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Risk Management

IDS Scheer has systematically continued to develop its risk and opportunity management and expanded the controlling systems in all its companies to detect risks through improved and continuous monitoring of economic developments and to initiate countermeasures at an early stage. As part of risk management, central risks to the company are tracked, analyzed and actively controlled at all times. Risk and opportunity management is an integrated component of the group's processes and organization. The continuing rise in the significance of risk management has been acknowledged by creating the position of a corporate risk manager with a direct reporting line to the CFO. In particular, the main responsibilities of this position are the further development of the risk management system of the IDS Scheer Group and the coordination and optimization of global risk management activities.

Owing to their similar range of products and services, IDS Scheer group companies have a similar risk structure and are incorporated into the groupwide risk management system. The main risk categories covered in risk reporting are market and product risks, financial risks and operating risks.

Market and product risks

• Internationalization: IDS Scheer AG is proceeding with its policy of internationalization to strengthen and expand further its leading global position in the market for business process management. The risks of internationalization lie in the fact that business developments in the markets addressed can fall short of expectations and investments in international regions may amortize more slowly than planned. In addition, the management of the international organization requires intensive support for and control of the national companies and the safeguarding of the transfer of expertise within the company. The management acknowledged this challenge by initiating the restructuring process. The merging of market processing for ARIS products and consulting offers synergies in terms of end-to-end customer support, increasing customer satisfaction and improving internal processes. Responsibilities for the four regions were revised for both products and consulting and, since 2009, these have each been assigned to one member of the Executive Board.
• Financial and economic crisis: The financial and economic crisis is affecting many industries worldwide. The risk exists that this will have an indirect effect on IDS Scheer through the economic situation of its customers, giving rise to a wide range of other risks. Consulting projects and license orders could be postponed or cancelled or customers could become insolvent and default on outstanding receivables.
• Major customers: Major projects are important for stabilizing business. A disruption or the cancellation of major projects can lead to diminished capacity utilization and falling profitability. IDS Scheer counters this risk with professional staffing management to utilize any resources for other projects in its order backlog and to flexibly reschedule planned training activities.
• Products: The economic success of IDS Scheer AG is dependent on the ARIS product family and the underlying ARIS methodology. It safeguards its position with the further needs-driven development of its products and solutions, an aggressive partner strategy, user conferences and customer surveys. The strong international distribution of ARIS products and the increasing globalization enhances the risk of product piracy. The management had partially protected its intellectual property with patents, which provides it with legal recourse in cases where products may have been copied. Products are also protected against unauthorized use with license keys.
• Consulting: A risk in consulting lies in the imitation of methods and solutions. Effective protection against these risks is provided by the further development of the consulting methodology at all times and investments in the implementation expertise of employees. Price pressure can arise in international consulting business due to more intensive competition, particularly as a result of the financial and economic crisis. IDS Scheer is countering this situation by concentrating on global core industries, defined growth topics and customer segments as well as the development of higher quality BPM consulting services.
• Partner strategy: IDS Scheer pursues an intensive partner strategy in order to intensify the distribution of its products and solutions and to expand its leading global position in the market for business process management. The contribution to sales by partners in ARIS license business can be less than anticipated by IDS Scheer. IDS Scheer has no influence on the business success of its partners and can only provide the basis for partners' success through intensive partner management. The integration of the products into system platforms and the sales network of strategic partners leads to high requirements of partner management and the controlling of indirect sales channels.

Financial risks

• Cash flow: In addition to the success of operating business, the most important factor influencing cash flow is the professional management of receivables. The main risk lies in receivables becoming overdue or defaulting. To minimize this risk, the creditworthiness of customers is reviewed in advance for major orders. Furthermore, the development of the receivables portfolio is monitored at all times to detect unfavourable developments at an early stage and to implement appropriate countermeasures.
• Liquidity: IDS Scheer has relatively high holdings of cash and cash equivalents and does not feel there is any immediate risk of illiquidity to the company in spite of the weak economic environment. With its current holdings of cash and cash equivalents, the company is able to meet all its financial obligations in full. In its management of cash and cash equivalents, IDS Scheer relies on secure investments with financial institutions of the utmost creditworthiness.
• Currency fluctuations: Owing to the company's international activities it is exposed to currency risks in USD, CAD, CHF and JPY in particular. Currency forwards and combined interest/currency swaps are used to limit or avoid the risk of currency fluctuations. External funds continue to be borrowed with matching currencies and maturities and forwarded for internal company financing. The counterparties for these hedging transactions are banks of high credit rating.

Operating risks

• Project business: In project business, which accounts for the highest share of sales, requirements are growing ever more complex and the share of major projects with international teams is constantly rising. The professional coordination of resources from different language and cultural groups and the rising complexity of project content must be guaranteed. There are risks with regard to scheduled completion in the calculation and settlement of major projects and, above all, of service contracts with fixed-price agreements. IDS Scheer counters these risks by concentrating on controllable services and with intensive project management and controlling. For this purpose, guidelines have been developed further for fixed-price projects and an additional, central project management system was established for quality assurance and risk reduction.
• Employees: In order to meet the growing requirements of its customers, IDS Scheer must recruit, integrate and retain qualified employees. With its targeted recruitment measures and a broad range of development and training measures, IDS Scheer is attempting to maintain and further enhance its attractiveness as an employer. To counter the risk of high fluctuation, especially in times of internal upheaval, the company uses a variety of staff loyalty measures and various options for individual further development. In addition to instruments to analyze the potential of employees, extensive, individually coordinated training measures and specific career paths play a key role, as does the promotion of junior executives.
• IT systems: The settlement of international business requires a complex and highly available IT infrastructure. IDS Scheer counters the risk of data loss or theft or the possible failure or central operative IT systems with a comprehensive security concept and a backup data center. The data centers are subject to industry standard ITIL and are therefore monitored professionally. Data security is guaranteed by the state-of-the-art security systems available on the market. There are currently no circumstances known at the IDS Scheer group that could endanger the existence of the company or impair its development.

Source: Annual Report 2008, page 85 – 88