As a company with global operations, the REALTECH Group is exposed to various risks in conjunction with its wide range of activities. The Group defines risks in the broadest possible sense as the danger of not reaching its financial, operational or strategic goals as planned. In order to ensure that the company is successful in the long term, it is thus essential to effectively identify and analyze risks, and to take appropriate control measures to remove or at least limit these risks.
REALTECH has a comprehensive risk management system. This allows the company to detect risks early on, analyze them and take appropriate corrective action. This system is implemented as an integral component of business processes throughout the Group. It comprises a series of control mechanisms and is a core element of strategic decisions. Areas that are monitored include the entry, checking and control of internal company processes and business risks, various management and control systems, a uniform, Group-wide planning process, as well as comprehensive and regular risk reporting. In order to ensure the effectiveness of risk management, REALTECH has established a uniform, Group-wide approach towards the management of company risks with direct reporting to the Executive Board. In this way, the Group can continually identify and assess the risks involved in all key business activities using a standardized, methodical approach. In addition, specialist departments are able to monitor implementation of the defined corrective action and regularly report on risks to management or the Executive Board.
Uniform risk assessment throughout the Group
When assessing risks, REALTECH considers their probability of occurrence and the extent of damage that they would cause. For this, the company uses both quantitative and qualitative methods. These are standardized throughout the company and thus make it possible to compare risk assessments across different business areas. The company then uses the result for the probability of occurrence and extent of damage, based on the uniform, Group-wide risk assessment matrix, to provide an assessment of the risk as a percentage.
In other areas that are less amenable to quantitative assessment, REALTECH uses the assessment matrix as a basis to perform qualitative risk assessments. In this process, the company estimates the probability of occurrence of individual risks. Possible implications of a risk are estimated over a time frame of three years so that risks can be prioritized accordingly. Risks are only controlled by taking out insurance when the Group considers this appropriate in view of the associated economic benefits.
Clearly defined risks
To create transparency regarding all risks that exist in the Group and also to facilitate the tasks of risk management and reporting, REALTECH records all identified risks in a risk map as part of corporate reporting. In the context of quarterly risk reporting, the various specialist departments consolidate and aggregate risk management information and report on this to the Executive Board. If risks have an expected loss of more than EUR 4 million, REALTECH considers them a danger to the company’s continued existence.
The company reviews its risk management guidelines and risk map on an annual basis and modifies them where necessary. Each year, the auditor analyzes the basic suitability of the company’s risk management system for the early recognition of risks that endanger the company’s continued existence as defined in Section 91, Paragraph 2 of the German Stock Corporation Act.
Significant company risks established by the risk management system are listed below. This list is based on the structure of the internal risk management reporting system.
Economic risks
In 2011, the environment in which the REALTECH Group was operating was influenced by the uncertainties surrounding the global economy, which were triggered largely by the sovereign debt crisis in the eurozone. This was reflected in tougher conditions on the capital markets and customers’ reluctance to invest. Leading economic research institutes have already lowered their forecasts for the German economy in 2012. Late receipt of payments, uncollectible receivables and the possibility of customers and business partners becoming insolvent may also affect the Group's development in 2012.
Other uncertainties, caused by changes in the political, legal and social situation, may have negative effects on the Group’s net assets, financial position and earnings – as a result of both a reduction in the general willingness to invest and a time delay in the planning of such investments. However, the company’s international orientation and the fact that REALTECH offers its products on the key world markets give the company the flexibility to compensate for regional economic difficulties with better results on other markets.
The economic declines resulting from events such as terrorist attacks, armed conflicts and natural catastrophes in recent years were generally only of a short-term nature and have had no lasting negative impact overall on business success.
REALTECH currently markets its products and services in more than 25 countries worldwide. Business activities in these countries are associated with the usual risks involved in international activities. As specified above, these risks include in particular the general economic or political situation of individual countries, interaction between different tax systems, and legal hurdles such as import and export restrictions, legal regulations governing the use of the Internet, and guidelines for the development or provision of software and services. For the majority of important target markets, in particular the markets in the EU, the Group considers it unlikely that these risks will take effect and believes their consequences to be minimal, thanks to the high level of convergence of legal regulations and tax regimes.
Market risks
The entire IT industry continues to be characterized by consolidation. A potential consequence of these mergers and acquisitions is increased competition due to new or stronger competitors, and this could lead to falls in revenue.
Concentrating on solutions from SAP makes REALTECH largely dependent on the market acceptance of these products. REALTECH anticipates that the market for SAP solutions will continue to grow. In addition, SAP records a substantial proportion of its sales revenues from its large regular customer base. Should existing SAP customers decide against extending their maintenance contracts, or decide not to sign any new license contracts for further products, this could have a significant influence on the revenues and income of REALTECH. However, in view of the stable growth recorded by SAP in business with existing customers in recent years, this seems unlikely. In addition, an increasing proportion of revenues recorded as a result of new customer business offers new sales opportunities and thus partial substitution options.
When it comes to developing its solutions, REALTECH pays great attention to customer requirements, in order to maximize market acceptance. However, the company is not in a position to guarantee that this acceptance will also remain constant in the future. In particular, the fact that competitive pressure is constantly increasing – among other things due to takeovers and the associated market concentration – may have the result that REALTECH products do not obtain the desired market access.
Risks in strategic planning
A significant part of REALTECH’s strategy entails further expanding its market share. The process of developing new products and launching them on the market is always associated with risks that may have a negative impact on the company’s financial position and earnings. Over the past few years, the company has demonstrated its ability to successfully counteract the risks connected with new products. Furthermore, REALTECH is convinced that it can meet customer’s technical requirements. Thanks to its years of experience, REALTECH is able to make a realistic appraisal of project risks and predict the costs entailed to fulfill orders. For this reason, the Group considers it unlikely that product innovations and new services will have any significant negative impact on income growth.
Personnel risks
REALTECH’s highly qualified employees form the basis for developing and marketing services and products. If large numbers of employees choose to leave the company and the company is unable to find new, well-qualified staff on the employment market, this may have a detrimental effect on business. With the exception of selected executives, the employment contracts of most REALTECH employees currently do not contain a competition clause for the event that the employees terminate their working relationship. Therefore, in view of the fact that competition for highly qualified people in the IT sector continues to be strong, it is not possible to guarantee that REALTECH will be able to retain its top performers in the long term. Due to its extensive activities aimed at retaining employees, the company considers the risk of suffering any real impairment to its business development as a result of losing managers and employees to be low at present.
Communication and information risks
In recent years, REALTECH has implemented a range of measures to counteract the risk of internal, confidential announcements as well as information regarding highly sensitive topics, for instance future strategies and products, being passed on to the general public incorrectly or too early. These measures include binding company-wide security standards and guidelines on internal and external communication. Furthermore, IT precautions have been taken which prevent confidential information being forwarded via external communications networks. Employees who regularly work with confidential information receive special hardware that includes additional data encryption. Despite this, there is no guarantee that these protective mechanisms will be successful in every single case. However, in view of the far-reaching measures, which REALTECH regularly reviews, the company considers it unlikely that the aforementioned risk will take effect.
Financial risks
Since January 1, 1999, the euro has been REALTECH’s balance sheet and Group currency. The company processes a comparatively small proportion of its transactions in other currencies. Nevertheless, periodic fluctuations of individual currencies may have an effect on REALTECH’s revenues and earnings. Appreciation of the euro in respect to other currencies generally has a negative effect, while depreciation of the euro has a positive effect. However, the company estimates the resulting risks to be low and easy to calculate. REALTECH continually monitors potential currency fluctuation risks on the basis of balance sheet items and expected cash flows, and deals with these risks by means of targeted exchange rate management.
Other financial risks are hedged by a credit management system, as well as by stringent receivables management and checks on creditworthiness.
Operational risks
REALTECH needs to take a large number of potential risks into account with regard to its consulting and product business. Despite numerous precautions, the Group is unable to guarantee that it will succeed in detecting and neutralizing all risks at an early stage. Moreover, several of these risks lie outside REALTECH’s sphere of influence.
In principle, the company is subject to the risk that the products and services it offers may not enjoy sufficient market acceptance. As a result of a rapid technology changeover or erroneous development activities, for instance, the company may not quite meet customer requirements. In addition, cyclical fluctuations may postpone expected revenues and income in the short or medium term.
All REALTECH solutions, as well as all new product versions, are subject to a comprehensive quality assurance procedure. Nevertheless, there is still a danger of issues occurring that have a negative effect on the company’s image. Identified errors could cause a delay in new products being brought to market, with the result of additional costs and lost revenues.
Events that occur as a result of such risks may, under certain circumstances, detract from the validity of original assumptions regarding future business developments as well as forecasts regarding revenue and income. At present, REALTECH assumes that general economic conditions will have no sustained negative impact on its business development. Nevertheless, unexpected changes in the economic situation could have a detrimental effect on the Group’s revenue and income.
Insurance risks
The REALTECH Group is insured against claims for damages, including claims under liability law. In this way, the company is able to limit the possible consequences of remaining risks, if not eliminate them altogether. REALTECH regularly reviews the extent of its insurance cover and updates it as necessary.
Other risks
Risks also result from rules and laws relating to tax, competition, and patents. In order to counteract such risks, REALTECH obtains extensive legal advice when making decisions and designing business processes. This advice is obtained both from its own experts and outside experts. REALTECH principally uses copyright and trademarks to protect rights, software and intellectual property. However, it is not possible to rule out the possibility completely that market participants may copy REALTECH products or misuse existing rights.
New laws or changes in case law may give rise to legal regulations that also affect past issues. REALTECH has formed the necessary balance-sheet provisions for such risks.
In order to expand its business, REALTECH has in the past purchased not only companies, but also products and technologies. The risks typical of such transactions include the integration of the acquired company and the technologies or products concerned into existing technologies and products, a possible interruption to ongoing business activity, problems in obtaining important specialists and executives, the unwitting adoption of essential obligations of the acquired company, and possible negative effects on relationships with partner companies or customers.
REALTECH combats these risks with a wide range of measures, ranging from a comprehensive technical, financial, tax-related and legal due diligence verification of the acquisition object and end-to-end risk assessment to establish major transaction and integration risks, through to detailed integration planning and implementation by special integration teams. As REALTECH has acquired only a relatively small number of companies up to now, the risks described above appear controllable, and it is unlikely that they will trigger any significant negative influence on the company’s expected earnings.
No developments can currently be observed that may endanger the company’s continued existence or have a substantial detrimental effect on the company’s net assets, financial position and earnings. An overall assessment of risks and the risk management system used have shown that only a few, limited risks exist and that the risk management system works efficiently.
Opportunity management
REALTECH operates in a dynamic market environment in which new opportunities are constantly emerging. Systematically recognizing and using these, while avoiding unnecessary risks, is a key factor for the sustainable growth of our company. For this reason, opportunity and risk management is closely linked at REALTECH. Opportunities refer to internal and external potential that could have a positive affect on the company. Our opportunity management is closely aligned to our strategy for sustainable growth.
To enable successful opportunity management, we are extensively concerned with market and competition analyses, orienting our product range, cost drivers and critical success factors within our industry. From this, we derive specific market opportunities, which the Executive Board agrees on with the operational management as part of business planning and agreement of targets. In general, REALTECH adopts an approach that takes account of an appropriate ratio of opportunities and risks.
Source: Annual report 2011, page 56ff.
