natural part of all business operations that the organization must be able to manage effectively. Risk management is designed to prevent risks from materializing or to limit or prevent risks from adversely impacting operations.
Eniro has an annual, recurring risk analysis process, Enterprise Risk Management (ERM), which includes all parts of the business, as well as business areas and group functions. Eniro’s goal is to identify, assess and manage the risks its faces including industry- and market related risks, commercial risks, operative risks, financial risks, compliance risks relating to laws and regulations, and financial reporting risks. The risk exposure is to a great extent similar within the various business areas, and the risk analysis identifies the different risks in a structured manner by analyzing a number of risk drivers per risk category. For each evaluated risk, an assessment is made to determine to what extent the risk should be monitored, eliminated, reduced or increased. The risk analysis also provides input for annual business planning, where risk management activities are planned as a part of the strategic and operational initiatives adopted.
The company’s risk analysis, including risk management activities, are reported to the company’s Audit Committee and the Board of Directors for evaluation and approval. Eniro has defined the following three primary purposes of its risk management processes:
1. To ensure that the company’s management and Board of Directors are well aware of the company’s risks and to ensure that information about the company’s risk exposure is communicated effectively.
2. To support operative management by providing relevant risk information and decision-making data to obtain effective risk management and effective operational control and monitoring to achieve established business objectives.
3. To help company management and the Board of Directors to systematically identify, handle and monitor risks on various organizational levels in order to minimize damage to the business.
Risks that affect the Group's net income
Industry and market-related risks
Identified risks within industry and market-related:
• Technology development
• Macro-economic factors
• Customer behavior
• Competition
Both the markets for online and printed products are characterized by high competition in Eniro’s core markets. For printed products, it is mainly in the form of substitute competition, i.e. when a search channel takes users and advertising investment from a different type of search channel. As Eniro has a high market share in the Scandinavian and Polish markets Eniro usually competes with one or more independent competitors as well as with local and international search engines on the online market. Eniro faces competition from both new as well as established directory companies that continually develop and improve the search functions. In addition to traditional directory companies that mitigate their operations online, competitors in the online market include local as well as regional media companies expanding their activities and global search companies. The printed products published by Eniro compete with other directories and other printed forms of advertising operations, including traditional media such as newspapers, radio, television, billboards and direct marketing.
During 2010, the new product search service was launched. Sales of new advertising formats developed for the new product search service started in Sweden and Norway in January 2011 and will start in Denmark in the third quarter 2011.
Eniro’s ability to compete successfully for both advertising customers and end-users depends on factors both within and outside its control, including end-users demand for its services, successful development and timely introduction of
new products and services, Eniro’s ability to deliver relevant services to its advertising customers and end-users, pricing, industry trends and general economic trends. Further, Eniro’s competitors may reduce their prices in an effort to increase their market share or offer their services at a lower cost than Eniro. The increasing use of the Internet and mobile telephony by consumers as means to transact commerce will also likely result in the development of new technologies, products and services that could compete with those offered by Eniro. Increased competition in the Nordic markets and in Poland, as a result of price decreases, new product and service introductions or other factors, could have negative ramifications for Eniro, including a reduction in Eniro’s advertising customer and end-user base, lower usage rates and increased costs, which, in turn, may have a material effect on Eniro’s business,
financial condition and results of operations.
Commercial risks
Identified risks within commercial risks:
• Products and services
• Pricing models
Eniro’s business model to offer advertisers valuable exposure requires competitive and accessible search channels with motivated users. Changing user behavior and shifting trends in terms of purchasing media space constitute significant risks, and therefore, Eniro is focusing on continuously increasing its understanding of users’ purchases and demonstrating the value of advertising to our advertisers.
Eniro expects to derive a greater portion of its operating revenues from online advertising as directory usage continues to migrate from printed products to online. The expansion of Eniro’s online business is subject to a variety of challenges and risks including the following:
• Inhibited growth of Internet use. Eniro’s product and service development costs and investments in the online business may not generate expected additional operating revenues if the use of the Internet for information searches and as a medium for advertising does not continue to grow, or grows at a slower rate than currently anticipated. The growth may be inhibited for a number of reasons that Eniro cannot control or predict, including economic and technological developments.
• Changing technology and new product development. The markets in which Eniro operates and intends to expand into are characterized by rapidly changing technology, introductions and enhancements of competing products and services, and fluctuating advertising customer and end-user demands, including technology preferences. Eniro may be unable to upgrade, develop and deploy its new products and systems and attract experts in a timely and effective manner.
• Changes to pricing of online products and services. Revenues from services and products of the online business are distributed over the contract period, which is normally 12 months. In relation to pricing policies for online products and services, Eniro expects that some pricing will continue to change from subscription-based to more performance-based. A shift to more performancebased pricing would decrease the visibility and stability of Eniro’s revenue base.
Any failure by Eniro in the execution of its overall strategy and the expansion of its online business may have a material effect on its business, financial condition and results of operations.
Operational risks
Identified risks within operational risks:
• Product offerings
• Sales efficiency
• Alignment with cost base
As part of its strategy Eniro intends to broaden its product offering and sales channels, as well as increasing its sales efficiency. The new product search service launched during 2010, enables Eniro to launch a new range of improved products and services in January 2011. Alongside the existing products, customers will also be offered a selection of new improved advertising formats for small to mid size customers. In addition, new products, targeting larger customers and media buyers, will be launched. With continued launches within the framework of product search in January 2011, the mobile offering, which is today only available in Norway, will be rolled out across the markets of Directories Scandinavia. Eniro also intends to further increase the efficiency of its sales force and expand into under-used channels such as email and mail. Sales efficiency is improving with the shift from a single point of contact, contacting the customers once a year, and driven by the annual print canvas cycle, towards a multi-touch approach which gives an opportunity to retain customers and generate additional sales throughout the year. Any failure by Eniro in the execution of its above described intentions to broaden its product offering and sales channels, and increase its sales efficiency may have a material effect on its business, financial condition and results of operations.
As part of Eniro’s cost-efficiency program, Eniro seeks to identify areas for potential synergies and increased efficiency. The program covers implementation of a common IT platform and infrastructure across the organization, improving efficiency of the sales organization, centralizing product development, reducing general overlaps and inefficiencies, and developing Group-driven procurement of products and services. Any failure by Eniro in the execution of its cost-efficiency program may have a material effect on Eniro’s business, financial condition and results of operations.
Financial risks
Identified risks within financial risks:
• Funding
• Foreign currencies
• Interest rates
The Group’s common finance policy as established by the Board of Directors is the foundation for financial operations, delegation of responsibility and financial risk management. The focus of Eniro’s risk management is to reduce or eliminate financial risks, with consideration taken for costs, liquidity and financial position. In addition to the annual risk analysis, financial risks are continuously assessed and monitored. For a detailed description of financial risk management, see special section Financial risk management in Accounting principles.
Compliance risks
Eniro´s identified risks within compliance risks are:
• Laws
• Regulations
• Internal policies
Changed laws, regulations and governmental decisions could result in changed prerequisites for the business and thus affect Eniro. The company has a well-established system for internal regulations and policies, which clearly regulates and determines how the operations should be managed in various respects. The company regularly follows up its compliance with laws, regulations and internal policies – for example, through the activities of the internal audit, which includes monitoring of compliance risks.
Financial reporting risks
Correct and objective financial reporting and sound internal controls are essential for the company’s credibility with respect to shareholders and other stakeholders. Eniro devotes considerable resources to the development of its processes
for risk analysis and risk management in order to maintain good internal control of its financial reporting, in accordance with the intentions of the Swedish Code of Corporate Governance. The risk of essential errors in the company’s financial reporting is analyzed from the point of view of the consolidated income and balance sheet and significant notes in the company’s annual report. Key accounts are identified and a risk analysis carried out, in which both quantitative and qualitative risk parameters are assessed. For a detailed description of the company’s risk analysis and risk management activities with respect to its financial reporting, refer to the section on internal control over financial reporting in the Corporate Governance Report.
Last updated:2011-04-06