1. 2012
www.bdo.com
Contact:
Tim Clackett
Los Angeles
310-557-8201 / tclackett@bdo.com
Slade Fester
San Jose
408-352-1951 / sfester@bdo.com
Hank Galligan
Boston
617-422-7521 / hgalligan@bdo.com
Aftab Jamil
Silicon Valley
408-352-1999 / ajamil@bdo.com
Supply and Demand: Potent Doug Sirotta
Silicon Valley
Risks for Tech Companies 408-278-0220 / dsirotta@bdo.com
in 2012
Ryan Starkes
Woodbridge
732-734-1011 / rstarkes@bdo.com
The 2012 BDO RiskFactor Report for Technology Businesses examines the risk David Yasukochi
factors listed in the most recent SEC 10-K filings of the 100 largest publicly Orange County
714-913-2597 / dyasukochi@bdo.com
traded U.S. technology companies. The risk factors were analyzed and ranked in
order of frequency cited.
I u atural Disasters,
N
n the past year, a number of events
highlighted the significance of certain
business and operational risks facing
Breaches Heighten
technology companies and the need for Prospect of Business
effective risk management policies. Natural Interruption
disasters and political unrest exposed the Tech companies across the globe were put on
vulnerabilities of integrated supply chains. notice when a devastating earthquake hobbled
And a still-sluggish economy heightened Japan’s Fukushima Daiichi nuclear reactor last
uncertainty over demand for new products year. The subsequent fallout, as well as severe
and services. To stave off fierce competition flooding in Thailand, storms in the Philippines
in the year ahead, executives will drive and prolonged conflict across the Middle East
innovation, albeit cautiously, while diversifying and North Africa—all of which compromised
supplier networks in an effort to insulate their essential infrastructure—highlighted for many
companies from future shocks to the global in the industry the risk of sudden business
economic system. interruptions. Two years ago, just over half
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2. 2 BDO 2012 RiskFactor Report for Technology Businesses
“Data breaches can be very costly to the business and have a significant negative impact on a company’s reputation and
brand. Leading companies are looking for ways to manage the risk associated with both cyber security and sole-sourced
supplier relationships,” said Clark Schweers, managing director at BDO Consulting and head of the firm’s Insurance
Claim Services practice.
of companies (55 percent) cited natural
disasters, wars and terrorist attacks among Business Interruption Risks Loom Large
their concerns; this year, nearly nine-in-10
companies (88 percent) named the same 100%
factors as risks to their business operations.
90%
Concerns over data security and breaches
of technology also skyrocketed this year, 80%
as a slew of hacking incidents rattled tech
companies, credit card giants and government 70%
agencies. Seventy-one percent of companies
60%
listed technology breaches and data
security as risk factors in 2012, up nearly 30
50%
percentage points from 2010, when just 44
percent of companies cited similar concerns. 40%
30%
u upply Chain
S 2010 2011 2012
Disruptions Remain a
Natural disasters, war, conflicts
Concern
The tech industry’s growing reliance on Maintenance of infrastructure and information systems
third-party suppliers is reflected in rising Breaches of technology and data security
concerns over both potential disruptions to
those networks (88 percent) and the financial
well-being of vendors (64 percent). Ongoing
disputes over “rare earth” metals and the Supply Chain Risks Continue to Escalate
rising cost of raw materials also served to
heighten supply chain-related risks. Tech 100%
companies would be wise to further diversify 90%
their suppliers in the year ahead to protect 80%
against potential disruptions.
70%
60%
u ew Product
N
50%
Development Pressures
40%
Mounting
30%
Tech companies are increasingly concerned
about the R&D phase of product 20%
development. With a constant stream of 10%
new products and software updates flooding
0%
the market, tech companies must innovate 2010 2011 2012
or risk losing market share to competitors.
For the fifth year in a row, competition is the Supplier and vendor concerns
top-ranked risk factor, and tech companies Equipment failure and product liability
also note rising concerns over their ability to Credit worthiness and financial risk of suppliers and vendors
develop new, innovative products and services Price and availability of raw materials
to meet growing customer demand.
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3. BDO 2012 RiskFactor Report for Technology Businesses 3
“Technology is moving so fast now, that the product lifespan has shrunk dramatically and that’s a fundamental business
risk,” Aftab Jamil, partner and national director of the Technology & Life Sciences Practice at BDO USA, told The Wall
Street Journal. “If you misread what those trends are or your timing is not aligned with what the market demands, there will
be consequences for that.”
u ounting Legal
M Product Development Risks Rise Amid Heavy Competition for Customers
Challenges Raise
Visibility of IP 100%
Infringement 90%
Intellectual property (IP) infringement
concerns among tech companies rose again 80%
this year. Eighty percent of companies said
they were wary of IP infringement, likely 70%
bolstered by a slew of high-profile legal
battles and continued focus on patent 60%
violations in China. With the specter of IP
breaches at record levels for the study, it is no 50%
2010 2011 2012
surprise that tech companies say they are also
increasingly prepared to face litigation in the Competition
year ahead; 83 percent cited legal proceedings
as a risk. Development of new products and services
Customer demand
u ngoing Legislative
O
Changes, Accounting
Challenges Cause
Anxiety
Concerns over government regulations are at
bring more capital into the market and enable “Acquisitions are a key strategy for
more acquirers. Amid heavy deal activity,
an all-time study high. With the presidential companies to grow and thus increase
more companies (88 percent, up from 85
election looming, a cyber security bill pending, their value. However, acquisitions can
percent in 2011) cite concerns over their
and continued challenges around the roll out
of the Dodd-Frank Act top of mind, nearly all
ability to successfully complete and integrate be risky, and if the fit is not right, then
acquisitions. Tech companies are also more the acquiring company could alienate
companies (98 percent) cite regulation as a
wary of anti-takeover and change-in-control
risk. Compliance with new revenue recognition the new employees and ultimately do
provisions that may make it more difficult for
rules and other accounting challenges likely
contributed to the 19 percent increase in
a third party to acquire them, even though more harm than good,” said Thomas
it may be favorable to shareholders. Thirty- Zambito, senior vice president at
companies noting concern over accounting
eight percent of companies cite these risks,
standards and maintaining effective internal
up from 28 percent in 2011. With acquisition BDO Valuation Advisors.
controls (69 percent versus 58 percent in
a key strategy this year, access to capital
2011).
and financing remains a top priority. While
the BDO 2012 Technology Outlook Survey
u ompetition Fuels M&A
C found that tech CFOs are more confident in
their ability to access capital this year, most
Activity as Liquidity companies (69 percent) continue to safeguard
Concerns Linger themselves against a volatile market by noting
The tech industry is primed for another uptick access to financing as a risk.
in acquisition activity. Facebook’s Instagram
deal is fueling competition among the major
industry leaders to grow patent portfolios,
and the recently passed JOBS Act aims to
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4. 4 BDO 2012 RiskFactor Report for Technology Businesses
The Top 20 Risk Factors of the 100 Largest U.S. Technology Companies
2012
2012 2011 2010
Rank
1. Competition and consolidation in tech sector; pricing
99% 97% 94%
pressures
2. U.S. general economic concerns 98% 96% 93%
2t. Federal, state or local regulations 98% 96% 88%
4. Failure to develop or market new products or services 93% 88% 94%
5. Predicting customer demand and interest, innovation 91% 85% 63%
6. U.S. and foreign supplier/vendor and distribution concerns 88% 86% 75%
6t. Failure to properly execute corporate strategy 88% 93% 68%
6t. Management of current and future M&A or divestitures 88% 85% 86%
6t. Natural disasters, war, conflicts and terrorist attacks 88% 81% 55%
10. Threats to international operations 85% 85% 83%
11. Legal proceedings 83% 86% 80%
12. Ability to attract or retain key personnel 82% 82% 83%
13. Intellectual property infringement 80% 79% 74%
13t. Equipment failure and product liability 80% 75% 64%
15. Cyclical revenue and stock fluctuation 76% 70% 57%
16. Inability to maintain operational infrastructure and systems 73% 68% 42%
17. Breaches in technology security or privacy 71% 57% 44%
18. Inability to acquire capital or financing 69% 68% 55%
18t. Accounting, international controls and Sarbanes-Oxley
69% 58% 54%
compliance
20. Credit or financial risk of customers, vendors or suppliers 64% 61% 48%
t – indicates a tie in the risk factor ranking
About the Technology & Life Sciences Practice at BDO USA, LLP
BDO has been a valued business advisor to technology and life sciences companies for over 100 years. The firm works with a wide variety of technology and life sciences
clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, on myriad accounting, tax and other financial issues.
About BDO
BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly
traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed
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international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information,
please visit: www.bdo.com.
Material discussed is meant to provide general information and should not be acted upon without first obtaining professional advice appropriately tailored to your individual circumstances.
To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be contained in this communication (including any attachments) is not intended
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© 2012 BDO USA, LLP. All rights reserved. www.bdo.com
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