BT 2010 Annual Report Download - page 38

36 BT GROUP PLC ANNUAL REPORT & FORM 20-F
REVIEW OF THE YEAR
Principal risks and uncertainties
In common with all businesses, BT is affected by a number of risks
and uncertainties, not all of which are wholly within our control.
Although many of the risks and uncertainties influencing our
performance are macroeconomic and likely to affect the
performance of businesses generally, others are particular to our
operations.
This section highlights some of those particular risks and
uncertainties affecting our business but it is not intended to be an
extensive analysis of all risk and uncertainty affecting our business.
Some may be unknown to us and others, currently regarded as
immaterial, could turn out to be material. All of them have the
potential to impact our business, revenue, profits, assets, liquidity
and capital resources adversely.
We have a defined enterprise-wide risk management process for
identifying, evaluating and managing the significant risks faced by
the group. The key features of the risk management process are
provided in Internal control and risk management on page 80. The
group risk register captures the most significant risks facing the
business. Each risk is assigned a senior management owner
responsible for monitoring and evaluating the risk and the
mitigation strategies. The group risk register has been reviewed by
the
Operating Committee before being reviewed and approved by
the Board. The principal risks below are all identified on the group
risk register.
The principal risks and uncertainties should be considered in
conjunction with the risk management process, the forward-
looking statements for this document and the Cautionary
statement regarding forward-looking statements on page 156.
Competitive activity
As detailed on page 15, we operate in markets which are
characterised by high levels of competition. While there are many
OUR RISKS
Our risks
Principal risks and uncertainties
Competitive activity
Global economic and credit market
conditions
Regulatory controls
Major contracts
Security and resilience
Pensions
factors which contribute to the high level of competition the
prominent factors include regulatory intervention which is focused
on promoting competition, technology substitution, market and
service convergence, customer churn, declining levels of market
differentiation, declining market growth rates and the emergence
of competitors with distinctive and non replicable sources of
competitive advantage.
BT faces a number of challenges in relation to growing revenues.
A distinct challenge is that our UK voice and connectivity business is
a mature business subject to price deflation and declining or
negative market growth rates leading to declining revenues,
margins and cashflow. The net effect is that we increasingly have to
look beyond the UK voice and connectivity market to secure
profitable revenue growth from adjacent markets, both inside and
outside the UK. This in turn is dependent on developing strong and
advantaged competitive positions in attractive product and service
markets. As well as looking beyond the UK and voice and
connectivity market we also need to deliver major new investments
(e.g. super-fast broadband) which will not only help us defend
existing revenues but also open up new adjacent markets for us to
penetrate. These new areas of growth carry associated risks
including high investment in development and launch and might
not yield the necessary returns or offset declining revenues in our
traditional business.
Global economic and credit market
conditions
Whilst there have been improvements in the UK and global
economies during 2010, the level of business activity could be
impacted by continued economic uncertainty and could lead to a
reduction in revenue, profitability and cash generation. In common
with many other businesses, our financial performance could also
be impacted by increased exposure to the default of customers and
suppliers if economic conditions do not continue to improve. In
achieving our goals, we are dependent on a number of partners,
contractors and suppliers and therefore are at risk of loss of
revenue, increased cost, delays and possibly associated penalties in
the event of their failure.
However, unfavourable economic conditions may arise which
could impact our ability to generate sufficient cash flow or access
capital markets to enable us to service or repay our indebtedness or
to fund our other liquidity requirements. We may be required to
refinance all or a portion of our indebtedness on or before maturity,
reduce or delay capital expenditure or seek additional capital.
Refinancing or raising additional financing may not be available on
commercially reasonable terms or at all. Our inability to continually
generate sufficient cash flow to satisfy our debt service obligations,
or to refinance debt on commercially reasonable terms, may
adversely affect our business, financial condition, results of
operations and prospects.
Regulatory controls
Some of our activities continue to be subjected to significant price
and other regulatory controls which may affect our market share,
competitive position and future profitability.
Many of our wholesale fixed network activities in the UK are
subject to significant regulatory controls which are reviewed
periodically. The controls regulate, among other things, the prices
we may charge for many of our services and the extent to which we