Controlled risks - a winning way forward

Operational risks

Business-cycle dependence

At present, the Nordic region is ÅF’s largest market, where clients operate in a number of industries, including construction, engineering, the public sector and energy. This means that ÅF is dependent on a reasonably stable trend in these areas to achieve its targets. The general economic situation and propensity to invest are also highly significant, but ÅF’s diversification over a number of markets and in areas that experience different business cycles reduces any risk.

To reduce the dependence on the Nordic market, and to take advantage of growth opportunities, ÅF is expanding outside the Nordic region. ÅF’s strategy is to grow in the segments in which the Group is already a market leader in the Nordic countries. Increasing the geographical spread will help even out the effect of local business cycles.

Capacity utilisation and hourly rates

A consulting firm’s capacity utilisation rate is important for its ability to generate a profit. Every percentage point difference in this invoiced-time ratio equates to a rise or fall of SEK 40 million in ÅF’s annual earnings. The hourly rate itself is also, of course, another essential component behind the profitability of a consulting company. Increasing the hourly rate by SEK 10 would, if all other factors remained unchanged, improve profits for ÅF by some SEK 44 million a year.

Various approaches are adopted to reduce sensitivity, including employing contracted consultants and personnel on fixed-term contracts, increasing the variable component in salaries, broad-ening expertise and markets, and developing "packages" of services to increase competitiveness and reduce clients’ sensitivity to prices. ÅF is also increasingly taking over the management of large-scale projects for its clients and liaising directly with sub-contractors with regard to the detailed project planning services that are necessary during the various phases of the project.

Fixed-price contracts

Fixed-price contracts for carefully specified consulting services can be beneficial to both parties. Often consultants are able to make use of past experience to serve their clients more efficiently and are well placed to make an accurate assessment of the amount of time and resources required. A fixed-price contract may, however, involve an increased risk – for client and consultant alike – if the time required to complete the assignment is not correctly estimated. In the event that the fixed price is exceeded, ÅF suffers a write-down in its fee. Training and tuition in factors such as project management and the formulation of constructive terms and conditions is the key to reducing the risks associated with this kind of agreement. Continuous monitoring and evaluations of the amount of work remaining in fixed-price contracts also reduce this risk. Major fixed-price assignments may be led only by assignment managers who have received the appropriate training.

Acquisition risks

Over the past decade or so the technical consulting sector has undergone a process of consolidation and this process continues unabated. Failure to follow this industry trend could result in the gradual erosion of competitive strength. While ÅF remains committed to taking an active part in this process, it also recognises that growth and the takeover of other consulting companies is not risk-free. To minimise the risks, ÅF has adopted a systematic approach to acquisitions with strict criteria for obligatory documentation and thorough reviews. The ÅF board conducts an annual evaluation of any companies that have been taken over, and a special Acquisitions Unit has been set up to ensure a proactive and systematic approach to corporate acquisitions and expansion into new geographical markets.

Employees

To achieve the targets that have been set, it is crucial that employees in a consulting company are motivated and possess the relevant skills and knowledge. There is always a risk that skilled employees may join competitors or clients, or set up their own businesses. The risk is exacerbated if these people are able to use their inside knowledge of the company to cherrypick the best of their colleagues. A situation like this could make it difficult for ÅF to deliver the services it is contracted to supply and incur extra costs for the company.

In order to attract and retain co-workers of the right calibre ÅF invests, for example via the ÅF Academy, in continuous professional development, skills development and management training. It is highly unusual for large numbers of key employees to leave the ÅF Group, and regular attitude surveys show that employees are largely happy in their work. ÅF is able to offer the opportunity to work on large and highly sophisticated international projects, which is attractive to potential ÅF employees. Competition for qualified members of staff at all levels is increasing, and with it the pressure on ÅF to present itself as an attractive employer. For this reason ÅF invests large sums each year in recruitment and induction activities.

Competitors

Competition in the technical consulting industry comes from a number of major international companies and various small local competitors in each individual market. Competition is fierce, both for projects and for the best personnel. And, at the same time, competition from consulting companies in countries with significantly lower cost structures is increasing. However, the impact of international consulting firms in the Nordic region remains limited, and, thanks to the company’s breadth and depth of skills, ÅF’s own competitive appeal is steadily increasing.

Business support system

In 2004 a shared process system was rolled out among the Swedish-based companies in the ÅF Group for managing, following up, controlling and documenting both fixed-price and open-account assignments in the most efficient way. The system has been certified in accordance with ISO 9001 and ISO 14001:2004. In 2007 work began on paving the way for the integration into this system of other units within the ÅF Group.

Environmental risks

Under the provisions of current environmental legislation the ÅF Group does not require any environmental permits nor has any obligations to report on its activities. The business’s environmental risks are restricted to the possible consequences of contravening existing environmental legislation. However, ÅF has sophisticated follow-up procedures built into its certified business support system to safeguard that all units within the Group comply with environmental law. ÅF is not involved in any environmental disputes or incidents.

Legal risks

ÅF’s business activities do involve a risk of dispute. Disputes may arise if ÅF disagrees with a client about the conditions that apply for a certain assignment. Disputes can also arise in conjunction with takeovers. Drawing up contracts for all assignments and detailing the terms of the agreement reduces the risk. In most instances, ÅF contracts are carried out under the terms of "The General Conditions for the ÅF Group", which in turn are based on ABK96 (General Conditions for Consulting Assignments for Architects and Engineers, 1996). For corporate acquisitions and purchases of the net assets of businesses, a standard contract is used that has been drawn up by ÅF’s legal advisors. ÅF has a tried and tested body of rules and regulations to be used when taking over another company’s business operations. For more complex transactions, legal advice is always sought. The ÅF Group is involved in a small number of disputes that may have to be settled in court.

Insurance

In order to reduce risk in its business activities, ÅF has a high level of insurance cover. In line with good practice in the industry, the Group has taken out consulting liability insurance. This covers ÅF for the liability involved in any given project (normally the same as the project fee), up to a ceiling of 120 times the so called "basic amount" used in Sweden in these contexts. The maximum cost borne by ÅF in conjunction with an insurance claim is usually restricted to SEK 100,000, except for in a few instances where the excess is set at a maximum of SEK 250,000. ÅF is covered for loss of contribution to cover fixed or additional costs in the event that its premises/equipment are damaged, stolen or in any other way rendered unusable.

IT risks

The majority of ÅF’s IT support has been outsourced to highly reputable suppliers. Although agreement has been reached with these service providers on response and action times, there can be no cast-iron guarantees that unplanned interruptions will not lead to loss of income at one or more of the Group’s offices.

Financial risks

Finance policy

In its operations, the ÅF Group is exposed to several types of financial risk in the form of fluctuations in the company’s results and cash flow as a consequence of changes in exchange rates, interest rates, refinancing and credit risks. Responsibility for the Group’s financial transactions and risks is handled centrally by the parent company’s Corporate Finance department in accordance with policies laid down by the Board of Directors. The overall goal is to provide cost-effective financing and to minimise the negative effects of market fluctuations on the Group’s earnings. Overall, the financial risks within the Group are relatively low.

Currency risk

Currency risk comprises the risk that fluctuations in exchange rates will have a negative impact on the consolidated income statement, balance sheet and cash flow. Currency risk can be split into transactions exposure and translation exposure. Transactions exposure is the net of operating and financial inflows and outflows in foreign currencies. Currency risks related to changes in expected and contracted payment flows are relatively limited for ÅF, as the majority of sales and expenses take place/arise in local currencies. In the event of a currency risk in excess of EUR 50,000 the risk is hedged through derivatives.

Translation exposure comprises foreign subsidiaries’ net assets and profits/losses in foreign currency. The effects of the translation of non-Swedish subsidiaries’ net assets and profits/losses in foreign currency (translation exposure) are fairly limited, since non-Swedish subsidiaries represent only a minor part of ÅF’s balance sheet total. ÅF does not hedge translation exposure.

Interest rate risk

Interest rate risk comprises the risk that changes in interest rates will affect the Group’s net interest income/expense and/or cash flow. The Group’s financing expense is affected by changes in market interest rates. For the purpose of reducing the effect of changes in interest rates on the Group’s performance, ÅF’s policy is that the average fixed-rate period on loans taken out must be between three and twelve months. During 2007, the fixed-rate period has been around 3 months. The current borrowing requirements mean that the effect on the Group’s profit/loss of a change of 1 percent in interest rates will be in the region of SEK 3.6 million. ÅF’s policy is for cash and cash equivalents to be deposited in bank accounts with local banks. Loans from credit institutions consist largely of overdraft facilities.

Credit risk

Financial credit risk

ÅF’s financial transactions give rise to credit risks in relation to financial counterparties. The risk of a counterparty being unable to fulfil its obligations is reduced through the careful selection of creditworthy counterparties and the capping of involvement with each counterparty.

Bad debt risk

This form of credit risk relates to the outstanding accounts receivable at any given time: in other words, the credit extended to ÅF’s clients. This risk is limited through ÅF’s highly-effective credit policy, which specifies how the company’s credit management procedures are to be implemented to avoid any uncontrolled assumption of risks and prevent any unnecessary bad debt losses. This includes, for example, rules on advance payments and advice on how to avoid clients who are likely to have payment problems. Historically the Group has reported only very limited credit losses. ÅF’s ten largest clients, who represent 20 percent of the Group’s sales, are all large listed companies or publicly owned institutions. There are, therefore, no exceptional credit risks in relation to any one major client.