Financial risks

These are risks that arise as a result of movements in financial markets. Principal risks are:

• movements in foreign currency exchange rates;
• interest rates;
• commodity prices; and
• counterparty credit risk.

A description of these risks and details of the Group’s risk mitigation actions in this area are provided in the Finance Director’s review

Operational risks

Performance of supply chain
The Group’s products and services are delivered through the effective operation of its facilities and key capabilities, including its supply chain. The Group’s success in strengthening its market position places increased reliance on the performance of the supply chain. The Group manufactures approximately 30 per cent by value of its gas turbine products, the remainder being provided through external suppliers, including risk and revenue sharing partners. Meeting delivery commitments on schedule, cost and quality are critical to the achievement of business goals. The Group has a consistent focus on cost reduction and performance improvement and it continues to modernise its production facilities to improve productivity and reduce costs. Investment in developing world-class manufacturing processes is continuing in Asia, North America and Europe. This also drives development of the external supply chain through sourcing of parts from many new countries.

Global supply chains are inevitably complex with numerous inter-relationships with a wide variety of organisations. While the Group’s strategy is to improve integration and simplify the internal and external elements of its supply chain by building strategic links with fewer, stronger suppliers, it is still prone to disruption from financial or physical causes. A major disruption in any of these elements would adversely affect the Group’s ability to deliver its operational commitments and would have the potential to affect financial returns.

The planning for, and management of, any such interruption is addressed through the Group’s business continuity management process. Substantial progress has been made in the deployment of business continuity management systems and structures to assess the likelihood and potential impacts of a catastrophic disruption to the Group’s key facilities. In addition to the Group’s comprehensive programme of business interruption insurance, significant investment is being undertaken to establish, where possible, dual sourcing of key components. Increased focus is also being applied to understanding and addressing sources of risk arising in the external supply chain, particularly those associated with financial instability. Procedures are in place to monitor, assess and respond in such circumstances.

IT security
The continuing globalisation of the business and advances in technology have resulted in more data being transmitted across international communication links, posing an increased security risk. There is also the possibility of unintentional loss of controlled data by authorised users. In either case, adverse impacts upon operational effectiveness, the value of intellectual property, legislative compliance or the reputation of the Group might arise. The active sharing of information through industry and government forums and the continual upgrading of security equipment and software mitigate these risks.

Ethics
The Group recognises the benefit that is derived from conducting business in an ethical and socially responsible manner. This approach extends from the sourcing of raw materials and components to the manufacture and delivery of products and services. It applies to the provision of a safe and healthy place of work and investment in technologies to reduce the environmental impact of the Group’s products and operations. Shortcomings in any of these areas could damage the Group’s reputation and disrupt its business.

The Group is committed to maintaining high ethical standards. A global code of business ethics has been issued to employees and a face-to-face training and engagement programme is in place in order to strengthen employee awareness of the Group’s values. The Group’s ethical standards are also communicated to the Group’s first-tier supply base through a supplier code of conduct. Concerns regarding potentially unethical behaviours can be reported in confidence via dedicated global telephone and internet channels. All such reports are followed up and will be monitored by the recently formed ethics committee.

Programme risk
The Group manages complex product programmes with demanding technical requirements against stringent, and sometimes fluctuating, customer schedules. This requires the co-ordination of the engineering function, manufacturing operations, the external supply chain and other partners. Failure to achieve programme goals would have significant financial and reputational implications for the Group.

The Group seeks continuous improvement of all its processes and employs project management controls on a routine basis. All major programmes are subject to Board approval and are reviewed regularly by the Board with a particular focus on the nature and potential impact of emerging risks and the effective mitigation of previously identified threats.