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Business risks

In 2013, risk management focused on the further improvement of the quality and extent of the risk management process. The systematic development of the extent of insurance coverage 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 Itella’s competitive ability and regulation by the authorities. Operative risks were primarily related to profitability, the reform of ICT operations, and business interruptions and other disruptions.

The postal licenses that have been granted allow for competition in addressed deliveries, but competition did not yet have an impact on Itella in 2013. The Finnish Government issued a postal delivery license to one of Itella’s competitors on January 30, 2014. Itella considers increased competition in the postal market to be a positive development. However, in the view of Itella, the decision to issue the postal license reduces its 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 Itella. Turbulent financial markets and any related disturbances may also pose a risk to Itella’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 strong decline in the volumes of letters, magazines, and newspapers. Itella strives to develop its operations continuously to minimize this risk.

In late 2013, Itella Posti initiated negotiations with publishers on renewing its delivery agreements on early-morning newspaper delivery. With the present operating model and prices, early-morning newspaper deliveries are not profitable as a whole. Any decisions by customers to discontinue cooperation with Itella may cause non-recurring costs in the short term if the capacity and general costs must be reduced.

In logistics, unexpected changes related 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 2013, Itella continued to integrate the groupage logistics business operations that it had acquired in the previous year into Itella Logistics.

In Russia, the development of the economic, social, legislative and other areas of the business environment may pose a strategic market risk for Itella. The fluctuation and weakening of the ruble affect shareholders’ equity through changes in the value of capital employed in Russia. In accordance with Itella’s financial policy, equity investments in subsidiaries are not hedged. However, Itella seeks to hedge against the transaction risk on the balance sheet in full, and against the operational transaction risk in part, in accordance with the limits determined in the financial policy. Itella Logistics’ investments in Russia are substantial and continue to grow in accordance with Itella’s 2020 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.

A large part of the shelving system in Itella Logistics’ Shushary warehouse in St. Petersburg collapsed in July 2012. Measures to minimize the environmental impact of the collapse were initiated immediately in accordance with instructions issued by the authorities. In January 2014, Itella’s management in Russia were acquitted of charges relating to the inappropriate handling of environmentally hazardous material. The processing of the insurance compensation has progressed, but the amount has not yet been confirmed in full. For this reason, the ultimate effects of the accident are yet to be determined. The indemnity is recognized in other receivables on the balance sheet, and a short-term provision for costs is recognized in liabilities. Related to this, a cost of EUR 1.7 million is recorded in the result for the 2013 financial period.

OpusCapita’s capacity to develop the outsourcing of financial processes and the related processes during a period of rapid growth involves an operational risk. At the same time, it is essential to ensure profitability in outsourcing business operations. 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.

Rigid cost structures slow the improvement of profitability, particularly in Finland, where the universal service obligation also limits the potential for enhanced efficiency. As volumes decline, a new recession would further complicate efforts to maintain profitability.

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 Itella.

In 2013, Itella decided to reform its ICT operating model and signed an extensive partnership agreement related to this. As part of the agreement, Itella outsourced some of its ICT operations. The management of the risks related to the transition is key for the successful further development of ICT operations at Itella.

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.

Other risks

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. Itella launched the Safe Workplace project in Finland to further develop the management of occupational safety risks related to employees. The project spans several years.

The postal industry is undergoing the most dramatic transformation in its history. This requires Itella to adjust its delivery and sorting capacity and strongly enhance the efficiency of its operations in the coming years. This may involve risks that can cause disturbances to postal deliveries and processes. We seek to minimize these risks through active cooperation with employees, the Uusi polku (New Path) program launched by Itella and professional communications.

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.