risk section

principles underlying risk MANAGEMENT

USG People is exposed to risks in the performance of its business activities. Our success as an organisation is partly dependent on our ability to cash in on opportunities and to manage risks. This means that risk management, as well as taking advantage of opportunities, is an integral part of the day-to-day conduct of business at all management levels.

USG People’s policy is to safeguard the continuity of its business activities whilst maintaining a healthy balance between risks and returns. Internal risk management systems can help to achieve this balance. A properly functioning risk management system allows both opportunities and threats to be identified at an early stage, enabling us to take advantage of opportunities whilst limiting the associated risks. Responsibility for setting up internal risk management systems and for guaranteeing and monitoring their operation and effectiveness lies with the Executive Board and the management of USG People.

INTERNAL RISK MANAGEMENT AND CONTROL SYSTEM

The internal risk management and control systems at USG People are focused on identifying events which could have an impact on realising our objectives. In addition the purpose of these systems is to control the risks identified within our risk appetite.

These systems allow us to achieve our objectives without losing sight of the associated risks. In other words: errors are identified and corrected, and maximum precaution is taken to ensure that unexpected situations do not lead to surprises. It goes without saying that completeness cannot be guaranteed for such systems and that no internal control system is able to provide absolute certainty. The internal risk and control systems at USG People, which consist of a combination of instruments based on the COSO ERM model, are shown in the following diagram.

The various elements of the risk management and control systems are explained in more detail below.

Control frameworks

The criteria for our functioning are set out in documents such as our Code of Conduct, Business Principles, the Model Code and the Corporate Delegation of Authorities Scheme. In addition to these internal guidelines it goes without saying that the framework for USG People is also defined by external legislation and regulations. Together they form the control frameworks within which USG People seeks to realise its objectives.

Objectives and realising them

The management of USG People develops its strategy whilst taking into account the associated risks and risk appetite. The objectives and strategy form the basis for policy formulation, tactical and operational planning and the operating activities through which we seek to realise our objectives.

Steering mechanisms

Steering mechanisms are needed to achieve the objectives within the control frameworks. These mechanisms include the following:

  • the financial and operational planning and control cycles at corporate, regional, country and operating company level. These are supported by manuals, procedures and a detailed accounting manual outlining the principles of valuation and determination of results;
  • IT management which safeguards the integrity and continuity of our information using back-up and recovery systems, network and system redundancy and security systems;
  • insurance policies to cover the impact of company risks, debtor risks and liability risks;
  • risk management aimed at supporting the management in identifying and analysing risks, allowing them to choose the most appropriate measures. Examples include risk workshops organised for the Executive Board and country managers, the issue of a quarterly Letter of Representation and the quarterly risk reviews in which line managers outline the principal risks and how they are being dealt with.

Control by the Executive Board and management

The risk management and control model described above is controlled by the Executive Board and other senior management levels.

Supervision and monitoring

The entire risk management and control system is supervised by the audit committee. The Executive Board and the Supervisory Board receive information from the internal and external audit function. USG People’s centrally organised internal audit function conducts audits and reviews of the various countries and entities. It is supported in its activities by a network of local specialists.

The Executive Board reports to and is accountable to the Supervisory Board with respect to the design and organisation of the risk management and control system.

Assessments identify areas for improvement in our risk management and control systems, which are subsequently implemented and assessed again. This regular assessment process allows USG People to continue to control risks in a constantly changing environment.

MAIN RISKS IDENTIFIED

The main risks relating to our objectives and strategy have been identified and are listed below. They must be borne in mind when assessing other (forward-looking) information in this annual report.
Strategic risks
RISKS CONTROL MEASURES
Failure to take full advantage of strategic changes
  • There is a risk that mergers involving our operating companies will not produce the desired results.
  • USG People has defined a number of post-merger activities focusing on process and systems integration and on aspects of culture and leadership.
  • These post-merger activities are assessed and monitored.
Lower-than-expected growth of revenue and margins due to limited economic recovery
  • Delay in realising the strategy due to limited economic recovery in some countries.
  • Revenue diversification (general / specialist / professionals).
  • Increase the scale of the branch offices in order to achieve greater flexibility throughout the cycle.
  • Strict control and monitoring of costs.
  • Acquisition processes have been set in motion in various countries in the interests of realising strategy.
  • Competitors are being forced to lower margins due to continuing tightness on the demand side of the market. This creates the risk of us having to lower our margins as well in order to maintain our competitive position.
  • Innovation is allowing us to maintain or improve on gross margin levels.
  • Further diversification of the client portfolio enables better margin control.
  • Adjustments to the automated margin authorisation system and more training for the sales force have further curbed margin erosion.
Relatively high dependence on the Netherlands and Belgium for revenue and EBITA
  • As in previous years the Netherlands and Belgium made a relatively large contribution to revenue and EBITA in 2010. Lower-than-expected profitability in these countries has implications for our company.
  • The processes aimed at integrating operating companies and Shared Service Centers outside the Netherlands and Belgium have been intensified and this has increased operating efficiency. This will allow for example Germany to eventually account for a larger share of the portfolio.
  • Continued margin growth and indirect costs for each individual operating company.
  • Acquisition processes have been set in motion in various countries in the interests of realising strategy.
Pressure on returns due to limited scale in some countries
  • In a number of countries our operating companies are limited in scale. A possible dependence on a limited number of clients and/or on certain market developments may have a relatively high impact as a result. This in turn can put pressure on revenue and margins.
  • Take further advantage of the synergy effects deriving from merged operating companies.
  • Further optimising and integrating IT applications at international level.
  • Focusing on organic growth and where necessary realising growth through acquisitions.
  • Broadening the client portfolio.
Operational risks
RISKS CONTROL MEASURES
Too much internal focus
  • The integration of brands can temporarily result in internal focus, which in turn can put pressure on revenue and/or margins.
  • Thorough preparation and monitoring of the integration process so that integration can take place quickly and the desired external focus remains possible.
Dependence on IT systems
  • In 2010 USG People continued the partial outsourcing of IT in a number of countries, including the Netherlands, Italy, Germany and Spain. This creates a risk of dependency on external providers for the quality of parts of our primary process.
  • The service and supply management built up over the past years continued to undergo further improvement in 2010.
  • The failure of IT systems which could lead to a disruption of the primary processes.
  • The presence of back-up and recovery procedures, including mirrored IT systems at different locations.
Great diversity of IT systems
  • Excessive diversity of IT systems means there is a danger of uncontrollability and the absence of a platform for further (international) integration.
  • In 2010 the integration of back office systems took shape with the SAP implementation.
  • SAP has been developed in such a way that further integration – both of the front office and internationally – will be possible in the years ahead.
Shortage of staff
  • Difficulty attracting and retaining temporary staff for our clients (when the economy recovers).
  • Through marketing activities and by keeping our name recognition and image up to standard we are able to find staff and keep them.
  • Further enhancement of our online activities and our branch office policy help to mitigate this risk.
  • Inability to find, develop and retain sufficient own employees of the highest calibre.
  • USG People offers its staff good training and learning opportunities. Our existing management development and leadership programmes, as well as our onboard programmes and procedures surrounding succession planning help us to retain staff.
Financial risks

For information on financial risks please refer to the explanatory notes on the annual accounts.
RISKS CONTROL MEASURES
Changes to the creditworthiness and liquidity of debtors
  • In the course of the cycle the creditworthiness and therefore the possibilities for insuring debtor risks fluctuate. This can lead to costs as a result of provisioning for/writing off bad debts.
  • The credit management systems implemented have been further optimised.
  • Regular monitoring of the quality of debtors and changes in creditworthiness.
Greater demands on working capital
  • Increased financing requirement as a result of an increase in the total debtor amount in the working capital due to increased economic activity.
  • The presence of local credit management procedures, based on the corporate credit management policy.
  • Frequent monitoring and active management of important ratios, such as DSO, and debtor ageing trends at each operating company.
  • Continuation of additional commercial control of and focus on working capital in the commercial area of operations.
  • Use of factoring.
Goodwill impairment
  • Depending on market conditions it may be necessary to write down goodwill, which can have a negative effect on both the result and on equity.
  • Regular monitoring of the profitability and added value of activities, so that potential goodwill impairment is identified in good time.
  • Continuous attention to analysis and assessment of recognised goodwill.
Dependence on government subsidies
  • In two major countries we receive government subsidies. Changes to subsidy legislation can have a negative effect. For example in France subsidy legislation changed at the end of 2010 which may affect margins.
  • Devising a commercial plan to realise price compensation and to reduce the dependency on government subsidies (by diversifying the client portfolio).
Liquidity
  • To ensure we have sufficient means at our disposal to fulfill our direct commitments, it is of the utmost importance that we have direct access to cash and cash equivalents.
  • The Treasury department monitors group liquidity by means of budgets, forecasts and strategic plans.
  • Compliance with the conditions of the syndicated loan and other loans are actively monitored at all times.
Risks related to compliance with legislation and regulations
RISKS CONTROL MEASURES
Compliance with labour law obligations
  • The countries in which USG People operates have different collective labour agreements and complex local labour laws.
  • Operational quality management ensures that collective labour agreements and local labour laws are correctly applied.
  • Internal controllers assess whether regulations are complied with.
Frequent changes to legislation and regulations
  • Legislation and regulations (such as labour and safety laws) are subject to frequent changes in some countries. This creates the risk of USG People not complying with or being late in complying with new regulations, which may have financial and other implications and could damage our image.
  • Specialists at both local and central level are responsible for anticipating legislative changes. These specialists also develop and implement internal rules and guidelines to ensure that employees are aware of the prevailing legislation and regulations and comply with them.
  • Workshops on integrity, fraud and competition legislation contribute to increased awareness and knowledge of applicable regulations.
Legislative changes with business implications
  • Legislative changes (for example to the minimum wage or equal pay) can have business implications which are difficult to estimate.
  • Initiating and participating in lobbying activities through industry and sector organisations.
  • Communicating and coordinating in good time with clients in the event of a statutory increase in labour costs, so that that the increases can be passed on.
  • Further strengthening of internal control measures with regard to the introduction of and compliance with changes.

The risk profile has been discussed with the Supervisory Board. However, it cannot be ruled out that this summary may prove to be incomplete in the future. There may be additional risks of which we are currently unaware or risks which are currently classified as limited but which may turn out to have implications in the future.

STATEMENT REGARDING THE EVALUATION OF RISK MANAGEMENT AND INTERNAL CONTROL

The Executive Board is aware that risk management and control systems, however extensive they may be, are unable to provide absolute certainty that all material inaccuracies, losses, fraud and breaches of laws and regulations can be prevented entirely. The policy of the Executive Board remains focused on constantly monitoring and improving the internal risk management and control systems in order to make the processes as reliable and effective as possible. The Supervisory Board and audit committee are informed on the structure and operation of the internal risk management and control systems. It is the opinion of the Executive Board that the risk management and control systems functioned properly in the year under review with respect to the financial reporting risks. These systems provide a reasonable level of certainty that no material inaccuracies are contained in the financial reporting in the current year.

The Executive Board also declares that to the best of its knowledge:

  • the annual accounts of USG People give a true and fair view of the assets, liabilities, financial position and profit or loss of the issuing institution and companies jointly included in the consolidation;
  • the annual report of USG People gives a true and fair view of the position at the balance sheet date, the course of events during the financial year of USG People and the companies associated with it, the results of which are included in the annual accounts;
  • the main risks facing USG People are outlined in the annual report.