Aegis faces many different types of risks, including market and strategy, financial, operational and human resources. Over the last two years we have increased our focus on cash and counterparty risks as a result of the economic challenges in the macro environment.
We continually review our key risks and strive to improve our internal control framework to help mitigate them, where possible. Listed below are what we believe to be the principal risk factors and uncertainties that we have faced during the period, which we are still likely to face well into the future, and our strategies for managing them.
Due to the economic climate, a number of the risks outlined below have remained subject to a heightened level of monitoring, and will continue to be so. The level of communication of status of the risks has also increased and improved reporting has been put in place as necessary.
Counterparty Relationships
Counterparty risk remains a significant focus of attention for many organisations, including our own. We have maintained our efforts to identify and monitor material counterparty risk in relation to our clients, affiliates, banks, media owners and other suppliers.
These risks include, but are not limited to, loss of income from clients in financial distress and potential media buying liabilities arising in markets where we act as principal. We have also continued to face the risk of credit insurers withdrawing previously available cover and the continued viability risk of our domestic and overseas banking partners.
It is our policy to undertake credit enquiries on new clients and for written contracts to be in place before starting any significant work. To minimise the impact of the overall risk of default, our strategies can include requesting pre-payment, imposing credit limits and taking out credit insurance, broadening cover in markets where it remains available. We have also closely monitored our exposure to relationships with our banking partners, ensuring that deposits held with any one banking group do not exceed £30m.
Liquidity and Working Capital
Our funding arrangements and cash management have continued to be a priority for us during the period, and will remain so going forward, to enable the Group to meet our liabilities. Our media buying activities, in particular, require robust cash management processes. To help manage our cash, we receive daily cash reporting from our operations. Our larger businesses take part in cash pooling arrangements with our relationship banks, with which we also have our debt facilities. Business units also deposit surplus funds with Group Treasury to assist with managing interest payments and liquidity. Our cash pooling arrangements were extended during the period.
During the period we concentrated on improving reporting from our business units to ensure that executive management has accurate and timely information to actively monitor liquidity and covenant headroom. We actively manage our headroom to accommodate both general and specific contingencies. Management reporting, liquidity and covenant monitoring will continue to be a key focus going forward.
During the period, our principal borrowing arrangement, a five-year revolving credit facility of £450m with a syndicate of banks was extended until 2015. We have an active programme of regular communication with our relationship banks and bondholders, who are long-standing and supportive, and continue to have a good understanding of our business performance and prospects. Furthermore, in April 2010, we were successful in launching a convertible bond, due in April 2015, to raise £190.6m, thereby further improving our financial position.
Client Relationships
We have worked with some of our larger clients over a number of years, some in excess of 20 years, and have built up a strong sense of partnership. We have a broad portfolio of some of the world's most prestigious multinational and national clients across 80 countries worldwide. No single client exceeds 3% of revenues.
Although the winning and retaining of clients is at the core of our business, we are conscious that in the volatile economic climate we have endured over the last two years, there is a risk that our clients’ investment in advertising and research will decrease, causing an impact on our revenues.
While our diversified range of services help to mitigate this risk, we also make sure that we have dedicated client relationship teams in place. In the period, we continued to integrate our digital and traditional services in certain markets and in global client services, to give clients one point of contact to deliver to all their needs across our entire range of communications services. Through our “Power Brand” strategy, we also increased the opportunity across our client base to provide multiple services to clients, as and where appropriate. In addition, we increased our activity, both organically and through acquisition, in faster-growing regions, where advertising spend was continuing to grow, in contrast with developed markets, and focused on more resilient fee-based revenues.
Acquisitions and Successful Integration
As well as client service, new products and services are a key driver of our business performance. We accomplish this in part by investing in strong talent and by acquiring carefully selected acquisitions that will broaden our offerings and enable us to stay ahead of the competition and retain clients.
Acquisitions and joint ventures remain a key feature of Aegis’ long-term strategy. There is a risk that our investment in an acquisition is based on incorrect assumptions and does not have the long-term future on which we based our investment case, resulting in overpayment. There is also a risk that our integration plans for them are not successful, particularly if the acquired company operates a business model that we not are already familiar with.
All of our acquisitions require approval and independent due diligence. We measure the price paid by reference to an internal hurdle rate of return which exceeds our internal cost of capital. Acquisition sponsors from within our existing businesses are assigned to each new acquisition and robust post-integration plans are put in place for all acquisitions.
Competition and Keeping Ahead of the Game
We work in a competitive environment and current technology potentially allows our current and prospective clients to be reached by suppliers from anywhere in the world. For some services, aggressive pricing from competitors in countries where costs are lower could cause a reduction in our own revenue and margins. To minimise this risk, our aim is to build long term relationships with our clients and to remain competitive in staying ahead of the game in our offerings and reducing our own costs. We also aim to ensure that we are the supplier of choice by maintaining high standards, developing tools that add value to our clients’ marketing and business activity and delivering work to our clients on time. We have businesses that are ISO 9001 accredited, with quality management systems in place.
Parts of the industry we operate in have relatively low barriers to entry, increasing the risk of new competitors striving to take a part of our market share. We have already seen some of the search engines offer online advertising directly to our potential clients. We actively monitor our competitors’ activity and market practice to enable us to be aware of changes before they happen on a large scale. Our range of other digital services also help manage this risk.
Security of Data
We retain confidential information in relation to our clients’ new product pipelines and advertising strategies. We also host client databases and other applications on our own servers. Unauthorised access to, or inappropriate use of, any of this information could have a detrimental impact on our reputation and adversely affect our businesses. External access to such information is protected by our IT security framework whose strength we continually seek to improve and monitor by performing IT vulnerability testing, as well as IT security audits. These audits also review internal access rights to client data. We also take precautions to protect our clients’ data by using confidentiality clauses in our employees’ contracts and have blog guidelines in place that prohibit the posting of confidential information.
Talent Management
As a services business, our people are a key asset. We are proud of our teams, but recognise the risk that we could lose some of our talent, either to competitors or to set up their own competitive business. Talent management is one of our key priorities and something we take very seriously. We aim to be able to offer market competitive incentive plans to attract and retain quality staff. We also aim to promote within so that our staff can develop an enduring career with us. And we listen to our employees via our Employee Opinion Surveys, and produce follow-up plans based on the results.
Our people are important in our client relations and the wealth of knowledge they hold. Their departure could have an impact on client retention, key decision making and successfully leading our business forward. All of our businesses, including our global teams, are required to undertake succession planning and we ensure that no relationship with a major client is restricted to one individual.