In 2014, risk management focused on the further improvement of the quality and extent of the risk management process. The expansion of insurance coverage and the systematic development of insuring was another focus area.
Key strategic risks were related to the decline in postal delivery volumes, which progressed more rapidly than expected, as well as the economic recession and other changes related to markets or the business environment that were unexpected or more extensive than anticipated. Other strategic risks were related to Posti’s competitive ability and regulation by the authorities. Operational risks were primarily related to profitability, the renewal of ICT operations, and business interruptions and other disruptions.
The postal delivery licenses that have been issued allow for competition in addressed deliveries, but competition has not yet had an impact on the Group’s result. The Finnish Government issued a postal delivery license to three of Posti’s competitors. In Posti’s view, issuing the postal licenses with one-day delivery obligation reduces Posti’s opportunities to profitably provide services that fall under the universal service obligation in accordance with the Finnish Postal Act. For this reason, the decision increases the need for efficiency measures.
Strategic and operational risks
Continued economic recession may have an impact on the activities of companies and consumers and, consequently, on the volumes of products transported by Posti and demand for warehousing services both in Finland and abroad. Turbulent exchange rates and financial markets and any related disturbances may also pose a risk to the Group’s business operations.
Significant market risks include the digitization of postal services at a more rapid rate than expected and other unanticipated changes in this area, such as an unexpectedly fast decline in the volumes of letters, magazines, and newspapers. Posti strives to develop its operations continuously to minimize this risk.
Rigid cost structures slow the improvement of profitability, particularly in production operations in Finland, where the universal service obligation also limits the potential for enhanced efficiency. As volumes decline, the economic recession further complicates efforts to maintain profitability.
Posti has held negotiations with newspaper publishers regarding the renewal of delivery agreements for the early-morning delivery of newspapers, as early-morning delivery has not been profitable under the current implementation and pricing, and with the current development of circulation volumes. During the year, the negotiations on seven early-morning delivery agreements ended without result and the agreements were terminated. During the third quarter, one new cooperation contract and two extension contracts were signed. With some customers, an agreement was reached on additional months. In the case of two newspaper publishers, delivery was transferred to a partner by a business transfer agreement. Any decisions by customers to discontinue cooperation with Posti may cause non-recurring costs in the short term if the capacity and general costs must be reduced.
In logistics, unexpected changes related to domestic transport and to increasing international competition and the ensuing decline in volumes in the Nordic countries are also seen as risks.
Any delays in the management of acquisitions and the integration of the acquired businesses and their operations into the Group cause direct financial losses and pose a strategic risk that limits business development. Our goal is to ensure successful integration through careful monitoring. In 2014, Posti continued to integrate the groupage logistics business operations that it had acquired in 2012 into its logistics business.
In Russia, the development of the economic, social, legislative and other areas of the business environment may pose a strategic market risk for Posti. From the Group’s point of view, Russia also involves significant financial risks: the fluctuation and depreciation of the ruble affect shareholders’ equity through changes in the value of capital employed in Russia.
In accordance with the Group’s financial policy, equity investments in subsidiaries are not hedged. The parent company’s ruble-denominated receivables are hedged in full and the currency position related to the operational transaction risk are hedged in part, in line with the financial policy. Due to the ruble’s high interest level and the illiquidity of the ruble market, ruble hedging costs have increased significantly and the Group has, for the time being, terminated the hedging of the operational transaction risk and is also considering the full or partial termination of hedging related to the parent company’s ruble-denominated receivables.
Posti’s investments in Russia are substantial and continue to grow gradually in accordance with the Group’s vision. Our risk management measures include the continuous monitoring of developments and trends, the increasing monitoring of critical processes and solid establishment in the Russian market through our own companies, employees and effective networking. We seek to prevent reputation risks from materializing through enhanced internal auditing, separate local compliance operations, continuous risk assessment and regular compliance training for employees.
OpusCapita’s capacity to develop the outsourcing of financial processes and the related processes during a period of rapid growth involves a strategic risk for OpusCapita. At the same time, it is essential to ensure profitability in outsourcing business operations. Financial management software is being increasingly offered as cloud services. This involves the risk of whether OpusCapita is able to develop its operations and service offering quickly enough. With the volume of paper-based transactions decreasing, and that of electronic transactions increasing rapidly, along with competition, it is evident that the average price of transactions will decline more than the volume of business operations will grow. This calls for continuous improvement in cost-efficiency.
The protection and development of key production and warehouse facilities and the continuity of the ICT infrastructure are critical in the management of operational risks related to loss and interruption. If materialized, in a fire, for example, such risks could result in substantial losses of customer accounts and value for Posti.
Other significant business disruption risks are related to the vulnerability of information security, networks and the production infrastructure. These risks concern both operations and the corporate image.
Financial risks and their management are explained in the Notes to the Financial Statements.
In a labor-intensive industry, the successful management of sick leave and the effective and extensive prevention of accidents are extremely important in terms of employee well-being and productivity as well as the Group’s profitability. The Safe Workplace project is underway at Posti in Finland to further develop the management of occupational safety risks related to employees. The aim of the project is to halve the number of accidents by 2018.
The postal industry is undergoing the most dramatic transformation in its history. This requires Posti to adjust its delivery and sorting capacity and strongly enhance the efficiency of its operations in the coming years. Changes may cause disturbances to mail deliveries and processes. We seek to minimize these risks through active cooperation with employees, good change implementation planning, the Uusi polku (New path) program launched at the beginning of 2014 and professional communication.
We seek to insure against all residual risks for which insurance is the best option for financial or other reasons. Insurance policies related to business continuity, property and liabilities as well as certain insurance policies related to personnel are managed centrally at the Group level. In addition to management liabilities, liability risks include risks arising from operations and products. Deductibles are determined based on the Group’s risk-bearing ability.