Risks and risk management

Metso uses risk management to support the achievement of its strategic and business goals and to ensure the continuity of its operations also in changing circumstances.

We define risks as uncertainties, which, if materialized, can either positively or negatively impact our chances of achieving our goals. So, risk is either an opportunity or a threat to our goals – or a combination of opportunity and threat. We assess the significance of a risk as a combination of probability and impact of the occurrence. Our comprehensive risk management approach emphasizes anticipation of risks and proactive actions accordingly. We strive to execute this approach systematically and in a structured and timely manner. Risk management is embedded in all of our daily operations. Our risk management is established according to the requirements of the ISO 31000 standard.

The goals of our risk management are to:

  • Strengthen our ability to achieve our strategic targets and business objectives
  • Ensure the continuation of our operations
  • Support our strategic and operative decision making and planning
  • Increase our agility to take advantage of risks
  • Improve our organizational awareness, learning and resilience
  • Help us comply with legal and regulatory requirements and international norms
  • Improve our governance and controls
  • Minimize the negative effects of the risks on our operations
  • Help us avoid hazard risks
  • Increase internal and external stakeholder confidence

The Board of Directors approves our risk management policy. Additionally, the Board oversees that the planning, information and control systems in place for risk management are sufficient for the mapping and handling of risks.

The Board’s Audit Committee assesses the adequacy of risk management and ensures that it is consistent with our risk management principles.

The Metso Executive Team ensures sufficient resources and operating conditions for risk management. Business management is responsible for the implementation of the risk management policy and the annual risk management program in their respective areas of operations.

The Risk Management Team, comprised of Metso's CFO and representatives of the businesses, defines the risk management program and ensures that the views of the different stakeholders are taken into consideration.

The Group Risk Management function supports and oversees the implementation of the risk management policy and risk management program, and develops common processes, practices, guidelines and tools for use by the entire Metso organization.

Risk assessments
Ability to take risks and manage them effectively is an essential element of successful business that creates company value to the benefit of its stakeholders. We define risk as an effect of uncertainty. Thus it is either an opportunity for benefit or a threat to success or a combination of both of these aspects. We have a systematic method for assessing opportunities and threats within reporting segments by exploiting the best possible internal knowledge of business specific threats and opportunities.

Risks are identified, analyzed and evaluated, and the risk management response is defined in the annual risk assessment process. The purpose of the risk assessment is to assess the probability and impact of the risks and to define the need and priority of the actions to remove, mitigate, restrict, retain or utilize the risks. Annual assessments are made in workshops executed on the reporting segment level.

Additionally, critical threat scenario workshops are conducted on the executive level. Critical threats are defined by drafting worst-case scenarios with several combined threat factors that might cause severe financial losses and endanger the continuity of our operations.

Risk management evaluation audits
Risk management evaluation audits refer to the evaluation of the risk management level at our units globally. The purpose of these audits is to support our units in finding the best ways to manage risks and in training their personnel to use existing tools and procedures to manage risks. Furthermore the audits provide a forum for unifying and improving procedures and sharing the best practices across the company. Audits are conducted in five units every year thus covering about 80% of the Group’s sales within a 5-year cycle.

When evaluating the level and implementation of risk management and risk management practices in our units, we use the Flexible Risk Management Evaluation (FRiME) concept. The evaluation of risk management is always based on the location’s business impact analysis.

The risks and management processes related to property fire, property business interruption and natural hazards are assessed in the risk engineering audits. Also logistics audits are preformed to assess the risks related to packing, handling and lashing of the product, storing and warehousing, and shipment procedures.

Risk evaluation programs are coordinated by the Group Risk Management function.
In addition our sustainability team runs HSE-audits across the Metso Group.

Business development risks
Business development risks are related to new markets, business acquisitions and investments, new products and services, as well as to brand and reputation.

Metso’s risk management approach:
A key requirement for achieving our business goals is the utilization of our strong presence in growing markets, such as China, India and Brazil. In addition to opportunities, there are also threats related to emerging growth markets, such as risks associated with the protection of our intellectual property rights and our reputation as an ethical corporate citizen.

In business acquisitions, we aim to manage risks by applying the mergers & acquisitions process and a thorough due diligence process. All businesses to be acquired must meet our strategic and financial criteria.

Business environment risks
Business cycles in the global economy and in our customer industries influence the demand for our products and services as well as our financial position and the availability of financing in some of our customer industries.

Metso’s risk management approach:
The division of our net sales between services and mining, construction and automation equipment is approximately equal, and the global distribution of sales fairly even between all continents.

The effects of business cycles on our businesses are offset by the geographical scope of our operations, the large share of the services business and the range of customer industries we serve. We are actively aiming to grow our services business, the demand for which is less affected by business cycles than the demand for new equipment.

Market risks
Changes in the demand of our customer industries affect our operations. Such changes may be related to, among other things, economic cycles, strategy changes in our customer companies, competitive position, product requirements or environmental aspects.

Metso’s risk management approach:
We aim to differentiate ourselves from our competitors by offering technological know-how and intelligence that support sustainability, local presence, a comprehensive services offering and a long-term commitment to our customers. Our goal is to increase our presence in emerging markets, where we estimate the demand for our products and services will grow faster than in developed markets. We actively monitor changes in our competitor field.

Technology risks
Our technology risks are related to our technological competencies as well as research and product development. The introduction of new technology offers new business opportunities but may temporarily increase our quality-related costs.

Metso’s risk management approach:
In research and product development, we utilize our Metso Innovation Process, a project management model that guides the development process during its different phases. As part of the process, we also aim to determine the intellectual property rights aspects and environmental impacts related to products. We actively protect our intellectual property rights around the world.

Political, regulatory, cultural and legislative development
Our own and our customers’ operations are geographically widespread. Political and social unrest, terrorism and armed conflicts in different parts of the world may represent threats to our operations. Also political, regulatory or legislative changes could impact our business and financial position.

Metso’s risk management approach:
We monitor laws under preparation and try to anticipate their impact on our own and our customers’ business. We have our own manufacturing and supplier networks in many emerging countries. The threats associated with these countries are reduced by the wide geographical scope of our operations and our different customer industries.

Climate change and the environment
When planning our energy needs, we take into account the threats related to climate change. Environmental requirements are becoming more stringent all over the world. Stricter environmental legislation gives us opportunities to offer customers new solutions to meet the new, tougher requirements, but it can also make it more difficult to sell our products or it can increase our costs.

Metso’s risk management approach:
Our main tools for environmental management are processes ensuring compliance with environmental legislation, like the environmental systems compliant with the ISO 14001 standard. We want to support sustainability in our own activities as well as in collaboration with customers.

Organization- and management-related risks
Organizational and management risks are related to the sufficiency and competence of personnel as well as organizational efficiency.

Metso’s risk management approach:
We continuously assess our human resources and organizational structure. We aim to ensure organizational efficiency and competence and to avoid misguided recruiting, an imbalance in the age structure of our personnel and a high personnel turnover rate. We aim to anticipate these problems with systematic successor, substitute and recruiting planning. To secure the availability of a competent workforce, we work to improve our recognition among potential recruits.

Managing risks related to our business growth requires transferring competence from developed markets to emerging markets, where our operations and resources have grown strongly in recent years. Our own training programs support the transfer of know-how to new Metso employees and regions.

Metso’s Competency Model, created in 2011, provides a good foundation for all HR processes, from recruiting to development. In particular, defining the supervisor and job family competencies supports and harmonizes the whole scope of the training and development work at Metso.

Information security risks
Our operations are dependent on external, internal and embedded information technology services and solutions.

Metso’s risk management approach:
We aim to use reliable information technology solutions and information security management to avoid interruptions in service, information security risks, exposure to data loss, or compromised reliability or usability of information.

Production, process and productivity risks
These risks are related to our production, sales, marketing, inventory, innovation, delivery and process activities as well as environmental risk management, customer relationship work and efficiency and follow-up issues.

Metso’s risk management approach:
We are improving our productivity by ensuring the performance of our entire supply chain and by focusing on issues in our operations that are most significant in terms of our competitiveness.

We are continuously developing our operations in emerging and developed markets to consolidate our procurement to the most competitive suppliers and develop all parts of the value chain closer to our customers. A competitive cost structure also requires the continuous development of resources and the adjustment of costs to correspond with demand and the competitive situation.

Business interruption risks
The availability, price, quality and delivery schedule risks associated with our supply network can have an impact on our operations, and are particularly relevant related to new suppliers.

Metso’s risk management approach:
We decrease the availability risk for our key raw materials and components by using several suppliers. We decrease risks related to sudden price changes with longer-term delivery agreements and with price hedging when possible.

The manufacturing of the key components we have specified takes place primarily at our own production facilities. By splitting operations among several production facilities and with interruption insurance, we aim to shorten production interruptions caused by fire or some other hazardous situation and to offset the impacts caused by the interruptions.

Profitability risks
One of Metso’s key targets is to conduct profitable business. However, in large-scale projects and equipment trades, Metso is subject to the risk that it fails to estimate the actual costs of a trade accurately at the offer stage, and, therefore, may be unable to determine the appropriate trade price or to assess whether the market price level or Metso’s cost competitiveness are sufficient for a profitable trade.

Metso’s risk management approach:
We have a constant follow up of project costs especially when it comes to new technologies to avoid cost overruns or avoid causing unexpected quality-related costs. We also carefully follow possible changes in labor costs and in the prices of raw materials and components to avoid those that affect profitability. We always aim to pass any cost increases on to our sales prices.

Strong currency exchange fluctuations may also have an adverse effect on project profitability, although the wide geographical scope of our operations decrease the impact of any individual currency. We hedge the currency exposure that arises with firm delivery and purchase agreements.

Project activity risks
Our deliveries can include project-specific risks related to, for example, delivery schedules, equipment startup, production capacity and end-product quality. In some projects, risks may also arise from new technology included in the deliveries. Large-scale projects and equipment transactions are subject to the risk that we specify too low of a price for the sale in the bidding phase because we are not able to estimate the upcoming costs accurately enough.

Metso’s risk management approach:
We aim to limit project risks by contracts. The risks of individual projects do not generally become significant in proportion to the scope of our operations. A Metso Project Risk Check list tool has been developed to ensure holistic risk evaluation of projects during their life cycle.

We manage risks related to delays in project implementation schedules and possible cancellations with advance payments. In long-term delivery projects, initial customer down payments are typically 10-30 percent of the value of the project. In addition, the customer makes progress payments during the project execution. This significantly decreases our risk and our financing needs related to these projects. We continually assess our customers’ creditworthiness and ability to meet their obligations. As a rule, we do not finance customer projects.

Contract and liability risks
From time to time, we are involved in product liability claims that are typical for companies operating in our industry.

Metso’s risk management approach:
The possible risks related to any claims for compensation based on product liability are covered by an insurance policy with coverage of up to EUR 150 million per year, subject to applicable insurance terms and conditions. We aim to reduce product liability risks with sales contract terms, start-up training for customers, comprehensive instruction manuals, and investments in product safety development and automation.

Crisis situations
The primary goal in our crisis management is to secure the safety of our personnel. Because our own resources are limited and global catastrophes can exceed our ability to respond effectively enough to a threat, we use the services of external risk management specialists to assist us in preparing for crisis situations.

Compliance- and crime-related risks
We strive to comply with laws and regulations, although illegal activities, such as fraud, misconduct or criminal acts, can present threats for us.

Metso’s risk management approach:
To prevent illegal activities, our values and Metso's Code of Conduct are a central focus area in our personnel training. Internal guidelines and training, supervision, audits and other practical tools are used to reduce our exposure to these risks. One of the practical tools is a reporting channel that every Metso employee can use to anonymously report financial misconduct directly to our management via the Internet, email or phone.