G4S Annual Report and Accounts 2011

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Overview Strategic review Performance Performance Our risk assessment and management process Risk and potential impact to KPI Price competition The security industry comprises a number of very competitive markets. In particular, manned security markets can be fragmented with relatively low economic barriers to entry and the group competes with a wide variety of operators of varying sizes. Actions taken by the group’s competitors may place pressure upon its pricing, margins and profitability. Mitigation uu Group management continually monitors competitor activity to ensure that the group can react quickly to any competitor actions which would directly affect the group’s results. uu All business plans and strategic planning includes competitor and SWOT analysis and the pricing strategy for contracts is managed through business unit and regional price approval levels. Significant price reductions require group capex committee approval. Case study – Customer relationship management uu During 2011 the group implemented a new customer relationship management system across the organisation. Combined with the group’s sales leadership programme and account management, this should help the group win larger contracts more often and keep and develop existing customers. Risk and potential impact to KPI Major changes in market dynamics Such changes in dynamics could include new technologies, government legislation, political or economic volatility or customer consolidation and could, particularly if rapid or unpredictable, impact the group’s revenues and profitability. Security can be a high profile industry. There is a wide and ever-changing variety of regulations applicable to the group’s businesses across the world, with a recent development being an increase of restriction of foreign ownership in some countries. Failure, or an inability, to comply with such regulations may adversely affect the group’s revenues and profitability. Mitigation uu The group performs strategic and business planning at group, division, region and business unit level to ensure that specific local regulation requirements are met. Monthly business unit trading reviews ensure that market changes are identified quickly and actions taken to maintain performance and ensure that business objectives continue to be achieved. uu The group also monitors local markets and engages with governments around the world to ensure adherence to regulatory requirements, to identify any restrictions that could adversely impact the group’s activities and take appropriate actions. Case study – Reputation management During 2011, the group undertook a number of initiatives to protect its reputation as the world’s leading security group: uu It formed a business ethics steering group to develop a strategy to ensure compliance with the requirements of the UK Bribery Act and similar legislation. uu Actively participated in the development of the International Code of Conduct for Private Security Providers of which it is a founder signatory and which sets out principles for security operations in so-called “complex environments” – areas experiencing or recovering from disaster or unrest and where governments or the rule of law are weak. This code covers recruitment, vetting and training of staff, use of firearms, health and safety reporting and complaints handling. During 2011, G4S worked with companies, governments and NGOs to develop an oversight mechanism for the code and how appropriate action will be taken against a company if it is not compliant. Risk and potential impact to KPI Cash losses The group is responsible for the cash held on behalf of its customers. Increases in the value of cash lost through criminal attack may increase the costs of the group’s insurance. Were there to be failures in the control and reconciliation processes surrounding customer cash these could also adversely affect the group’s profitability. Mitigation uu The group has formal systems and policies in place documenting physical security procedures and directives and adheres to a security framework to help reduce the risk of cash losses. uu The group also operates a captive insurance business unit to mitigate against the financial risk of losses and attacks. uu All transactions are subject to strict authorisation limits and regular reconciliations of cash balances are performed for both cash in ATMs and cash held on customers’ behalf. uu In addition there is regular reporting of any cash losses/attacks and audits of security are performed in branches. uu The group has in place regional cash reconciliation managers to increase the focus on cash reconciliations globally Case study – G4S UK cash solutions uu Through investment in technology and ongoing development of operational procedures, the number of attacks in the UK have roughly halved over the last two years. All changes have been made with the support and backing of the GMB union. Risk and potential impact to KPI Poor operational service delivery and crisis management Failure to meet the operational requirements of its customers and/or failure to respond to a crisis could significantly impact the group’s reputation, contract retention and growth. Mitigation uu Group-wide operational procedures and standards for crisis management and communication are in place and adherence to them is tested in all business units. There is also a robust supervision structure which allows management to monitor the progress and delivery of the group’s contracts and customer relationships. uu The Group crisis communications process is reviewed regularly and an updated process was introduced in 2011. 42 G4S plc Annual Report and Accounts 2011
Governance Financial statements Shareholder information Risk committees Group The group operates around 160 businesses spread over more than 125 countries and across a range of product areas. Most of the risks identified below are market specific and so the diversity of the group’s operations means any particular issue should have a limited impact. Management meetings Regions (and clusters) Risks identified and escalated based on materiality The group operates a management structure that is appropriate to the scale and breadth of its activities, and the internal audit department operates under a wide remit to ensure strict adherence to group authorisation procedures and control standards as outlined here. Company (and business functions) Risk reporting system Risk and potential impact to KPI Financing If, due to adverse financial market conditions, insufficient or only very costly financial funding were available, the group might not be in a position to implement its strategy or invest in acquisitions or capital expenditure. This includes possible bank bankruptcy, loss of headroom particularly from movement of exchange rates, unavailability of bank, bond or other sources of financing and downgrading of the G4S credit rating. These could adversely impact G4S revenue growth and profitability. Mitigation uu The group treasury department monitors and follows policies to mitigate against liquidity, refinancing and currency/ exchange rate risks. Refer to note 33 to the group accounts for more details. uu The group’s historical main source of funding has been a revolving bank facility of £1.1bn which was renewed in March 2011 until 2016. The group has sought to diversify its sources of finance by issuing a number of private placement bonds in the US and more recently a public bond in the UK. uu These have spread out the refinancing requirements over the next ten years to ensure the group has access to sufficient funds to meet its business and strategic plans. Risk and potential impact to KPI IT Cyber attacks and incidents on G4S and client systems and services, especially around critical national infrastructure could result in financial loss, breach of contract, legal action and reputational damage. Mitigation u u The group employs IT specialists at all levels and has in place mandatory minimum security controls (relating to 35 specific controls). In addition penetration testing of networks and systems is performed regularly to ensure that key systems are robust. Risk and potential impact to KPI Onerous contractual obligations The group could commit to sales contracts specifying disadvantageous pricing mechanisms, unachievable service levels or excessive liability. This could impact its margins and profitability. Mitigation uu Any new contracts entered into are subject to a defined approval process. Standard contracts are used where practicable. Non-standard contracts which expose the group to material risk (e.g. unlimited liability) are subject to risk assessment and depending on the level of risk exposure are referred for regional or group legal department review. Risk and potential impact to KPI Defined benefit pension scheme A prolonged period of poor asset returns and/or unexpected increases in longevity could require increases in the level of additional cash contributions to defined pension schemes. This could constrain the group’s ability to invest in acquisitions or capital expenditure adversely affecting its growth and profitability. Mitigation uu The performance of the group’s pension schemes and deficit funding plans are reviewed regularly by both the group and the trustees of the schemes taking actuarial and investment advice as necessary. Case study – Defined benefit pension scheme management uu The UK scheme was closed to future accrual from 5 July 2011 and this should help to reduce future volatility in the deficit. G4S plc Annual Report and Accounts 2011 43
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