Increased Labor Risks Also Place Companies on Edge
Faced with fierce competition and the unrelenting demand to innovate and meet consumer needs, technology companies are increasingly turning to strategies such as mergers and acquisitions (M&A) and global expansion to defend their market positions. As technology companies increase their size, change structure and confront new geographic frontiers, they raise their exposure to related risks. Furthermore, the evolving regulatory landscape and looming changes to U.S. GAAP add to a climate of uncertainty. According to a new report from BDO USA, LLP, while competition and regulation are the most frequently named risks (mentioned by 99 and 98 percent of technology companies, respectively), more and more technology companies are citing risks related to M&A, supplier and vendor concerns, and threats to international operations.
The 2014 BDO Technology RiskFactor Report, which analyzes the most recent SEC 10-K filings of the 100 largest publicly traded technology companies in the U.S., also found that companies are increasingly addressing labor-related risks in their filings (cited by 83 percent of companies, up from 55 percent last year). Labor concerns are on the rise amid the shortage of highly skilled labor, the growing cost for healthcare benefits and an improving labor market. Additionally, global competition for talent is vigorous, with 81 percent of companies citing concerns over their ability to attract and retain key personnel. Tech companies also note risks related to managing a geographically dispersed workforce. Increased focus on these challenges is also in line with trends identified in the BDO Technology Outlook Survey, which found that 95 percent of tech CFOs do not plan to offshore their activities in the coming year. As companies repatriate previously off-shored positions, they increase their need for highly-skilled U.S. professionals.
"Competition is the consistent theme in many of the top risks in the technology industry this year," said Aftab Jamil, partner and leader of the Technology & Life Sciences practice at BDO USA, LLP. "Companies are battling to manage, attract and retain the best talent, efficiently oversee supply chains and protect their valuable intellectual property, all while developing the most innovative products at fiercely competitive prices. In this fast-paced market, any delay or unanticipated cost can be the difference between success and failure."
The following chart highlights the top 25 risk factors cited by the 100 largest technology companies in the U.S.:
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*t indicates a tie in the risk factor ranking
Additional findings from the 2014 BDO Technology RiskFactor Report include:
International operations are subject to political and economic uncertainties. Technology companies are increasingly apprehensive over greater exposure to risk as a result of the global nature of their business. This year, 89 percent of technology companies cite risks associated with international operations and sales, up from 82 percent in 2013. In addition, concerns regarding political and social unrest, natural disasters and terrorist attacks rose two slots in the ranks (cited by 89 percent of companies compared to 75 percent in 2013). Managing global supply chains is becoming increasingly difficult as companies face more stringent regulations around the use of raw materials originating from conflict-affected areas. As such, 93 percent of companies cite risks related to U.S. and foreign supplier and vendor and distribution concerns, up from 84 percent last year. International economic concerns, geopolitical conflicts, unfavorable foreign exchange rates and growing challenges around complying with foreign regulations and trade restrictions are additional international challenges weighing on technology companies.
Increased litigation risks pressure tech companies as IP battles persist. Headline-making patent litigation trials have tech companies on high alert. Risks associated with legal proceedings jumped to the seventh most cited risk, up from number 14 last year. Intellectual property and infringement concerns increased by 11 percent, likely due to the ongoing prevalence of patent infringement claims. Additionally, the vast majority of tech companies (82 percent) note concerns over equipment failure, manufacturing problems, delays, recalls and product liability, which could lead to litigation and reputation risk.
Security breaches are an increasing matter of concern. Following BDO's prediction in previous editions of the BDO Technology RiskFactor Report, concerns over breaches of data security or privacy continue to increase with 91 percent of companies citing this risk, compared to 81 percent last year and only 30 percent in 2009. With recent high-profile data breaches at large organizations, technology companies face heightened pressure to protect and manage their own IT infrastructure. According to 10-K filings, 79 percent of companies (up from 71 percent in 2013 and 41 percent in 2009) cite the inability to maintain or implement operational infrastructure, including information systems, as a concern. To combat these pressures, technology companies are devoting significant resources to defend against security threats, including embracing new ways of sharing data and communicating internally, engineering more secure products and services, investing in technologies that help to protect customers from attacks, and improving the deployment of software updates to address security vulnerabilities, amongst other efforts.
