Opening new markets is the key to recovery

This month, Italy was hit by another round of bad news concerning its economy – the landscape has failed to improve despite two years of austerity measures.

The news came from the country’s National Institute for Statistics (Istat) and its prognosis was one of doom and gloom; GDP was expected to contract by 1.8% in 2013 compared with a previous forecast of 1.7%.

The prognosis followed disappointing news in August, when the country experienced a steep drop in industrial production. The situation was not helped by continual instability surrounding a fragile left-right coalition, or an unemployment rate of 12.5% of the population, the highest since 1977. All these elements do little for domestic confidence even if Istat estimates for 2014 hints at a slow recovery.

Indeed, the projection points towards further economic challenges, which was why it was no surprise that financial risks topped the agenda at a risk managers’ roundtable held at the ANRA conference in Milan last month.

The event brought together Italian risk managers from a broad range of sectors – technology, finance, aerospace production – to discuss their challenges and share examples of best practice. While the discussion centred on economic hurdles, it was only one of many risks highlighted by the table; compliance, supply chain, and cyber risks also featured highly.

Economic challenges

But whatever the risk, the underlying message was that sound risk management and proactive innovation were the best approaches to allaying any potential threats. This was indeed the advice from the table for how best to respond to economic challenges – an area that remains the top risk for Italian businesses in general, according to Fabrizio Sechi, risk manager at Italian telecommunication firm Fastweb.

“One of the most significant risks that we face is changes to the economic environment. This affects market conditions, placing pressure on prices, which can result in price wars in certain markets. Additionally, it can sometimes have a knock-on effect on our customers’ ability to pay on time.”

For financial institutions, the fallout from such a crisis is more immediate. “Banks have had a very big credit crunch and the impact was a reduction in the money available for lending activities in favour of clients,” says Gianpaolo Corbella, insurance group manager at Italian multinational bank UniCredit.

“Fortunately, our group is strong in Eastern Europe compared with our operations in Italy and Germany. For example, in Poland, Romania, Bulgaria and Turkey market conditions are better, and in these markets we are seeing some growth in our banking activities compared with the domestic market. This helps to offset the slowdown that we are experiencing in Western Europe.”

Corbella adds that banks have had to “manage changes” experienced in Western Europe: “What we are seeing is that a lot of customers in this part of Europe are more dependent on home banking, which is becoming more and more popular.

“As a result, banks are losing physical contact with the clients and therefore they have fewer opportunities to offer services that would be of benefit to them and their business. Banks have had to react to this and in some cases they have closed down smaller branches and ended agreements with some suppliers.”

The production sector is also feeling the brunt of the downturn, says Gabriele Palandri, group insurable risk manager of Finmeccanica, Italy’s leading aerospace, defence and security firm. “Recent market research tells us that Italy’s production sector has been more affected by the economic downturn compared with other sectors.”

“But this does not only concern SMEs, which are more exposed to fluctuations in the economy,” he adds. “The downturn is also having an impact on large companies and consequently on their subcontractors and suppliers, making supply chain processes more vulnerable.”

But not all Italian businesses are suffering in this way. Multinationals with operations all over the world are, of course, in better financial health. Although this may not be immediately obvious if the overall GDP is anything to go by, says Alessandro De Felice, chief risk officer at Italian-based cable specialist Prysmian.

“The figure is misleading. The aggregated GDP is made up of two different, perhaps opposing measures – foreign demand and local demand. And this does not add up to represent the true reality. The reality is that there are a number of Italian companies that are not exposed to banks and which export their products to foreign markets. These companies are not suffering from the economic crisis. They are, in fact, growing and in profit.”

Embracing change

The table’s general consensus was that whatever the size of the business, whether it is a multinational co-operation or a domestic SME, those that survive through a prolonged recession are those that innovate, says Paolo Rubini (pictured), ANRA president and insurance manager at Telecom Italia.

“The reaction is always innovation – the economic crisis always brings innovation,” says Rubini. “Italian businesses are trying to find a market and this is how some companies that are deemed to be dead are still surviving – they have been able to find a market and this is, of course, down to innovation.

“Businesses have to embrace change. As far as the telecommunications industry is concerned, the solution is to boost traffic by selling new services such as cloud computing. This is a way to find a new market in challenging times.”

Palandri agrees, stating that over the past four to five years, a number of SMEs have turned to innovation, with a good percentage of their returns arising out of new and innovative solutions or products.

“Innovation is a characteristic of Italian businesses,” he says. “Usually big companies invest considerable amounts of money in research and development. And during challenging times they are now focusing their attention on optimising R&D within the production process.

Innovation is necessary for surviving.”

Regulation, supply chain cyber

Italy’s economic situation is not the only threat that keeps Italian risk managers awake at night. Regulation and supply chain risks were among the topics also discussed.

Sechi said complying with new changes in regulation is a key hurdle. “We continuously face changes in the regulatory environment. The evolution of the national criteria, which is steadily becoming more and more harmonised within the EU, may undoubtedly have an impact on telecommunication operators’ business models. For this reason it is very important to monitor these changes.”

Rubini seconded this, stating that regulation on net neutrality in particular – which oblige internet providers to disclose connection speed and prohibits them from blocking competing services – could affect the prices technology companies offer customers.

“We can control the quality of our service by updating it but we cannot control the returns. For technology businesses, there could potentially be a trade off between updating the internet network and services, and the cost offered to customers as a result of the new EU requirement.”

He adds: “If we are able to attribute different prices according to the customers needs, then we will be able to speed up on the updates to our technology. But if we stay in the existing situation of neutrality then this will of course slow down any updates that we are planning.”

Regulation is also a focus area for financial institutes, the introduction of rules from European authorities will bring about a sort of equalisation among EU countries and banks will benefit of common rules and evaluations.

As regards critical insurance areas, unauthorised trading poses a particular challenge because of the lack of insurance to cover such risks, says Corbella.

“Anecdotally some banks have been affected severity in unauthorised trading. The problem is that there is insufficient capacity in the insurance market for this kind of risk, which for some financial institutions could cost them billions. Banks have tried to find other solutions in the market but it’s difficult to find something that covers the level of risks that banks are exposed to.”

For De Felice, while also agreeing that compliance is a key risks, says trading in foreign markets can bring up obstacles in terms of competition: “In some countries, there are less rigorous business practices. For example, in Southeast Asia payment terms are often delayed and delayed in sometimes an unacceptable way. Discounts are unjustified. And there have been examples where local producers have been selling items below the cost price. This creates unfair trading conditions.”

In terms of insurance, two key areas were highlighted where further support is needed Palandri says: “Cyber risks are a key emerging threat for Italian businesses. Larger companies are putting measures in place to deal with this threat however the capacity from the insurance market is still limited.”