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Supply Chain Risks Continue to Trouble U.S. Tech Industry, According to BDO Study

Supply Chain Risks Continue to Trouble U.S. Tech Industry, According to BDO Study

Interruptions and impediments to supply chain operations continue to rank among the greatest concerns for U.S. technology companies according to an annual report issued by BDO USA, a leading accounting and consulting organization. Eighty-eight percent of tech companies cite concerns over reliable suppliers, vendors, distribution of products and services, as well as the global distribution chain. This marks the third consecutive year that supply chain concerns have increased (75 percent in 2010 and 86 percent in 2011).

“The effects of these incidents extended so deeply into the technology industry and served as a reminder of the fragility of even the soundest supply chain. As tech companies continue to grow and extend their footprint globally, supporting and securing operations is paramount for success.”

The 2012 BDO RiskFactor Report for Technology Businesses, which analyzes the most recent SEC 10-K filings for the 100 largest publicly traded technology companies in the U.S., also found that natural disasters and other geo-political issues pose a serious threat to supply chain management and operations. In fact, 88 percent of companies cited those risks in this year’s study, up from 81 percent in 2011. With business interruption top of mind, more tech companies (73 percent versus 68 percent in 2011) are worried about the maintenance of their infrastructure and information systems. Notably, 71 percent of tech companies cited breaches in security as a major risk, up 25 percent from 2011. The popularity of e-commerce and increased use of mobile devices are contributing to this concern.

“A rise in supply chain and business interruption risks was expected after the fallout from the 2011 Japan earthquake, floods in Southeast Asia and other natural disasters,” said Aftab Jamil, partner and national leader of the Technology & Life Sciences practice at BDO USA, LLP. “The effects of these incidents extended so deeply into the technology industry and served as a reminder of the fragility of even the soundest supply chain. As tech companies continue to grow and extend their footprint globally, supporting and securing operations is paramount for success.”

The following chart highlights the top 20 risk factors cited by the 100 largest U.S. technology companies:

2012Rank 2012 2011 2010
1. Competition and consolidation in tech sector; pricing pressures 99% 97% 94%
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 property 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 compliance 69% 58% 54%
20. Credit or financial risk of customers, vendors or suppliers 64% 61% 48%

Additional findings from the 2012 BDO RiskFactor Report for Technology Businesses include:

  • Matching new product development with customer demand proves challenging. With a constant stream of new products and services being brought to market, many tech companies are concerned with their ability to keep up with the competition. Nearly all (99 percent) companies noted industry competition as a top risk factor for 2012. As competition continues to heat up, innovation and appealing to customer interests are top priorities. This sentiment was evident by the 91 percent of companies who view predicting customer demand as a rising risk (up from 85 percent in 2011), and 93 percent of companies worry they may not be able to continue developing new products and services (an increase from 88 percent in 2011).
  • Product delays and raw material costs fuel supply chain concerns. As tech companies work to ensure timely development of products and services, several factors threaten their success. Equipment delays, manufacturing issues and product liability were cited as risks by 80 percent of tech companies, up 7 percent from 2011. Concerns over the price and availability of raw materials rose 21 percent in this year’s analysis (41 percent versus 34 in 2011), another result of Japan’s earthquake and tsunami. Moreover, volatility in the global economy has technology companies increasingly concerned about the credit and financial risk of partners, vendors and suppliers (64 percent versus 61 percent in 2011).
  • The battle for more IP leads to greater risks and continued legal concerns. Patent disputes are increasing in the tech industry as competitors fight over intellectual property rights to breakthroughs in areas like mobile technology and cloud computing. Poorly defined rights for inventions are leading even the biggest companies to take desperate measures, including banding together to protect themselves against claims of increasingly broad and vague patents. The study results reflect this threat, with 80 percent of tech companies noting IP protection as a significant risk. Additionally, because of the increasingly complex nature of IP rights, litigation costs are skyrocketing, causing many tech companies (83 percent) great concern.
  • M&A concerns remain high amid uncertain liquidity levels. Following an increase in the value of technology M&A deals over the past year, more tech companies (88 percent, up from 85 percent in 2011) cite concerns over their ability to successfully complete and integrate acquisitions. M&A risks are also more in focus as companies like Facebook and Google increasingly look to acquisitions to grow their patent portfolios. Given the heavy amount of deal activity, financing remains a priority. While the BDO 2012 Technology Outlook Survey found that tech CFOs are more confident in their ability to access capital this year, most companies (69 percent) continue to safeguard themselves against a volatile market by noting access to capital and financing as a major risk.
  • Ongoing legislation changes and accounting challenges cause anxiety. With the November election looming, concerns over government regulations are at an all-time study high, with 98 percent of tech companies marking it as a risk. Contributing to the concern is the pending cyber-security bill, currently making its way through Congress, and continued issues involving the roll out of the Dodd-Frank Act. Compliance with new revenue recognition rules and other accounting challenges are likely contributing to the 19 percent increase in concerns over accounting standards and maintaining effective internal controls (69 percent versus 58 percent in 2011).

These findings are from the 2012 BDO RiskFactor Report for Technology Businesses, which examines the risk factors listed in the most recent SEC 10-K filings of the 100 largest publicly traded U.S. technology companies. The risk factors were analyzed and ranked in order by how frequently they were cited.

Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs.

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