Now that we may be seeing the light at the end of this recession, technology companies are apparently getting concerned about their ability to keep up with an improving economy.
For each of the last five years, professional services firm BDO USA LLP has examined annual 10-K filings of the 100 largest publicly traded technology companies in the United States. The firm carefully reads the “risk factors” section of each 10-K. Although many standard risk factors are repeated year after year, the BDO team counts them, notes the order in which they are listed (this can change with circumstances, as companies are supposed to list the most important first), and analyzes the language the company uses.
“We look at exactly what they say and how they are saying it,” says Aftab Jamil, partner and national director of the Technology and Life Sciences Practice at BDO.
The level of concern over ability to execute strategy has skyrocketed among these companies over the last three years, rising from 27 percent in 2009 to 93 percent this year. Much of this concern has to do with supply chain issues. Jamil and his team attribute the dramatic rise to two major factors. One is the increasingly global nature of business, which makes companies more susceptible to natural disasters or political disruptions around the world — a risk made apparent this year in the wake of the earthquake in Japan.
Specific concerns about disasters, war, conflicts, and terrorist attacks rose from 55 percent last year to 81 percent this year. Note, however, that these numbers are based on levels of concern before the big quake. (The study looks at 10-Ks filed in April, which are prepared in early February based largely on what happened the previous calendar year.) I have to wonder whether that percentage is now standing at 100. (Click here for the full report.)
The other factor behind the rising level of worry is that we're starting to come out of the recession. Those 2009 percentages reflect what was going on in 2008. That was the deepest point of the recession, and most companies were in “hunker-down mode,” says Jamil. Their only real strategy was to preserve cash and survive. There's not much risk in executing that strategy, and therefore a low level of concern. But now that the economy has improved, the pressure is on companies to move aggressively to capture more market share, enter new markets, and expand their business. That means the business depends more on executing a dynamic strategy, which entails more risk, particularly when it depends on a supply chain that's constrained or easily disrupted.
Among the other growing worries among tech firms:
- US and foreign supplier/vendor concerns and supply chain issues, up from 75 percent last year to 86 percent this year
- Predicting demand, up from 63 percent to 85 percent
- Inability to maintain operational infrastructure and systems, up from 42 percent to 68 percent
- Price and availability of raw materials, up from 19 percent to 34 percent
- Balanced inventory, up from 30 percent to 57 percent
“Next year I'll be very surprised if we don't see all of these risks go much higher,” notes Jamil.
Those numbers will reflect the lasting impact of the Japanese earthquake, an historic event that has caused huge disruptions for semiconductor, consumer electronics, and auto manufacturers, and reminded the world that disasters can happen any time without warning.