Global and regional economic conditions
The Global economy represents a mix of both opportunities and risks for Colt. The recent growth in the US and UK, fluctuating oil prices, the fragile recovery in the European Union, the slowing of emerging economies, Russian sanctions and recession in Japan could singularly or together have the ability to create headwinds globally and impact multiple regions. Further, volatility could adversely affect Colt's results by muting the confidence of Colt's customers across its global footprint.
Adverse economic conditions also increase the risk of asset impairment and impact short-term investments; however, they may also create opportunities as our customers seek to reduce costs and outsource their ICT operations.
The Group cannot completely mitigate this risk. However, the following mitigations are key:
- The recent acquisition of KVH represents a strategic move to diversify Colt's operations across multiple economic regions and reduce its historical dependence on the EU market. It also places Colt closer to China and India, two of the largest emerging market economies.
- The Group's financial planning processes provide ongoing management of cost versus revenue performance.
- Investments are restricted to AAA money market funds that do not have sovereign debt exposure and deposits with approved counterparties.
- Rigorous customer and supplier due diligence processes.
- Established appraisal, prioritisation and monitoring processes in relation to business growth initiatives.
As Colt serves its customers through multiple technologies and across multiple geographies, there is an inevitability that technical faults and outages can occur. Accordingly, we have established incident processes that address these 24×7.
In contrast, this risk refers to a major or prolonged disruption in the form of a critical physical loss, damage, failure or limitation of capacity to one or more of Colt's data centres, network, network management centres, nodes or key IT systems. Such a failure could disrupt our business or customers' business. This could have an adverse impact on the Group's reputation, business and financial condition including asset carrying values and operating results.
Colt has established processes to effectively deal with this risk and reduce exposure, including:
- A network designed with resilience built in.
- Dedicated teams and supplier services to manage and maintain the infrastructure and equipment to ensure failures are minimised.
- Infrastructure monitoring and fault resolution by our Operations Centre.
- A business continuity and crisis management capability.
Changes in laws and regulation
The communications industry is highly regulated in all the countries where Colt provides services. Regulation also affects the competitive landscape by impacting, for example, Colt's cost of inputs including "interconnect", and the profitability of its on-network business.
In addition, Colt is required to respond to a number of new regulatory developments including environment laws, new EU security regulations and tax changes by national governments in response to the fragile European economy. The Group is therefore subject to uncertain and changing regulatory issues that could potentially affect the way it operates in different jurisdictions, and impact on its results.
Colt has in-house legal and regulatory capability that ensures risks and opportunities are understood and managed, and that compliance is maintained.
With regard to environmental and security regulation, Colt does the following:
- We maintain certification against the ISO 14001 Environmental Management Standard.
- We work actively with the regulators and the business to address EU Article 13 and ND1643 security regulation requirements.
The security risk profile of Colt's IT environment is changing as key technologies converge and new cloud technologies are adopted. Similarly, the sophistication of cyber criminals is increasing. If the Group fails to invest in and maintain an adequate information security organisation, with associated processes and tools, there is a risk of security breaches and consequent reputation damage. Further, an inadequate information security capability may impact our ability to secure revenues as customers and regulators demand more security assurance over our services.
Mitigating actions to reduce exposure to this risk include:
- Security policy framework with supporting security baseline standards for many technologies.
- Alignment, and increasingly certification, to ISO 27001. During 2014 Colt has increased the scope of its certification to include a number of its network services, and the remainder of its data centres.
- A robust Cyber Security Incident Response Team (CSIRT), supported by a number of state-of-the-art malicious software detection tools.
- We include security requirements as standard when developing all new services and systems.
Service model and customer intimacy
Colt is focused on delivering an exceptional customer experience across its portfolio of products and services. Customers' expectations vary and are dependent on the service offered. Our increasing service focus requires a greater degree of customer intimacy and a shift to a more industrialised, measurable and formalised approach to meeting customer requirements across our portfolio. Any failure to assess and change portfolios, skillsets, culture, organisation, processes and systems accordingly could result in reputational risk that could also impair growth.
Colt is actively pursuing a number of initiatives to drive its exceptional customer experience agenda, including:
- The reorganisation into lines of business is bringing greater focus on the service portfolios and delivering end-to-end accountability.
- The focus on key vertical industries ensures we deliver appropriately tailored service propositions to the industry.
- A go-to-market realignment with the lines of business drives more effective customer service.
- Automation and operational change programmes bring greater agility and quality control to our service delivery.
- An ongoing programme to up scale and mature Colt's customer shared services capabilities.
- Improved performance management monitoring to identify and respond to service issues.
- Instigated the Colt Academy programme to help develop our people, skills and culture appropriately (detailed on Our people).
Changes in technology and competitive risk
Colt's lines of business are subject to unique and diverse technology and competitive risks. Across networking and telephony, competitors are driving technology integration to achieve a lower cost to serve which has increased margin and price risks. The industry also anticipates more disruptive "Voice over IP" and wireless propositions as the use of traditional technologies declines. The continued increase in the number of connected devices, mobile data growth and the rise of "big data" all increase demand for bandwidth, which has served to offset the above-mentioned price pressures.
In IT services, the pace of change is even faster as competitors explore disruptive propositions in the cloud and "as-a-service" spaces. Similarly, as organisations respond to the cloud and the implications on their computing infrastructure, this brings risks and opportunities to Colt's data centre services model.
Failure to adequately innovate, manage, monitor and respond to any of these aspects could have an adverse effect on Colt's business and financial condition, including asset carrying values, and operating results.
Colt has established effective business planning processes as well as business development strategies to proactively counter this risk. As such, we see this risk as a potential opportunity. Mitigating actions include:
- A proactive innovation and prototyping capability that aims to establish disruptive propositions for Colt to take to market.
- An established technology and architecture board to evaluate and prioritise responses to industry and technology changes.
- Portfolio development capabilities to drive proactive and reactive commercial propositions.
Geopolitical risks with particular emphasis on Colt's shared service centres
Colt generally operates in countries that have a low geopolitical risk profile; however, there are exceptions:
- Shared Services – We operate our shared service centres (SSC) in India (Gurgaon and Bangalore), Spain (Barcelona) and Romania (Sibiu). While India has the highest risk profile, we recognise that all these centres represent concentration points where many processes, critical to the effective daily operations of Colt, are located.
- KVH Japan – While Japan is considered low risk from a political perspective, it has significant natural disaster risk, with exposure to earthquakes, volcanoes and tsunamis.
Physical loss, damage, network isolation or restriction of timely access to the Group's SSCs or KVH assets in Japan could disrupt Colt's business, or our customers' businesses. This could have an adverse impact on the Group's business, financial condition, operating results and reputation.
Mitigating actions to reduce the exposure include:
- General – Physical risk assessments are performed across Colt and security teams have communications and response processes for emerging geopolitical threats.
- Shared Services – We operate multi-site operations in India and Spain and are working on establishing the same in Romania, to ensure continuity of operations in the event of localised disruptions or loss. We also have dedicated business continuity specialists in India and Spain and at Group level to test these processes. India, the larger SSC, is accredited against the international business continuity standard ISO 22301.
- KVH Japan – Business continuity and crisis management plans have been established and tested. All KVH data centres sited outside AAA rated (low earthquake risk) areas have been constructed and reinforced to withstand seismic activity and JMA Intensity 6 earthquakes.
The Group is reliant on a number of key IT software, service and communications equipment suppliers to ensure a consistent and effective supply chain and to meet its business plan commitments.
Any financial or operating weakness of key IT software suppliers, service suppliers or communications equipment suppliers, which affects their availability, consistency and/or reliability of delivery could affect the Group's performance.
Mitigating actions to reduce the exposure include:
- Sourcing – We operate dedicated procurement functions to manage supplier relationships, establish dual vendor strategies and monitor key suppliers' ability to serve our needs. The functions also engage with Group Business Continuity to perform key supplier risk mapping and assessments.
- Inventory – We operate an established "hub and spoke" inventory distribution system, including buffer supplies and use of a globally recognised distribution partner.