6 Risks and Opportunities for Future Business Development
In its business, SinnerSchrader is subject to many risks which could have a negative impact on the Group’s and the AG’s asset, financial and income situation or could result in SinnerSchrader failing to meet the goals it has set for future business development.
It is necessary to take risks when engaged in entrepreneurial activity aimed at earning profits. To ensure that the success is sustainable, it is important to manage these risks. On the one hand, this means evaluating them for probability of occurrence and the possible impact on the asset, financial and income situation and continuously monitoring them. On the other hand, it means identifying measures with which risks can be limited or avoided and – with regard to the Group’s own core expertise, financial strength and the costs of the relevant measures – defining which limitation or avoidance measures should be taken to what extent for which risks.
In managing the Group, it is one of the key tasks of the Management Board to define general conditions and processes for risk management for the SinnerSchrader Group, to monitor compliance with them and to regularly analyse the development of the risks in each division with the managers of the operating units and administrative divisions.
The SinnerSchrader Group’s risk management system and the risk profiles of the individual divisions are documented in a risk manual. An employee from the financial division of the AG has been appointed the Group’s risk officer and has been commissioned to ensure that the specified risk management system is internally evaluated on a regular basis and that the results of this evaluation are documented at least once a year. Furthermore, it is the task of the risk officer to randomly analyse individual divisions on behalf of the Management Board with regard to the extent to which the specified measures to limit or avoid risks are being implemented.
It is the responsibility of the managers of the individual divisions to continuously monitor and manage the risks in their own divisions. If there is a significant increase in the degree of individual risks above a specified threshold, the managers are required to report this immediately to the Management Board.
Good risk management depends on quickly and reliably providing information to the management about the course of business. To this end, SinnerSchrader has set up a controlling and reporting system which reports on a monthly basis on the development of key business data in the individual divisions and on the financial results.
As far as the key risk areas are concerned, the risk profile of the SinnerSchrader Group has hardly changed in the 2005/2006 financial year. In the following, individual important risk areas will be explained in more detail. This selection of risks does not mean that there can be no significant impact on the asset, financial and income situation of SinnerSchrader from other risks that have not been mentioned.
» Economic Risks
The general economic development influences the volume of investments in IT and Internet services as well as expenditure on online advertising and supporting services. A deteri-oration in the economic situation could further reduce the market volume addressed by SinnerSchrader with regard to quantity and price. The measures for capacity adjustment which are necessary as a reaction to such a development may be effective only with a time lag and would once again lead to costs for restructuring measures.
» Competition
Competition in the market for IT and Internet services has increased continuously in recent years. In particular, there are providers active in this market – or who are appearing on this market – who have a broader portfolio of services, more international business and longer and better-established customer relationships than SinnerSchrader. The future development of SinnerSchrader largely depends on how well SinnerSchrader succeeds in establishing adequate prices on the market for its services as a specialised service provider without the means of temporary cross-subsidisation.
The extent to which the procurement of programming services in emerging nations becomes more important for competitiveness in relation to the individual developments offered by SinnerSchrader is also significant in this context. SinnerSchrader does not currently have sources for such services and, if necessary, could only build them up over time. Bigger competitors with an international market presence already have the relevant structures or would be able to establish them more quickly.
» Operational Risks
Sinner Schrader earns 17 % of its revenue with one customer; the five biggest customers have a joint share of almost 61 % of revenue. In the best case, it would only be possible to compensate for the loss of the business of these important customers after a considerable amount of time, and during this time it would not be possible to reduce costs correspondingly.
Since SinnerSchrader’s business revenues are not secured by long-term contracts, but instead largely come about on the basis of individual orders for a limited period, revenue plans are subject to a high degree of uncertainty. The tendency of SinnerSchrader’s customers to commission whole projects in small steps has not yet diminished, with the result that orders on hand do not extend beyond one quarter’s revenue.
SinnerSchrader processes a major part of its revenue within the framework of fixed price agreements. Because of complexity and high technical demands, the originally calculated costs may be exceeded, resulting in unplanned losses. Furthermore, SinnerSchrader assumes standard guarantee and liability stipulations within the framework of project contracts, which can result in considerable follow-up costs for individual projects.
The projects that SinnerSchrader undertakes for renowned customers sometimes have a considerable effect in the public sphere. Quality deficiencies in providing the service can therefore result in negative publicity, which could significantly impair the sale of services and thus future business development.
» Personnel Risks
The success of SinnerSchrader is heavily dependent on the qualification and motivation of its staff. Particular importance is attached to certain employees in key positions. If SinnerSchrader does not succeed in keeping these employees in the company or in continuously hiring qualified employees, the success of SinnerSchrader may be significantly impaired because of the loss of expertise.
» Technological Risks
The market for IT and Internet services is characterised by a high rate of change in the basic technologies used and by a level of standardisation which remains low. The future market success of SinnerSchrader depends on the extent to which the breadth and depth of the technological expertise can be kept at an adequate level and technological dead-ends can be avoided in view of high employee training costs with limited resources.
» Risks from Acquisitions
SinnerSchrader is also interested in expanding its market position in Germany through targeted acquisitions. The success of acquisitions depends on the extent to which the acquired company can be integrated in the Group structure and the desired synergies are achieved. In this context, acquisitions in the field of professional services entail a particular risk in that the expertise, market knowledge and customer relations which are being acquired are rarely permanently tied to the acquired company. Unsuccessful integration can therefore quickly lead to the need for considerable depreciation, or even a total loss of the investment.
In spite of the relevance of the risks listed above and on the basis of the available information, no risks are currently apparent that would threaten the future existence of the SinnerSchrader Group or SinnerSchrader AG. Because of the positive business development in the 2005/2006 financial year, the asset and financial situation of the Group is stable.
The risks are countered by opportunities, and SinnerSchrader could exceed its goals if
they occur. The main opportunities lie with existing customers, the SinnerSchrader brand name and the performance of some key members of staff, especially those with sales and customer care tasks. Above and beyond what is assumed in the plans, these three factors could result in currently unforeseeable individual orders from existing customers or a higher-than-planned new customer rate.
Another opportunity lies in the development of the prices that can be achieved on the market for SinnerSchrader services. The rising demand for the services offered by SinnerSchrader could result in SinnerSchrader being able to achieve higher prices on the market than assumed in the plans.
Furthermore, a successful acquisition could bring about a very positive change in the planned development. The forecasts are based only on the organic development of
SinnerSchrader.