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BDO Risk Factor Report


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BDO Risk Factor Report

  1. 1. 2011 www.bdo.Com ContaCt: Tim ClaCkeTT Los Angeles 310-557-8201 Hank GalliGan Boston 617-422-7521 Jay Howell San Francisco 415-490-3270 jhowell@bdo.comSupply Chain VulnerabilitieS afTab Jamil Silicon Valleya top riSk to teCh SeCtor 408-352-1999 DouG SiroTTa The 2011 BDO RiskFactor Report for Technology Businesses examined the risk factors Silicon Valley listed in the most recent SEC 10-K filings of the 100 largest publicly traded U.S. technology 408-278-0220 companies. The risk factors were analyzed and ranked in order of frequency cited. The report has been cited in the following media outlets: Wall Street Journal’s CFO Journal, ryan STarkeS Baseline,, EBN, IndustryWeek, InfoTech, ITAC Blog, @Risk, the Strategic Sourceror Woodbridge Blog, Supply Chain Digital, Supply Chain Matters, Tech Journal South and Virtual Strategy 732-734-1011 Magazine. rstarkes@bdo.comt mike wHiTaCre ech companies are changing, and The fourth annual BDO RiskFactor Report for Atlanta so are their risks. Challenges that Technology Businesses identified the most 404-688-6841 were put on the backburner during commonly cited risk factors among the 100 mwhitacre@bdo.comthe downturn, most notably supply chain largest U.S. public technology companies. Asissues, are once again weighing heavily on reported in an exclusive article on the study in DaviD yaSukoCHithe minds of executives. And while economic Wall Street Journal’s CFO Journal, one function Orange Countyconditions remain a concern, companies of the risk factor section in 10-Ks is to provide 714-913-2597can no longer afford to keep their heads companies with a legal out, but they also dyasukochi@bdo.comdown and focus merely on survival. For 2011, point to the chief issues companies face. Whenexecutives will approach growth initiatives tracked over time, as our study discovered,with a “lessons learned” attitude, focusing on risk factors can show significant shifts in theproactive strategy and shoring up potential sector. This year, we saw a continuation in theweaknesses along the supply chain. With two most frequently cited risks of industrycustomer demand in mind, tech companies competition (97%) and economic conditionshave a renewed laser focus on the timely (96%), but large increases in several risks thatdevelopment of innovative products and were less prominent during the  Read more
  2. 2. 2 bDo 2011 riSkfaCTor reporT For TeChnology BUSineSSeS upply Chain iSSueS S Supply Chain risks escalate in Tech Sectorthreaten from allangleS 100%As production levels begin to stabilize, 90%companies note increased risks from thebeginning of the supply chain to the end. 80%The vast majority of companies (86%)stress concerns over supply chain issues 70%(including vendor relations, distribution andmaterial costs) as top risk factors, reflecting 60%a 15 percent increase over 2010 (75%).From a sourcing perspective, concerns over 50%the availability of raw materials saw a 79percent increase this year, as the cost of oil 40%and commodities rise. risks associated withequipment failure and delays and balanced 30%inventory saw substantial increases as well.The potential disruption to factories and 20%distribution channels as a result of naturaldisasters and geopolitical issues is also a 10%much greater concern for companies thisyear – a particularly notable jump, especially 0% 2009 2010 2011as these disclosures were made before theearthquake in Japan. Connected to this risk, Supplier/vendor concerns Inventory balancewe’re seeing more tech companies focus onways to diversify their supplier base and look Natural disasters, war, conflicts Price/availability of rawfor vendors who can help mitigate the supply Equipment failure and product materialschain concentration risk. liability“There will be efforts made withincompanies themselves and within to strategy with laser sharp focus, updating also top of mind for the majority (58%) oftheir supply chain to mitigate risk. growth plans and improving operating companies, as concerns over the convergenceWe are beginning to see companies models. This comes in the face of mounting of accounting standards and the final ruling on competitive pressures and what some are revenue recognition mount.question whether they are handling calling “acquisition sprees” in the sector.their supplier concentration properly, We’ve seen this happening in the enterprisewhether sole sourcing is a best storage market, where, among others,   proteCtion key to ippractice, and whether or not they have major players like SanDisk, Seagate and preSerVing CuStomer Micron Technology are all heavily targeting demanda plan B,” aftab Jamil, partner and acquisitions. As sector leaders including Apple andnational Director of the Technology Samsung pursue intellectual property (iP)& life Sciences practice told EBN. “Companies are coming up with infringement cases, and an increasingly strategies to grow, but the execution global supply chain opens companies to iP risk in China, it’s not a surprise that concerns trategy riSkS inCreaSe S has to be flawless if they are going to over iP protection (79%) are back on theaS teCh exeCS eye meet their objectives,” Jamil told the rise after falling from 86 percent in 2009 togrowth WSJ CFO Journal. 74 percent in 2010. iP risks factor into the escalating concerns over legal proceedingsWith bottom line concerns over product and litigation issues, as companies look toquality and inventory levels mounting,  egulation riSkS on the r fiercely protect their ideas and products amidtechnology companies have becomesignificantly more preoccupied with the risk riSe rising concerns over innovation and new product development. The ability to transitionof being unable to properly execute their With google and Microsoft devoting record products and develop new technologycorporate strategy. reflecting one of the dollars to lobbying during the first quarter, continues to be particularly worrisome for amost dramatic increases, companies citing it’s clear that tech companies are increasingly vast majority (88%) of technology companies.this risk have more than tripled over the past concerned over government regulation. in new product development has becometwo years (93%, up from 68% in 2010 and fact, it was the second most commonly cited especially crucial in many sectors including27% in 2009). What’s driving this? Following risk factor this year at 96 percent, up 19 mobile where we see heightened demand forthe downturn, tech companies have returned percent since 2009. Accounting standards are  Read more
  3. 3. bDo 2011 riSkfaCTor reporT For TeChnology BUSineSSeS 3the latest and greatest. responding to thatdemand, markedly more companies (85% ip risks rise to meet Demand for innovative productsvs. 63% in 2010) cite the ability to satiatecustomer interests and desires for innovative 100%products as a major risk. 90% infraStruCture iSSueS  80%raiSe threat of SeCurity 70%breaCheSConcerns over the ability to maintain 60%operational infrastructure were cited by more 50%than two-thirds (68%) of tech companies 2009 2010 2011this year, representing 62 percent growthover 2010 (42%). While infrastructure Intellectual property risksvulnerabilities remain a top consideration,many companies also reported that they are Ability to meet customer demand for innovative productsin process of launching new systems that Legal proceedingswere previously deferred during the addition to weaknesses and changes toinfrastructure, recent reports of data theft at the inability to successfully complete M&A associated with iP. in fact, 100 percent of techSony and Amazon have contributed to a large transactions and other divestitures. While companies in this region cited concerns overincrease in companies citing security breaches deals are up, and BDo’s 2011 Technology protecting their iP, compared to 79 percentas a risk. Fifty-seven percent of companies Outlook Survey found that tech CFos felt of the national sample. These companiescited it this year, up from 2010 (44%) and better about access to capital this year, also cite greater product transition pressures,2009 (30%). We predicted this increase last recession-era concerns over liquidity linger in with 95 percent pointing to concerns over theyear, as the amount of data collected and used 10-K reporting (68%). failure to develop new products or services,by technology companies is substantial and compared to 88 percent of companies overall.only increasing. The West Coast is also the scene of fierce  egional analySiS – top r competition for the best and brightest talent“iT infrastructure and networks are riSkS in weSt CoaSt teCh and they are notably more concerned over hub attracting and retaining key personnel (95%,no longer a back office function; compared to 82% of the national sample).they are integral to how businesses in addition to the top risks for U.S. companies This risk is embodied in a recent New York overall, we analyzed regional cuts of theare managed and should be data for companies based in the largest Times article which reported that the demand for hiring top talent has led to an increasefront and center from a strategy tech hub included in the sample – the West in companies buying start-ups not for thestandpoint. While these risks cannot Coast. Some notable trends emerged. For products, but for their people. This trend is West Coast-based companies, the innovativebe eliminated, tech companies known as “acqhiring.” culture seems to have led to amplified risksshould look for ways to managethem, including putting monitoring risks Differ in west Coast Tech Hubprocesses and failsafe mechanisms in 100%place,” Jamil discussed on the ITAC 100% 94% 94%Blog. 90% 88% 82% m&a riSkS remain high  80% 79%amid liquidity ConCernS 70%We’ve seen a busy year already in 2011,marked by a record 881 completed tech deals 60%during the first quarter of 2011. Accordingto Thomson reuters, the recent Microsoft-Skype deal lifted the total value of announced 50%merger transactions in the tech sector product ability to intellectualworldwide to $85.5 billion since Jan. 1, making Transition attract/retain property risksthis the strongest start since 2000 for tech key talent All companiestransactions. Amid this heightened activity, West Coast companies85 percent of companies note concern over  Read more
  4. 4. 4 bDo 2011 riSkfaCTor reporT For TeChnology BUSineSSeS the top 20 risk factors of the 100 largest u.S. technology Companies 2011 2011 2010 2009 rank 1. Competition and consolidation in tech sector; pricing 97% 94% 97% pressures 2. U.S. general economic concerns 96% 93% 85% 2t. Federal, state or local regulations 96% 88% 81% 4. Failure to properly execute corporate strategy 93% 68% 27% 5. Product transition, failure to develop new products or 88% 94% 91% services 6. legal proceedings 86% 80% 68% 6t. U.S. and foreign supplier/vendor concerns, supply chain issues 86% 75% 78% 8. Management of current and future M&A or divestitures 85% 86% 86% 8t. Threats to international operations 85% 83% 90% 8t. Predicting customer demand and interest, innovation 85% 63% 62% 11. Ability to attract or retain key personnel 82% 83% 82% 12. natural disasters, war, conflicts and terrorist attacks 81% 55% 60% 13. intellectual property infringement 79% 74% 86% 14. equipment failure and product liability 75% 64% 58% 15. Cyclical revenue and stock fluctuation 70% 57% 83% 16. inability to acquire capital or financing 68% 55% 42% 16t. inability to maintain operational infrastructure and systems 68% 42% 41% 18. labor concerns 61% 49% 22% 18t. Credit or financial risk of customers, vendors or suppliers 61% 48% 33% 20. Accounting, internal controls and Sarbanes-oxley 58% 54% 62% compliance*t indicates a tie in the risk factor rankingMaterial discussed is meant to provide general information and should not be acted upon without first obtaining professional advice appropriately tailored to your individual circumstances.To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be contained in this communication (including any attachments) is not intendedor written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the internal revenue Code or applicable state or local tax or (ii) promoting, marketing orrecommending to another party any tax-related matters addressed herein. bdo teChnology & life SCienCeS praCtiCe BDo is a national professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. guided by core values including competence, honesty and integrity, professionalism, dedication, responsibility and accountability for 100 years, we have provided quality service and leadership through the active involvement of our most experienced and committed professionals. BDo works with a wide variety of technology clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, on myriad accounting, tax and other financial issues. BDo is the brand name for BDo USA, llP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For 100 years, BDo has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 40 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDo international limited, BDo serves multinational clients through a global network of 1,082 offices in 119 countries. BDo USA, llP, a Delaware limited liability partnership, is the U.S. member of BDo international limited, a UK company limited by guarantee, and forms part of the international BDo network of independent member firms. BDo is the brand name for the BDo network and for each of the BDo Member Firms. For more information, please visit: © 2011 BDo USA, llP. All rights reserved.