Risk management

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Principles and methods

As one of the leading telecommunications companies in Austria and Central and Eastern Europe, the Telekom Austria Group is exposed to a wide range of risks and changes in market circumstances. The risk management system of the Telekom Austria Group anticipates these developments at an early stage in order to allow an effective response. It essentially consists of four areas: Market and business risks which may arise in the respective countries due to competition, regulatory intervention or an unclear legal situation are monitored and analysed throughout the Group by a central risk manager. Risks which may influence the guaranteed availability and security of the services offered, such as technical and topographical risks, are covered by business interruption management. Compliance risks are monitored by Group Compliance, which is aided by local compliance managers. Finally, financial risks such as liquidity, default, currency, transfer and interest rate risks are handled by Treasury.

The market and competition risks listed below are managed at Group level by means of the regular analysis of risks and opportunities and the use of effective measures to mitigate and exploit these. The effects of deviations from planning are evaluated using scenario and probability calculations. The overall risk situation is derived from the sum of the individual risks. In addition to the Austrian fixed-line and mobile communications market, the Telekom Austria Group also holds leading positions internationally in six other telecommunications markets as at 31 December 2014, which ensures broad diversification in terms of both sectors and geographical regions. The risk sets of the respective markets vary, which is why risk management is the responsibility of the local operational units. Risk management is controlled by the holding company. Structured interviews are conducted with the respective top managers in order to identify and assess risks and summarise them in an overall risk report. Building on this, measures to reduce and avoid risk are prepared, implemented and subsequently analysed. A risk catalogue forms the basis for risk management. The close integration of business planning and risk management also ensures appropriate risk control.

The Telekom Austria Group’s risk management is monitored by the Audit Committee of the Supervisory Board.

The most important risk categories and individual risks that could materially influence the net assets, financial position and results of operations of the Telekom Austria Group are explained below.

Risks

Market and competition risks

High competitive intensity, which is also being observed in the Telekom Austria Group’s international markets, is leading to sharp price reductions in both mobile communications and data traffic. Accordingly, there is a risk that growth in traffic volumes will not be sufficient to offset these price declines. Falling prices for mobile communications are also accelerating fixed-to-mobile substitution. However, the Group is addressing this risk by means of attractive product bundles and by expanding its convergent business strategy to include foreign markets. The trend towards smartphones is being exploited to make higher-value tariffs more attractive, thereby increasing sales potential in the medium term. The focus remains on convergent products.

The telecommunications sector is facing the challenge of having to be able to offer new services and products at faster and faster rates. Shorter innovation cycles also entail innovation risks that are countered with different measures. One example of this is ‘future.talk’, a series of events created by the Telekom Austria Group to discuss global challenges to the industry.

The economic and financial crisis led to increased volatility in the overall economic environment in the Telekom Austria Group’s operating markets. Accordingly, the monitoring of key macroeconomic indicators in order to assess any changes in consumer behaviour is an important aspect of risk management as well as strategic pricing and product design.

Regulatory and legal risks

Telecommunications services offered by a provider with significant market power are subject to extensive network access and price regulations. In Austria, the Telekom Austria Group is classified as this kind of provider in several sub-markets, and its foreign subsidiaries are also subject to equivalent regulatory frameworks. Regulation at both retail and wholesale levels restricts operational flexibility with regard to products and product bundles. There is also an obligation to provide access to infrastructure and fixed-line services for alternative providers. Additional regulatory rulings such as a reduction in mobile and fixed-line termination rates due to the European Commission’s recommendation on termination rates could negatively affect the Telekom Austria Group’s earnings development.

In 2011, the European Union decided to introduce additional comprehensive regulatory measures for roaming rates within the community as part of its Roaming III regulation, which came into effect on 1 July 2012. In contrast to the previous system, this includes a structural solution that is intended to allow customers a choice of provider for roaming services regardless of the national operator. This measure led to additional competition between operators in Europe from mid-2014 onwards. Price regulation also continued for voice, messaging and data services. Furthermore, the European Commission has issued a proposal entitled ‘Digital Single Market’ with the aim of lowering roaming charges for consumers to a national level. These regulations would affect the mobile communications companies of the Telekom Austria Group in the EEA member states Austria, Bulgaria, Croatia and Slovenia.

Telekom Austria Group and its subsidiaries are party to a number of legal proceedings both in and out of court with authorities, competitors and other parties. An ongoing dialogue with the stakeholders involved and a regular exchange of information on controversial issues that could pose a threat to the company enable the Group to identify problems at an early stage and develop measures to counteract them in a targeted manner if need be. Telekom Austria Group has joined the ongoing proceedings in connection with past misconduct as a private party. While some of the proceedings have already been concluded in the court of first instance, a final ruling has not yet been imposed.

Compliance risks

The annual compliance risk assessment process — which is an essential element of the Telekom Austria Group’s compliance management system — identifies relevant compliance risks on the basis of structured management interviews and workshops and defines risk-mitigating measures.

Financial risks

The Telekom Austria Group is exposed to liquidity, default, currency, transfer and interest rate risks (see Note (33) ‘Financial instruments’ in the Notes to the Consolidated Financial Statements).

Investment risks

The Telekom Austria Group counters investment risks with measures such as the active management of equity investments through target requirements, coordination processes and, where acquisitions of equity interests are concerned, thorough due diligence and enterprise valuation.

Personnel-related risks

The Telekom Austria Group counters personnel-related risks in various ways. For example, young talents are recruited as part of the ‘1A Career’ programme, which focuses on graduates, trainees and apprentices. The risk of losing key employees is counteracted by means of forward-looking succession planning and Group-wide talent management. Managers operate in accordance with Group-wide leadership standards with the dimensions ‘Person’, ‘Team’ and ‘Business’. Group-wide feedback for manager development is provided as part of a 360° feedback programme. An internal business school develops employees’ skills and abilities and serves as a platform for the Group-wide transfer of expertise. A regular Group-wide survey, ‘TAGisfaction’, is used to obtain employee feedback. Every year, the results of TAGisfaction lead to a number of effective improvement measures and are also incorporated into strategic planning for the subsequent year. In addition to business plan-oriented cost planning, human resources planning includes measures aimed at encouraging employee mobility.

Around 50% of employees in the Austrian segment have civil servant status. This corresponds to 27% at Group level. To address the structure of employee costs, the Austrian segment has developed not only several social plans in cooperation with employee representatives, but also models which enable employees with civil servant status to transfer to government ministries. The verdict by the European Court of Justice in November 2014 concerning the remuneration and other rights of civil servants required the Telekom Austria Group to recognise additional provisions in the amount of EUR 30.1 mn for personnel costs as well as EUR 15.0 mn for restructuring costs in the 2014 financial year, and hence served to increase the level of expenditure for periods subsequent to the 2014 financial year; this could have an adverse effect on the Group’s financial position and results of operations.

Technical and topographical risks

Maintaining a high level of availability and reliability of the services and products offered is a key aspect of operational risk management, as a host of threats such as natural disasters, major technical disruptions, third-party construction work, hidden faults or criminal activities can all impair their quality. Long-term planning takes technological developments into account, while the redundancy of critical components ensures fault tolerance, and efficient organisational structures for operations and security serve to secure high standards of quality. Furthermore, dedicated Group guidelines guarantee uniform methods for the recognition and management of the most important risks to operational processes. In 2014, operational risk provisioning was required to demonstrate its effectiveness following the serious flooding that hit the Republic of Serbia and parts of Croatia. Thanks to good technical and organisational preparations, the crisis was managed superbly by the local contingency management team with support from the Group.

Environmental risks

Climate change can give rise to risks for the Telekom Austria Group’s network infrastructure (ranging from rising average temperatures and high rainfall levels through to flooding, mudslides, etc.). The Telekom Austria Group is actively committed to climate protection and continuously observes developments in this area in order to ensure that it can initiate measures to protect its infrastructural facilities as necessary.

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