Risk management

Konecranes’ Board of Directors has defined and adopted a set of risk management principles based on widely accepted international good management practices. The Audit Committee evaluates and reports on the adequacy and appropriateness of internal controls and risk management to the Board.

Risk management principles

Risk is anything that will clearly affect Konecranes' ability to achieve its business objectives and execute its strategies. Risk management is part of Konecranes' control system and is designed to ensure that any risks related to the company's business operations are identified and managed adequately and appropriately to safeguard the continuity of Konecranes' business at all times.

The Group's risk management principles provide a basic framework for risk management across Konecranes, and each Group company or operating unit is responsible for its own risk management. This approach guarantees the best possible knowledge of local conditions, experience, and relevande.

The Group’s risk management principles define risk management as a continuous and systematic activity aimed at protecting employees from personal injury, safeguarding the assets of all Group companies and the Group as a whole, and ensuring stable and profitable financial performance. By minimizing losses due to realized risks, and optimizing the cost of risk management, Konecranes can safeguard its overall long-term competitiveness.

Significant risks for Konecranes

Konecranes has assessed its strategic, operational, financial, and hazard risks. The list of risks below and the risk management methods described here are intended to be indicative only and should not be considered exhaustive.

Market risks

Demand for Konecranes' products and services is affected by the development of the overall global economy and the business cycles of Konecranes’ customer industries. Capital expenditure on industrial cranes varies with the development of industrial production and production capacity, while demand for port equipment follows trends in global transportation and, over the shorter term, port investment cycles. Demand for maintenance services is driven by customers' capacity utilization rates. In addition to risks related to sales volumes, adverse changes in demand can also result in overcapacity and affect market prices.

Konecranes' aim is to increase the proportion of its service revenue in its total revenue stream and thereby reduce its exposure to economic cycles. In general, the demand for service is less volatile than that for equipment.

As part of its strategy, Konecranes strives to maintain a wide geographical presence to balance out economic trends in different market areas. Konecranes also aims to limit the risks resulting from changes in demand in different customer segments and demand for certain products by maintaining a diverse customer base and offering a wide range of products and services.

In 2011, Konecranes continued to dedicate substantial resources to enhancing its visibility in the marketplace and actively pursuing available opportunities.

Customer credit risks

Challenges with customer payments could adversely affect Konecranes' financial situation. To limit this risk, we apply a conservative credit policy towards our customers. It is Konecranes practice to review customers carefully before entering into a formal business relationship and to require credit reports from new customers. The credit risks of our customers are mitigated with advance payments, letters of credit, payment guarantees, and credit insurance where applicable. Using these tools and by carefully monitoring customer payments we have successfully limited our credit risks. During 2011, Konecranes further developed its Trade & Export Finance Department to support all business units with relevant expertise.

Technology risks

Konecranes recognizes that there are various threats and opportunities related to the development of new products and services in its business. Active management of intellectual property rights is essential in the global marketplace.

Konecranes monitors market developments and its competitors continuously to identify signs of potential changes in products, markets, and customer needs at an early stage.

Dedicated, process-driven product development operations have sustained Konecranes’ leadership in offering advanced technologies, products, and services to lift its customers’ businesses. Acquisitions have and will continue to be made to gain access to advanced technologies where appropriate. Konecranes ensures that its innovations are protected by international patents whenever applicable, and protects its trademarks as well.

During 2011, Konecranes increased its activities in developing markets. We completed various acquisitions and focused on products that improve our opportunities where growth exists. In developed markets, Konecranes invested in automation, software producs, and connectivity solutions to improve customers' added value and support our new vision.

Konecranes launched the TRUCONNECT ^(R)  family of remote services that enhance our knowledge of installed products by refining crane usage and sensory data into meaningful information. After professional analysis at Konecranes' Global Technical Centers, we can improve our customers' businesses through enhanced product and service options.

Conducting business in emerging and developing markets

Konecranes has manufacturing and supplier networks in many developing countries. A large part of sales also takes place in emerging and developing countries. Sudden changes in the political environment, economic, or regulatory framework of these areas can have an adverse effect on Konecranes’ business. Konecranes conducts careful studies of the political, social, and economic environment in these countries to ensure that it is aware of developments there.

The risks related to emerging and developing markets are balanced by Konecranes’ strong global presence and stable service operations in developed countries in Europe and North America.

Emerging countries will represent a significant market opportunity in the future, as economic growth is expected to be faster in developing areas than the global average; and Konecranes will continue its efforts to expand its presence in these areas.

Personnel

Konecranes' ability to operate is dependent on the availability, capabilities, and expertise of professional personnel. The ability to recruit and retain personnel is of key importance for the future success of the company, and any failure to do so may adversely affect Konecranes’ ability to execute its strategies. An annual employee satisfaction survey provide important information about employees' overall job satisfaction, leadership, and engagement. Survey results are used to support development activities in areas such as communication and leadership.

Konecranes manages its personnel-related challenges through a professional human resources team, utilizing external resources where applicable. Harmonized people processes and systems are now deployed almost everywhere within Konecrane.

During 2011, Konecranes continued to invest in training, and feedback indicates improved training quality. We also increased appraisal discussion activity, which resulted in a substantial improvement in indices related to job satisfaction leadership quality, and employee engagement. All of these were visible in the latest employee satisfaction survey, which attracted an increased number of participants.

Acquisitions

Unsuccessful acquisitions or the failure to successfully integrate an acquired company could result in reduced profitability or hamper the implementation of corporate strategy. Konecranes reduces the risks associated with acquisitions by carrying out thorough due diligence analyses, using external advisors when needed.

During 2011, the emphasis of acquisition process development shifted towards the integration of acquired companies.

Production risks

Konecranes’ strategy is to maintain in-house production of key components that have high added value and/or provide core competitive advantages. There are specific risks involved with different aspects of production, such as production capacity management, operational efficiency, continuity, and quality.

Efforts have continued to further develop production operations. Continuous replacement investments and enhanced maintenance of production equipment have been carried out. The capacity of acquired companies has become an integral part of the global production network on a phased basis. Risk management is an essential element of production strategy. The safety and security of key facilities continued to improve during 2011.

Material management and procurement risks

Material management and procurement operations require a proactive approach and development to avoid risks related to issues such as pricing, quality, capacity, availability, and stock values. Inefficiencies in these areas could affect the performance of Konecranes adversely. Konecranes manages its purchases and the logistics of materials and components of substantial importance for its operations on a centralized basis. Contracts with key suppliers are designed to optimize these purchases globally.

During 2011, Konecranes continued to develop the quality and scope of supplier cooperation and its audit process. We have also improved demand-supply monitoring, balancing, and forecasting to improve our ability to respond to customer needs rapidly.

Quality risks

High-quality products, business procedures, processes, and services play a key role in minimizing Konecranes’ business risks. Most companies in the Group and all major Group operations use certified quality procedures. Several existing quality certificates were  updated and new ones received in 2011. Determined certification work is continuing.

During 2011, Konecranes continued to develop both local and global quality improvement processes by utilizing local quality improvement teams and a global quality task force to support local efforts. Supplier quality has been developoed in the same way .

Supplier risks

Konecranes recognizes that price and continuity risks are associated with some of its key suppliers, as they could be difficult to replace. In the event of major production problems, this could undermine Konecranes’ delivery capacity. Quality risks and defects associated with subcontracted components are quality risks for Konecranes.

To reduce subcontracting risks, Konecranes constantly seeks competitive and alternative suppliers while improving cooperation with existing suppliers. When available, alternative suppliers enhance price competition, increase production capacity, and reduce Konecranes’ risks of single supplier dependency.

During 2011, Konecranes focused on ensuring the quality of cooperation to generate mutual benefits with critical suppliers. Improvement of Konecranes' quality processes enhanced the links between Konecranes' supplier quality and our customers' quality experience.

IT risks

Konecranes IT is responsible for all IT services, applications, and assets used by Group companies. Konecranes’ operations depend on the availability, reliability, quality, confidentiality, and integrity of information. Any and all information security risks and incidents may affect business performance adversely.

Konecranes uses reliable IT solutions and employs efficient information security management to avoid data loss and prevent the confidentiality, availability, or integrity of data from being compromised. User care and support is exercised with internal and outsourced IT services to ensure the high availability, resiliency, and continuity of services, and rapid recovery in the event of any temporary loss of key services.

Konecranes IT successfully completed the consolidation of datacenters and network services during 2011, enabling Konecranes to focus IT development on areas of higher added value and enhanced business focus.

During 2011, Konecranes IT continued the development of global business applications following business process harmonization. During 2012, Konecranes will start the implementation of these applications, covering risks in schedule, cost and content. Realization of the schedule risk may lead to delays in business benefit realization. Content risk could be realized if the intended business model cannot be implemented as planned in respect of selected applications. Delays in schedules and challenges with implementations may lead to a rise in total project costs. The majority of ongoing business process harmonization projects will be in the implementation phase during 2012. Konecranes IT was operated as a business support function with a presence in roughly 20 countries in 2011.

Contract and product liability risks

Konecranes can be subject to various legal actions, claims, and other proceedings in various countries typical for a company in this industry and consistent with a global business that encompasses a wide range of products and services. These matters may involve contractual disputes, warranty claims, product liability (including design defects, manufacturing defects, failure to post appropriate warnings, and asbestos legacy), employment, auto liability, and other matters involving claims related to general liability. These risks are managed by continuously monitoring operations, improving product safety, training customers, and making use of detailed sales terms. Konecranes also issues written policies in some cases to ensure compliance with legislation, regulations, and Konecranes' own principles across the Konecranes Group. Great emphasis is placed on training to ensure that employees are aware of and comply with the applicable legislation, regulations, and principles relating to their work. Konecranes' Legal Department retains outside experts to assist here when necessary.

Illegal activities

Konecranes aims to comply with all applicable laws and regulations, but breaches of the company's policies resulting in illegal activities can threaten the company. Konecranes considers the potential risks involved to be limited, however, although it recognizes that even small-scale illegal activity could damage its reputation and affect its financial status and results adversely. Internal procedures, supervision, audits, and practical tools are used to reduce Konecranes' exposure to these types of risks.

During 2011, Konecranes continued internal training on good governance and management practices and started to extend training to the supplier base.

Damage risks

Damage risks include business interruption risk, occupational health and safety-related risks, environmental risks, fire and other disasters, natural events, and premises security risks. Konecranes identifies and assesses these risks continuously as part of its business processes. To mitigate these risks, we have adopted a number of occupational health and safety guidelines, certification principles, rescue planning, and premises security instructions. Konecranes has also sought to prepare for the materialization of these risks through various insurance programs and by continuously improving its preparedness to deal with various potential crisis situations.

During 2011, Konecranes continued the determined development of occupational safety at all levels. Special attention has been paid to harmonizing all our factories, branches, and offices to the same level. India and China are examples of this work.

Financial risks

Konecranes manages most of its financial risk on a centralized basis through its Group Treasury. Group Treasury functions within Konecranes Finance Corporation, operating as a financial vehicle for the Group at Corporate Headquarters. Konecranes Finance Corporation is not a profit center that strives to maximize its profits, but rather its role is to help the Group's operating companies reduce the financial risks associated with global business operations, such as market, credit, and liquidity risks. The most significant market risk relates to foreign currency transaction risk.

The responsibility for identifying, evaluating, and controlling the financial risks arising from the Group’s global business operations is divided between business units and Konecranes Finance Corporation.

Units hedge their risks internally with Group Treasury. The majority of the Group's financial risks are channeled through Konecranes Finance Corporation, where they can be evaluated and controlled efficiently.

Almost all funding, cash management, and foreign exchange transactions with banks and other external counterparties are carried out centrally by Konecranes Finance Corporation in accordance with the Group’s Treasury Policy. Only in a few special cases, where local central bank regulations prohibit the use of Group services for hedging and funding, is this done directly between an operating company and a bank under the supervision of Group Treasury.

Konecranes Finance Corporation uses a treasury system that enables transactions to be processed in real time and provides in-depth records of activities and performance. Standard reporting is done on a weekly basis and covers Group-level commercial and financial cash flows, foreign currency transaction exposure, debt positions, derivatives portfolios, and counterparty credit exposure for financial transactions. In addition, all Group companies participate in monthly managerial and statutory reporting.

See Note 3 to the Financial Statements and the Board of Directors' Report for a detailed overview of financial risk management.

Insurance

The Group reviews its insurance policies as part of its overall risk management on a continuous basis. Insurance policies are used to cover all risks that are economically feasible or otherwise reasonable to insure.

During 2011, Konecranes enhanced controls to ensure that applicable insurance cover is deployed in an appropriate and timely way in all countries.