risk and opportunity management
A new platform
The acquisition of Vedior has significantly changed the platform of the Group. The ‘in control’ position at Randstad had been established in a different manner than at Vedior.
The integration process is crucial to the success of the transaction and requires priorities to be set. In this context, the Randstad risk & control framework, described below, has been updated using best practices from Vedior as well. In the course of 2009 the framework will be fully aligned and implemented.
The risk profile of the company has changed due to the acquisition of Vedior. On the one hand, revenue is more widely spread across geographies and segments. The share of revenue associated with idle time risks has reduced from 26% to 16%. The currency mix changed from 17% in non-euros in 2007 to 26% pro forma in 2008. Indirect personnel costs in liberal markets as a share of total personnel costs have also increased. On the other hand, due to debt financing of the Vedior acquisition, the balance sheet is more leveraged, with a net debt to EBITDA ratio of 1.8 (2008 pro forma) versus bank covenants of up to 3.5. Furthermore, the Group has increased its footprint from 20 to more than 50 countries. We now own some smaller operations more distant from the Group center.
Strategy, targets and risk appetite
Risk & opportunity management is firmly embedded in our strategy and is considered essential for achieving our
targets . We deliberately address risks and opportunities together, as we believe they go hand in hand. We actively stimulate entrepreneurship throughout the organization and encourage our people to identify and seize opportunities. At the same time, we recognize that the risks inherent in entrepreneurship must be assessed and controlled. It involves knowing when to give full throttle, but also when to apply the brakes.
We have defined our risk appetite on a number of internal and external factors including:
- business performance measures: an EBITA margin target of 5-6% on average through the cycle, with a minimum of 4%;
- financial strength in the long term, mainly defined through the repayment capacity ratio;
- liquidity in the short term: cash flow from operations and working capital;
- compliance with relevant rules and regulations;
- economic environment;
- reputation.
Our risk and opportunity analysis and risk appetite reflect a cocktail of potential risks and opportunities. We analyze combinations of potential risks and opportunities and use techniques to qualify and quantify risks to establish a direction for our key controls and insurance risk management. The likelihood of certain combinations is impossible to assess however, and as the potential inherent false security is a risk in itself, we use the quantification of risks with great care.
The table below provides a sensitivity analysis of the various factors that comprise our risk and opportunity analysis and risk appetite.
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| |
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Change |
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Impact |
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On |
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Assumption versus FY 2008 |
| |
|
|
|
|
|
|
|
|
| Revenue |
|
+/– 1% |
|
+/– € 35 million |
|
EBITDA |
|
Flat gross margin and no change cost base |
| Revenue |
|
+/– 1% |
|
+/– € 12 million |
|
EBITDA |
|
Flat gross margin and maximum conversion1 |
| |
|
|
|
|
|
|
|
|
| Gross Margin |
|
+/– 0.1% |
|
+/– € 17 million |
|
EBITDA |
|
Flat revenue and no change cost base |
| Gross Margin |
|
+/– 0.1% |
|
+/– € 6 million |
|
EBITDA |
|
Flat revenue and maximum conversion1 |
| |
|
|
|
|
|
|
|
|
| Operating expense |
|
+/– 1% |
|
+/– € 27 million |
|
EBITDA |
|
|
| |
|
|
|
|
|
|
|
|
| USD |
|
+/– 10% |
|
+/– € 5 million |
|
EBITDA |
|
Stable revenue and margin in US |
| GBP |
|
+/– 10% |
|
+/– € 5 million |
|
EBITDA |
|
Stable revenue and margin in UK |
| |
|
|
|
|
|
|
|
|
| EURIBOR |
|
+/– 100 bp |
|
+/– € 16 million |
|
Financial charges |
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Stable net debt versus year end |
| Net debt |
|
+/– € 100 million |
|
+/– € 3 million |
|
Financial charges |
|
Stable interest rates versus year end |
(1) Aim at maximum recovery of gross profit reduction through reduction in operating expenses. We are convinced that the continuity and sustainability of our business are as important to stakeholders as its growth and operation. Continuity and sustainability are therefore fundamental components of our strategy, risk appetite and key values.
Randstad’s risk & control framework is part of the ‘excellent execution’ building block that links our mission and objectives with the execution of strategy by the Group. It sets the standard for the way we manage risks and opportunities and is in line with the COSO-ERM framework (Committee of Sponsoring Organizations of the Treadway Commission).
In 2008 the framework was updated using the best practices of Vedior’s framework, ensuring the continuity of the effective risk management and control systems in place within Randstad and Vedior. A fully aligned framework will be implemented during the course of 2009.
Our risk & control framework is designed to ensure:
- monitoring of the effectiveness of our strategy – by regularly reassessing our strategic direction, we fully leverage our strategic strengths while ensuring strategyis consistently executed;
- the company’s continuity and sustainability, among others by consistent accounting, reliable financial reporting and compliance with laws and regulations;
- excellence in execution – we focus on the most efficient and effective way to conduct our business, enabling us to identify opportunities and avoid mistakes;
- avoidance of material negative financial impact on the Group’s profit & loss account and cash position.
The framework’s core components are illustrated and described below.
