The key risks we face in executing our strategy and business processes are described in the following tables. The identified risks are related to our strategic objectives, which are described in the chapter 'Our strategy' and have been used as input for the stakeholder materiality matrix as described in the chapter 'Our operating context'. We start with the table on our strategic risks below, followed by the operational, regulatory and financial risks we identified.
For each risk, we determine the risk level based on impact and likelihood of occurrence, using a three-point system classifying risks as low, medium and high (1-3). In addition, we have indicated for each risk whether the risk trend is decreasing, increasing or remained stable compared to 2018. Management reviewed the risk profile regularly throughout 2019 and will continue to do so during 2020.
Risk mitigation as described below is meant to provide a high-level overview of potential and initiated action items in response to the risks identified and is not to be interpreted as a comprehensive list of risk responses within PostNL. The risks related to unforeseeable events are very difficult to quantify, and while we organise comprehensive risk mitigation techniques, we are not always able to anticipate the consequences these types of events may have, if any, on our financial performance and position.
Risk description | Risk level (1-3) | Trend | Link to key material topic |
|---|---|---|---|
Competition |  |  | Financial performance and position |
Substitution | | | Manage declining mail volumes |
Climate change and air pollution |   | | Emission-free delivery |
Description: Competition continues to put pressure on our market share, volumes and prices, which could have an adverse effect on revenues and profitability. We are faced with increasing competition particularly in our traditional parcels and international businesses as markets become more dynamic and volatile. In this area we see that new functionality, driven by the speed of IT developments, is increasing. Next to this we see the impact of the platform businesses, which has an effect on the concentration of volumes and increases purchasing power for these platforms. In addition, customer satisfaction is increasingly a decisive factor for maintaining competitive advantage. As a result, we may have to lower our prices in specific segments to protect our volume or may decide to exit certain businesses or markets in the future. In the markets where we decide to protect our position, we may have to focus on margin management by increasing efficiency and leveraging on economies of scale.
Mitigation: Commercial initiatives are in place, such as differentiating service levels, (new) products and adequate pricing, as well as initiatives aimed at improving our customer satisfaction and quality, including investments in our network coverage and projects related to operational excellence. Further information regarding competition can be found in the chapter 'Our operating context'. Our customer & quality management department continuously monitors our customer satisfaction metrics and oversees related improvement initiatives.
Description: The ongoing digitalisation trend amongst consumers to move to online alternatives is leading to a decline in physical mail. As a result, the volume of mail is decreasing and there is a risk that this decrease will accelerate faster than anticipated. This decrease in volume requires us to adapt our infrastructure and delivery processes. Substitution or alternatives to our delivery services may reduce revenues and profitability. A decline in the addressed mail volume mix of one percent results, on average, in a decrease of approximately €7 million in underlying cash operating income.
Mitigation: We continuously and consistently take commercial initiatives to slow down or adapt to substitution, leading to the introduction of a range of new services and solutions and the abolishment of existing services and solutions. Furthermore, we develop operational processes to be able to adapt more flexibly to future volume declines. More information can be found in the Business Report.
Description: As a logistics and postal service provider we produce GHG emissions from our national and international operations. In addition, we produce nitrogen oxides (NOx) and particulate matter (PM) emissions that negatively impact air quality. We are committed to understanding and reducing the impact of our organization on climate change, and related economic and social effects. This commitment is supported by our objectives to realise emission-free last-mile delivery in 25 city centres in the Netherlands by 2025, and across the Benelux by 2030. Achieving these objectives will involve multiple complex changes in our business operations and reporting processes. Not being able to achieve these objectives may have an adverse material impact on our reputation and our financial performance.
Mitigation: In 2019 we developed a long-term roadmap toward emission reduction. Specifically for all relevant emission sources, we developed a concrete action plan to achieve our emission reduction towards 2030. These actions are directly linked to the four pillars in our environmental strategy: green innovations and efficiency, green kilometers, sustainable buildings and sustainable value chain. We monitor, report and evaluate the results of our strategy execution against short- and long-term targets in our planning and control cycle and review our long-term roadmap annually.
Risk description | Risk level (1-3) | Trend | Link to key material topic |
|---|---|---|---|
Information Technology | | | E-commerce growth |
Execution of cost saving initiatives | |  | Engaged people |
Implementation of strategic change programme | | | E-commerce growth |
Network peak capacity | | | Customer experience |
Labour related developments | | | Engaged people |
Description: Information technology (IT) is vitally important to our business and we are increasingly dependent on it. Threats to the availability, confidentiality or integrity of our IT networks, systems or (customer) data caused by IT disturbances, cyberattacks or lack of appropriate security and infrastructure measures may damage our ability to provide timely delivery, or result in loss/theft of customer data, higher costs, penalties and damage to our reputation. We experienced post implementation issues in the second half of 2019 related to the completion of major IT transformation projects in our Customer to Cash process. These issues have been addressed and the IT environment is stabilising.
Mitigation: Cyber security is centrally governed, managed by a central Cyber Security Office with decentral cyber security coordinators. Given our full (public) cloud strategy, management of our cloud suppliers is one of our most important processes and subject to a strict control framework (so-called CRA methodology). Appropriate attention to cyber security at all stages of the IT development process is secured via the Security by Design principle and as such is explicitly addressed in architecture and design documents, testing and implementation plans, and awareness programmes, and so on. All critical applications are frequently measured and tested against our resilience criteria and actions are taken to keep the application up to date and at the required levels.
Description: Cost saving initiatives, including streamlining our workforce, introducing greater efficiencies across our infrastructure, and reducing costs at our head office, may be delayed or not achieve the results intended. Additionally, they could cause labour unrest. This could result in the deterioration of our employee engagement. Furthermore, this could have an adverse impact on the quality of services we provide. For example, it could lead to a drop in the delivery quality of our mail business. Other adverse results could be an impact on our reputation and financial performance.
Mitigation: Cost savings projects are executed via enhanced programmes and are monitored continuously by a programme office. Mechanisms to adjust to changing circumstances have been implemented and are reviewed periodically. Execution via pilots and in close collaboration with the Works Council enables smooth implementation on a larger scale.
Description: Implementation of the business strategy is supported by a change programme. We are implementing an increased number of growth initiatives, restructuring and IT projects, as well as undertaking acquisitions and divestments. These all require significant change and stakeholder management, as well as project management expertise. Executing the broad range of projects and operational activities in parallel may cause delays in successfully implementing all projects to initiate growth and to realise cost savings, and therefore may have an adverse material effect on our mid- and long-term targets. We may lack resources in terms of quantity and quality to execute these projects. The strategic change projects inherently increase the risk that internal controls are ineffective for a short period.
The sale of Postcon and PostNL Communicatie Services, and the acquisition of Sandd, we completed in the second half of 2019. PostNL aims to complete the integration of Sandd in early 2020 and may experience operational disturbances during the implementation process.
Mitigation: All critical projects have been prioritised and are supervised by the Board of Management to ensure an aligned and integrated vision, and commitment of senior management to the change agenda. The agenda is monitored by adequate programme management. Priorities within the critical implementation projects are reviewed during our planning events every three months to ensure alignment with PostNL's strategic priorities on the tactical level. We also employ and develop in-house expertise, including talent management. We mitigate the increased risk that internal controls are ineffective for a short period by performing compensating controls and activities.
Description: We are facing the risk of operational failures and disruption in logistics processes due to the growing volumes in our parcel business, especially during peak periods when our networks operate at full capacity. In case of such major business disruption we may not be able to fall back on our regular business continuity measures. Structurally operating at full capacity may also lead to negative effects on our employees, such as employee motivation, commitment and eventually absenteeism. In addition, we foresee that while the e-commerce market will continue to grow in the coming years, the infrastructure capacity may not be able to keep up at the same pace. With the current business models of logistic service providers, this may result in more traffic congestion, which imposes a risk on our ability to deliver a growing number of parcels on time. This may have a material effect on our business as customers increasingly look for fast delivery options.
Mitigation: We continuously look for initiatives that increase our operational efficiency in our sorting centres in order to increase the capacity of our networks. In order to manage expected growth, we continue to invest in new sorting centres and vehicles, and we also invest in recruitment, development and retention of our personnel. Over the long term, we are investigating the future logistical model for Parcels.
Operational efficiency in road transport is an ongoing focus area. This includes, for example, optimisation of packaging and route planning to increase the occupancy rate of our road transport. Furthermore, we have launched a programme called “city logistics” to explore the potential of future parcel delivery business models in cities. This includes city hubs, zero emission transport and other sustainable solutions.
Description: People are at the heart of the services we provide to our customers. We face the risk of not being able to attract, develop and retain qualified personnel. This risk concerns people in our operations, specialists and management. Key drivers for this risk are the overall scarcity of resources in the labour market and the overall attractiveness of PostNL as employer.
Mitigation: We make use of innovative online recruitment techniques and are continuously improving the employee experience. In addition, we continue to invest in training, development and employee retention. For example, we have added various new development programmes and learning tools and invest more in PostNL employer branding in addition to recruiting for individual jobs.
Risk description | Risk level (1-3) | Trend | Link to key material topic |
|---|---|---|---|
Regulatory requirements | | | Accessible and reliable postal services |
Description: We are confronted with complex legal and regulatory requirements in the countries in which we operate. These include, but are not limited to, tariff regulation, competition law, regulation related to dangerous and prohibited goods, customs regulations, labour regulation, data protection, environmental and privacy requirements. In addition, we must comply with the relevant preconditions connected to the acquisition of Sandd. Changes in legal and regulatory requirements, and the interpretation thereof, had and may continue to have, an adverse material impact on our business operations, our reputation and on our financial performance.
In the Netherlands, a specific regulatory circumstance is that PostNL is appointed as the designated operator to provide services under the universal service obligation (USO). This is the basic postal service that ensures that nationwide postal services remain accessible, affordable and reliable for all. Possible changes in the USO regulation, or adverse decisions of the Ministry of Economic Affairs or the ACM in relation to the USO, could have an adverse impact on our ability to adapt to market developments and changes in customer demand in a timely and effective way. New legislation is being developed, for which drafts have been communicated in 2019, while the implementation is expected in 2021. However, the related uncertainty and potentially negative financial consequences remain a risk.
Mitigation: We implement appropriate policies, processes and internal control procedures, which limit exposure to complex legal and regulatory requirements, such as competition law and anti-bribery acts, and operate a robust integrity programme that includes business principles. We have a continual dialogue with governmental and non-governmental stakeholders about complying with regulation. We are constantly adapting our operations to changes in the legal and regulatory requirements. In addition, we continue dialogue with governmental and non-governmental stakeholders about the development of USO regulations at both EU and national levels.
Risk description | Risk level (1-3) | Trend | Link to key material topic |
|---|---|---|---|
Total cost of employment | | | Financial performance and position |
Volatility of financial performance due to pensions |  | | Financial performance and position |
Financial risk management | | | Financial performance and position |
Liability of loss or damage | | | Financial performance and position |
Description: Being a good employer is vitally important to us. One aspect of this is the terms and conditions under which we hire our personnel and employ outsourced labour. These terms and conditions, including salaries and other secondary benefits, represent a substantial expense for our company and is an important component of our operating model. Our financial performance could be affected by higher than anticipated total cost of labour and/or other related losses. In addition, opportunity costs due to operational disruptions as a result of action from trade unions and/or media could further undermine our financial performance.
Mitigation: We maintain good relations with trade unions and social partners based on mutual recognition of shared interests. We agreed to a Social Plan in 2015, which remains in place until 31 December 2020. On 4 March 2019. we reached a final agreement regarding the PostNL CLA and the Saturday deliverers CLA. Both apply to the period 1 January 2019 to 31 March 2020 and include agreements on salary increases. The CLA covering deliverers at Mail in the Netherlands expired on 30 September 2019. Negotiations with trade unions have started and we aim to agree on the new CLA in the first quarter of 2020.
Description: Actuarial assumptions, such as discount rates and demographic variables, have an impact on the valuation of employee benefit plans. A decrease in equity returns or interest rates may negatively affect the funding ratios of our pension fund, which may lead to an increase in the pension provision, or in multi-year additional funding obligations.
Mitigation: We hold open and regular discussions with the pension fund trustee board, which is independent of PostNL. We have reduced the volatility risk of pension provision in recent years by revising our finance agreement with the pension fund. Analysis shows comfortable headroom for further interest rate declines before our financial position is materially impacted by pensions, substantiating the significance of our de-risking steps. However, our pensions still retain an element of vulnerability. A materially bad economic climate, combining lower interest rates, declining pension fund assets and material increases in life expectancy, could still negatively impact cash and equity.
Description: We are exposed to a variety of financial risks, such as currency risk, interest rate fluctuations, credit risk, liquidity risk, price risk and cash flow risk. These risks can have an adverse effect on our financial position and results. This also impacts the valuation of the pension provision.
Mitigation: Such risks arise in the normal course of business and we use various techniques and financial derivatives to mitigate them. For example, we hedge both currency and interest rate risks in accordance with the relevant Group policies. In November 2017, PostNL refinanced its debt by issuing a new bond loan amounting to €400 million, with a fixed interest rate of 1.0% and an expiration in 2024. In September 2019, PostNL issued a new 'green' bond amounting to €300 million, with a fixed interest rate of 0.625% and an expiration in 2026, to finance its sustainability initiatives. This lowered our interest expenses and improved our ratios. For more information, see note 4.4 to the consolidated financial statements.
Description: We are exposed to claims for loss or damage. Some of these exposures are covered under conventions such as the United Postal Union, the Warsaw Convention or the Convention on the Contract for the international Carriage of Goods by Road, as well as PostNL’s general terms and conditions. Claims for loss or damage not covered under these conventions or PostNL’s general terms and conditions may negatively affect our financial performance. Our exposure to this risk is increasing as a result of the growing volume of e-commerce parcel deliveries in our portfolio, which on average are higher in value.
Mitigation: We maintain insurance policies in relation to our business and assets with reputable underwriters and/or insurance companies against claims for loss or damage to the extent not covered by conventions, and to the extent that is usual for companies like ours.
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