Risk Management

The following are considered the principal risks facing the Group and are the result of the robust, top down and bottom up risk assessment process previously described. It includes those risks that would threaten the Group's business model, future performance, solvency or liquidity.

  
 
Description and importance to Rotork Summary of mitigation and controls Link to strategic objectives
Economic and market conditions     

A decline in government and private sector confidence and spending will lead to cancellations of expected projects or delays to existing expenditure commitments.

This lower investment in Rotork's traditional market sectors would result in a smaller addressable market, which in turn could lead to a reduction in revenue from that sector.

Risk trend: Stable

  • Product development and innovation to address new markets and new applications in existing markets.
  • Geographic and end market diversification provides resilience to a reduction in any one area or market but, as we have seen this year, may not fully mitigate a change in the larger end markets.
  • Accelerated cost saving management as required to maintain profitability of regions and relevant businesses.
  • Sales growth
  • Service growth
  • Cost management
     

Increased competition on price or product offering leading to a loss of sales globally or market share.

Risk trend: Stable

  • Rotork already has production or sales and service operations in many low cost countries.
  • Global strategic sourcing team secure lower prices for components.
  • R&D investment and organic product development, or acquisition of companies with new products, to maintain differentiation from the competition both in terms of the quality of our products and the services we provide.
  • Continue to focus on an improved customer experience to ensure that price is not the only means of gaining a competitive advantage.
  • Sales growth
  • Service growth
  • Cost management
  • Innovation
     

Increasing social and political instability results in both disruption and increased protectionism in key geographic markets. This includes the risks posed by Brexit.

Business disruption would impact our sales and might ultimately lead to loss of assets located in the affected region.

Risk trend: Increasing

  • Regular review of global markets considering social and political risks, including the risk of greater protectionism, and develop contingency plans and market exit strategies to implement as appropriate.
  • Key risk indicator monitoring % of revenue from high risk markets reported quarterly to the Board.
  • The increasing geographic spread of Rotork's operations and customers diminishes the impact of any one market on the results of the Group as a whole.
  • Sales growth
  • Service growth
  • Cost management
     
Financial    

UK defined benefit pension scheme deficit continues to increase due to a number of factors including investment returns, long-term interest rates, price inflation and members' longevity. This in turn might lead to a requirement for the Company to increase cash contributions to the schemes.

Risk trend: Stable

  • Both defined benefit schemes are closed to new members.
  • The Group and trustees monitor the performance of the scheme.
  • Actuarial and investment advice is taken with a view to reducing volatility and the overall cost of the provision of this employee benefit.
  • Cost management
     

Volatility of exchange rates would impact Rotork's reported results and competitive position.

Risk trend: Increasing

  • Rotork's Treasury Hedging Policy addresses short-term risk and this works together with the natural hedging provided by the geographical spread of operations, sourcing and customers.
  • The Hedging Policy continues to be reviewed annually to ensure it remains fit for purpose.
  • Cost management
     
Health and Safety    

The nature of Rotork's core business and geographical locations involves potential risks to the health and safety of our employees and other stakeholders.

Risk trend: Stable

  • Compliance with relevant legislation and codes of best practice.
  • Robust health and safety policy and training included in all staff inductions, in addition to regular refresher training.
  • Regular health and safety audits, site checks and reporting.
  • Regular communications about accidents at work and visible key performance indicators (KPIs).
  • Appropriate training is provided for known safety risks.
  • Third party provider of international support and travel advice in all markets and regions.
  • See health and safety report on pages 58 to 59 for further details.
  • Manufacturing excellence
  • Corporate social responsibility
     
Product quality and reliability    

Major in-field failure of a new or existing Rotork product potentially leading to a product recall, major on-site warranty programme or the loss of an existing or potential customer.

Risk trend: Stable

  • Extensive product design review process pre-launch reduces the risk of product failures occurring in the field.
  • Rotork has experience of launching many products and has enhanced the process based on this experience.
  • Comprehensive set of quality control procedures over suppliers. These include supplier visits, audits and a scorecard system to measure their performance.
  • Our global service coverage ensures that any product failure issues should be dealt with quickly and efficiently to minimise any reputational impact.
  • Fitting and commissioning products wherever possible by Rotork engineers to ensure current operations.
  • Sales growth
  • Service growth
  • Manufacturing excellence
  • Corporate social responsibility
  • Innovation
     

Failure of a key supplier or tooling failure at a supplier causing disruption to manufacturing at a Rotork factory.

Risk trend: Decreasing

  • Dual sourcing for key components wherever possible provides the best mitigation for key suppliers.
  • Regular KPI monitoring of the supply chain throughout the organisation, including a key risk indicator (KRI) measuring dual sourcing of critical components reported quarterly to the Board.
  • Comprehensive set of quality control procedures over suppliers. These include supplier visits, audits and a scorecard system to measure their performance.
  • Maintaining safety stock levels sufficient to protect against short-term disruption.
  • Regular monitoring and replacement of our tooling at all suppliers reduces the risk of a tooling failure.
  • Manufacturing excellence
  • Cost management
     
Acquisition risk    

Failure of an acquisition to deliver the growth or synergies anticipated, either due to unforeseen changes in market conditions, or failure to integrate an acquisition effectively.

Significant financial underperformance could lead to an impairment write down of the associated intangible assets.

Risk trend: Increasing

  • Forecast market conditions are considered during the acquisition process.
  • During the due diligence process a 100 day plan is prepared to manage the important initial stages of integration.
  • Consideration is given to the composition and skills of the management team with the necessary training and support provided by a variety of Rotork personnel.
  • Business development directors provide greater support and co-ordination.
  • Effective integration and communication of Rotork's policies and procedures.
  • Sales growth
  • Service growth
  • Acquisitions
     
IT security, continuity and system implementation    

Failure to provide, maintain and update the systems and infrastructure required by the Rotork business.

Failure to protect Rotork operations, sensitive or commercial data, technical specifications and financial information from cybercrime.

Risk trend: Increasing

  • Thorough business process reviews and use of flexible testing environments to address functional issues.
  • Post-system implementation, each business is monitored.
  • Dedicated implementation resource provided by experienced Rotork team.
  • Robust security systems are in place to monitor and protect the Rotork network.
  • We continually review the effectiveness of our key IT security controls, including a KRI to monitor the number of successful cyber breaches reported quarterly to the Board.
  • Regular cyber security and cyber fraud awareness training and guidance.
  • Global business systems
     
Compliance with law, regulation or ethical standards    

Failure of our staff or third parties with whom we do business to comply with law or regulation or to uphold our high ethical standards and values.

Risk trend: Stable

  • Tone from the top, a 'no tolerance' culture to reinforce our high ethical standards and values.
  • Commitment to compliance embodied in Rotork culture.
  • Anti-bribery and corruption training is provided to all relevant staff.
  • Continued communication and education of agents.
  • Use of WorldCheck for agents and acquisition targets before engaging in business relationships.
  • Availability and promotion of the whistleblowing policy and hotline.
  • Ethical and quality control procedures over suppliers. These include supplier visits, audits and a scorecard system to measure their performance.
  • Corporate social responsibility

For further details about risk management view our Annual Report & Accounts 2016.