Companies “leaving the back door open” in pursuit for growth

The UK’s mid-market companies lost approximately £48bn over the last 12 months, medium-sized businesses across the UK lost on average 5.44% of their annual turnover as a result of incidents affecting their supply chain, customers, workforce, cyber security, tax and/or regulation.

companiesWith the Department for Business, Innovation and Skills estimating that the UK mid-sized business market is worth £875bn, the estimated impact of these failures therefore equates to £48bn last year due to a failure to adequately mitigate risks directly within their control, according to new analysis by KPMG Enterprise.

In particular, an over-reliance on a small number of suppliers and customers has left companies vulnerable to costly fractures in their supply chain and a loss of vital revenues amounting to approximately half a billion pounds each year See table in Notes to Editors.

In KPMG Enterprise’s latest study of 222 leaders of mid-sized businesses (with a turnover of between £10m to £500m), executives were asked to reveal their approach to mitigating risks relating to their workforce, customer base, supply chain, data security, regulation and tax compliance.

A total of 41% of those surveyed expressed concern that they have an over-reliance on a small group of suppliers within their supply chain – leaving them at greater exposure to price increases, changes in commodity prices and quality control issues. This is in spite of 38% of companies experiencing a failure in their supply chain over the last twelve months, with each incident costing the company, on average, 0.95% of their turnover.

Furthermore, despite half of respondents saying that the threat of losing major customer accounts was their most pressing day-to-day concern, over a quarter (29%) admitted that they rely on their top five customers for more than half of their turnover – again, leaving them exposed to the risk of bad debt, or a significant loss of income should those key customers switch loyalties.

Ben McDonald, partner, KPMG Enterprise, commented: “By their very nature, leaders of privately-owned businesses tend to be bold decision makers blessed with entrepreneurial spirit. Their comparative freedom of movement when compared to their counterparts at listed companies enables them to be decisive, innovative and agile. However, our research also suggests that in their pursuit for growth, these leaders are leaving the back door open by failing to adequately address the many and varied risks that threaten their business. Whether related to customers, suppliers, data security or regulation, never has the adage ‘fail to prepare, prepare to fail’ rung more true – and the financial impact that this lack of preparation is having on business is startling.”

Ben McDonald continued: “Relying on a small pool of suppliers is a particularly common vulnerability amongst middle market companies, yet we’ve seen many high-profile examples of organisations that have taken a substantial financial hit as a result of a fracture in their supply chain. And these fractures aren’t solely caused by suppliers going bust. Ethical lapses such as poor working conditions, data security breaches, substandard production, a flouting of environmental regulations or irregular financial transactions can all translate into significant reputational – and ultimately financial – damage to the contracting business.”

So with such high stakes, what steps should businesses take to protect themselves? Ben McDonald said: “Watch out for early warning signs, such as suppliers delivering late or demanding early payment. Often, it’s the employees on the ground who pick up on the signals first – we know of one company which only discovered there were problems afoot at its largest supplier when a delivery driver made a passing remark that he had been paid late to a warehouse manager. Ask yourself which suppliers would seriously interrupt your business if they failed, and perform a credit check on them. If you find they are high risk, consider splitting procurement over one, two or even three more suppliers. That way, if one breaks down, the others can take up the slack.

“Finally, don’t underestimate the cyber threat posed by suppliers. ‘Whaling’ – where senior executives are targeted with fake emails from suppliers asking for payments – is massively on the increase. And don’t assume that if you are hit, your cyber insurance will automatically pay out. Check the small print.”

Over-reliance on a small number of customers can be equally perilous, something that the fifth of respondents to KPMG’s survey who experienced a loss of a major customer in the last 12 months know all too well.

Ben Gaster, director, KPMG Enterprise, said: “Customers are the lifeblood of any business, so it’s no surprise that the prospect of losing a major account keeps many a business leader awake at night. In assessing their risk exposure, we advise companies to look from the outside in and truly understand what their value proposition is. Breaking this down is important so they can be clear in discussing what they deliver, versus their nearest competitor.”

Businesses should be prepared to run commercial value-based negotiations with their different customer groups, particularly those that are most significant. Ben Gaster explained: “Remember that ‘value’ versus ‘relationship’ is a seesaw, and at any point, the balance could tip. Just as you might be prepared to pay a builder with whom you have a good relationship a little more, so your customers may do the same. If you’ve forged a good relationship and you are balancing that with price, then you are already on the front foot. But if the relationship shifts or breaks down, then value becomes more pertinent.”
“Maintaining a commercial dialogue that reaffirms the value provided as well as responding proactively to customer issues is key, otherwise you run the very real risk that your customer will start hunting for alternatives,” he concluded.