Czech companies are more vulnerable than businesses in other European countries to changes on financial and commodity markets because they don't effectively utilize tools for managing financial risk, according to a recent report by Ernst & Young. Tomáš Němeček, senior analyst at Advanced Risk Management (ARM), discusses with The Prague Post why businesses here have a different approach to risk than elsewhere in Europe. Němeček also says that some big risks are not financial.

1. A recent study by Ernst&Young showed that many Czech companies tend to underestimate the importance of hedging against adverse developments on financial and commodity markets. Why do businesses pay so little attention to risk management?

The market economy has a very short history in the Czech Republic, and it takes time to learn. Companies may not deliberately underestimate risk; they just don't realize 'it' can happen to them — or they hope it won't. Many companies might wishfully think that they can manage risk themselves and save money on expert services or software.

2. Do companies here underestimate risk management because most Czech products are targeted to European Union markets, which are considered transparent and safe?

It's possible. EU markets seem less risky because of their political and economic stability. Of course, risks still exist when exporting, even to a politically stable area. Currency risk is an example. Until the euro is adopted, it can't be underestimated.

3. Do Czech companies market their products toward countries in the EU specifically because they're risk-averse?

Czech companies tend to be risk-averse, but this is not the main reason they're focused on exporting to countries in the EU. Local companies are comfortable with the proximity and similar mentality of these countries. And what about our inherent reluctance to live and start businesses in distant or exotic locations? Even that has been changing, as shown by recent ventures in China and other Asian countries. Our companies will make use of this potential.

4. How do Czech companies compare to businesses in other EU countries when it comes to assessing and managing risk?

Local companies are getting used to the fact that the differences between Czech and other EU companies are decreasing. For example, you wouldn't find differences in the banking sector. The quality of some Czech banks' risk management systems is better than those used by banks in old EU member countries.

5. How long will it take before more Czech businesspeople begin perceiving risk as an opportunity rather than a threat?

Czech businesspeople have learned to look for and utilize opportunities. In many cases, though, they don't see the risk in opportunity. They would be more efficient if they managed risks as well as the opportunity. This is complicated and requires know-how, but compared to the situation abroad, we are not lagging behind.

6. Should banks and nonbanking financial institutions place more emphasis on promoting various risk management tools?

Many Czech companies use them already, but the market has a big potential. Although banks have these tools in their portfolios, they don't seem to offer them enough, as we sometimes hear from clients. ARM tries to raise awareness during training and consultations. However, to avoid any conflict of interest, ARM doesn't actively market risk management tools.

7. Your portfolio seems to contain lots of big companies. What do you do to appeal to smaller businesses as well?

Companies that acknowledge risk want to manage it. These are typically banks and large nonfinancial companies. It's a matter of awareness, which still has to be heightened for small and midsize companies. That's why we hold various types of seminars, sometimes in cooperation with other institutions.

8. How strong is competition among specialized financial institutions such as ARM? Is focusing on one specific field, such as risk management, the way to survive in the shadow of large multinational consultancy firms?

The competition is not as fierce as in other areas because our services are based on a unique knowledge and skill set. Our competitors are either the 'big four' companies [KPMG, PricewaterhouseCoopers, Deloitte and Ernst & Young] or independent consultants providing similar services. It's also important to have long-term experience. Some ARM experts have been in this business since the mid-1990s, which is a competitive advantage. I would say that we have found a niche on the Czech market because of our focus on customer service and our strategy of dealing with each client individually, regardless of its size.

9. ARM also provides consultancy services and professional training. How much emphasis do Czech companies place on investing in their employees' education? Isn't it more common for large, foreign firms to invest in education?

We've noticed that a company's willingness to invest in human resources development is connected to how it perceives the value of knowledge. Generally, companies that base their business on the know-how and knowledge of their staff are willing to invest in training because they realize it is cost-effective. In this respect, there is not much difference between Czech and foreign-owned companies.

10. What's the biggest risk you've ever taken?

The biggest risks I take are not financial. Personally, I feel the most at risk when it comes to relationships. In this area I don't have enough experience, I guess. For instance, there is always risk involved when asking a question like 'May I invite you for dinner?'