Our Risk Management

INTEGRATED
REPORT 2019

Risk management is an integral part of our value-based strategy, our governance and our day-to-day operations. We believe that each risk carries an associated opportunity and aim to not only deal with uncertainty in the business environment and minimise our downside exposure but also seek to capitalise on the upside potential to achieve our strategic objectives. Thus, our integrated and cohesive approach to risk management is inextricably linked to strategy formulation and execution.

Integrated Risk Management Model And Combined Assurance

AYO’s integrated risk management framework sets the foundation for our businesses to effectively manage environmental risks in a standardised and systematic manner.

The Board approves AYO’s risk profile, financial risk appetite and tolerance levels and ensures that risks are managed within these levels. To support the Board and ensure effective risk management oversight, each committee is responsible for monitoring relevant risks within the ambit of its scope.

The internal auditor performs an independent objective assurance function and consulting activity on the adequacy and effectiveness of the Group’s systems of governance, risk management and internal controls. The system of internal control is designed to ensure that significant risks are appropriately identified, managed and provide reasonable assurance that:

Company assets and information are safeguarded;
Operations are efficient and effective; and
Applicable laws and regulations are complied with.

BDO Cape Inc., the external audit firm, provides an audit opinion in accordance with the Companies Act, the JSE Listing Requirements and King IV™. They assist the audit and risk committee in discharging their corporate governance and compliance responsibilities. They provide advice on financial reporting, tax and business issues and make recommendations to management to improve internal controls and business efficiencies to add further value to the Company.

AYO’s risk management model is further applied to our “watch list”, which contain risk areas not specifically covered in the Group’s top risks. Our “watch list” is constantly evolving and together with the top risks list represents a comprehensive coverage of themes that could potentially impact on the Group’s performance.

The watch list themes include:

South Africa’s and Africa’s political and economic developments;
Significant changes in public sector ICT expenditure;
New and changing laws and regulations affecting the ICT industry and the industry verticals we operate in;
Changes in customers’ buying criteria;
Disruptive new technologies launched in the world;
Governance and integrity perception of our Group by regulators, media and shareholders;
Reputation management for our subsidiaries;
Time spent in legal and other non-core value-generating activities.

BUSINESS, MARKET AND FINANCIAL RISKS

Economic Uncertainty:

Macroeconomic events beyond our control, including significant currency rate fluctuations, drastic movement in the public sector’ expenditure and overall economic stability directly affect our costs and revenues. While many such events can be seen as opportunities for AYO to introduce cost-saving technological advancements and assist our clients in navigating these uncertainties in the medium- and long-term, our immediate vulnerability to South Africa’s volatile economy is acknowledged.
Mitigation:

Diversifying our portfolio with operations in both developing and developed foreign economies
Entry into new industry verticals to diversify the risk of segmental exposure
Modular re-structuring of core managed services offerings to enhance competitiveness and cost management for clients

Market Consolidation:

Telecommunications operators aiming to position themselves as turnkey service providers and large multinationals looking to penetrate the African market via South Africa are driving significant market consolidation where small local players are rapidly absorbed. While this trend is positive for the industry as it brings about capital investment and access to innovative global technologies, it could present a risk for AYO, particularly if we are unable to innovate ahead of the curve.

Mitigation:

Investment in capabilities (both people and infrastructure) to drive growth through innovation
Targeted acquisition strategy to fortify our presence in the fastest-growing subsegments of the industry

Investment Performance:

The financial performance of the AYO Group is in part influenced by the performance of subsidiaries within the Group in which AYO does not hold a controlling stake. Our ability to identify and acquire companies that will upsurge our Group revenues and profitability while opening access to new niche market segments is crucial to our growth strategy.

Mitigation:

Careful, consistent monitoring of subsidiaries’ performance
Collaborative initiatives amongst subsidiaries to facilitate symbiotic relationships and mutual growth
Stringent due diligence on past performance and future potential of targeted acquisitions

REPUTATIONAL, LEGAL AND HUMAN RISKS

Reputational Impairment:

Negative media portrayal, whether founded or not, ultimately results in reputational impairment. Even when allegations are later withdrawn or corrected, the damages incurred linger long after the dust has settled. This has certainly been the situation in which AYO has found itself in 2019 and the impact of such unfavourable publicity can be felt in our acquisitions pipeline, investments and new business contracts.

Mitigation:

Proactive corporate communication strategy to reposition the AYO brand aimed at all stakeholder segments
Honest and transparent corporate citizenship behaviour and communications

Talent and Skills Shortage:

The South African ICT industry is strongly affected by the global shortage of scarce technical skills as top industry talent is lured by lucrative opportunities in more developed economies, now more easily accessible to them than ever. Loss of key skilled employees could impact our ability to innovate, particularly in the software development space, and affect our ability to fulfill contractual obligations.

Mitigation:

Focus on delivering improved employee value proposition, enhanced employee communication and people centered commitment
Development of critical scarce technical skills through AYO Academy

Legal and Compliance Risks:

Our governance and integrity are perceived to be weak by regulators and certain shareholders as an indirect result of negative publicity. The JSE has challenged us in auditing unaudited interim results for the previous year and is exceptionally vigilant in monitoring our regulatory compliance.

Mitigation:

Appointment of new executive team and Board
Appointment of an internal audit team and IFRS specialist to ensure compliance with listing requirements at all times

B-BBEE Rating:

AYO’s B-BBEE rating is an important differentiator and competitive advantage for the business, which we can leverage to expand our market share and revenue. A lower rating, conversely, could result in potential loss of new business or limit access to growth opportunities.

Mitigation:

Active monitoring of ongoing B-BBEE programmes
Pursue areas in which our scoring can be improved
Assess potential acquisition’s B-BBEE score as part of their overall evaluation process

OPERATIONAL RISKS

Unplanned Legal Actions:

On 31 May 2019, AYO received summons issued by the Public Investment Corporation (“PIC”) and the Government Employees Pension Fund (‘GEPF”). We have instructed our attorneys to oppose the action. While we appreciate the fair and accessible judiciary system of the country and understand the need to protect the interests of vulnerable demographic groups whose financial future depends on responsible investment by PIC on their behalf, such unplanned legal shenanigans impact on our resources and ability to deliver on our strategy.

Mitigation:

Decisive response strategy for swift and effective resolution of current and potential legal actions threatening our resources and operations
Proactive corporate communication strategy aimed at all stakeholders to assuage resulting brand damage from legal actions and sequential negative media coverage.

Loss of Major Projects and/or Clients:

Inundated by constant allegations in the public domain, we acknowledge the capacity of such negative coverage to challenge our ability to retain existing customers and renew business agreements. This risk affects not just AYO as a company, but all subsidiary businesses in the Group and has further indirect effects including reduction of credit facilities with suppliers, concerns around owner warranties and high staff apprehension and turnover.

Mitigation:

Pursue a diversified project mix and customer base, underpinned by long-term partnership agreements
Investing in brand recognition and positioning for our subsidiary companies in their own right.

Dependence on Major Customers:

While we value the importance of major contracts with large organisational clients, we recognise that over-reliance on specific customers could potentially result in a material reduction in revenue for the business.

Mitigation:

Expanding our portfolio into new industry verticals
Expanding our portfolio into new geographies
Acquiring businesses with an established, existing client base

INTEGRATED
REPORT 2019