Technological innovation, geopolitical upheaval, and environmental challenges threaten businesses at a clip that is likely to speed up in coming years, and business leaders are carefully monitoring the risks.
Three surveys explore the risks board members and executives in the US and globally expect to be of most concern in 2019. The survey results show that:
Risks that threaten long-term performance worry business leaders the most going into 2019;
Investments in technology and tools aren’t enough to deal with these strategic and operational risks; and
High-performing companies are better at preparing for the challenges and at meeting customers’ needs.
Together, the surveys by global accounting and business advisory firms BDO and Deloitte and by the Enterprise Risk Management Initiative at North Carolina State University’s Poole College of Management and consulting firm Protiviti polled more than 1,700 respondents across the world.
Strategic and operational risks, meaning risks that put into question growth strategies and threaten key operational capabilities to execute these strategies, are what most worry business leaders at the end of 2018, all three surveys suggest.
Of the respondents to the Deloitte survey, which focused on the US, 97% of board members and 95% of CEOs said they expect serious challenges to their business’s growth prospects in the next two to three years. They considered new disruptive technologies and innovations to be the biggest threat (35% of respondents), ahead of cyber incidents (27% of respondents).
Since 2017, the concern that existing operations and legacy IT infrastructures may not be able to meet performance expectations as they face competitors born digital jumped from the bottom to the top spot of the ten biggest risks respondents listed in the global ERM Initiative/Protiviti survey. The rapid digitalisation also has many of the survey respondents worried they might need to change their company’s business model to remain competitive.
Whilst the effects of rapid technological innovation have become more prominent on business leaders’ minds, regulatory concerns persist across the globe. Changes in regulatory scrutiny ranked third amongst ERM Initiative/Protiviti’s top ten risks. Respondents to the BDO survey, which was also global, listed it as their top worry amongst risks that cannot be predicted (62% of respondents).
Technological innovations that allow companies like Airbnb and Uber to flourish cause disruption, and regulators step in, David Prime, national risk advisory services partner at BDO Canada, said at CPA Canada’s 2018 annual conference in Halifax, where he presented the survey results. Europeans, in particular, were referring to having to deal with the EU’s new General Data Protection Regulation, Prime said.
The top ten global risks
Macroeconomic developments, such as rising interest rates, newly imposed tariffs, and Britain’s efforts to leave the European Union, were concerns amongst 60% of respondents in the BDO survey, ranking second behind changes in regulatory scrutiny. A year earlier, macroeconomic developments had placed third on the BDO list of the top ten global risks.
The ERM Initiative/Protiviti top ten global risks did not include macroeconomic developments, but the strategic and operational concerns that dominated the list reflected several concerns respondents in the BDO survey also considered critical. The ERM Initiative/Protiviti top risks were:
1. Existing operations and infrastructure may be unable to adjust to competitors born digital. This concern could be a composite of several uncertainties, including a company’s digital readiness, a lack of agility in staying ahead or keeping pace with changing market realities, a lack of out-of-the-box thinking about the business model, and the threat of more nimble competitors.
Corresponding concerns on the BDO top ten list were increasing competition (52% of respondents) and failure to innovate and meet customer needs (42% of respondents).
2. Succession challenges and talent acquisition and retention. Over the past two years this concern has become critical to respondents in the ERM Initiative/Protiviti survey. What’s at stake is sustaining the workforce with the requisite talent and the skills needed in a rapidly changing digital marketplace.
Having the right people was a concern for 49% of respondents in the BDO survey. Access to talent and the mobility of people with desired skills had not been a top ten concern before, Prime said in his presentation.
3. Regulatory change and heightened regulatory scrutiny. This concern declined in importance in North America compared with previous years but remained a top-five concern amongst respondents in Europe and Asia Pacific.
4. Managing cyber threats. Forty-three per cent of respondents in the BDO survey also named computer crime, hacking, viruses, and malicious code as a critical concern.
5. Resistance to change. Coupled with concerns about the inability to adjust existing operations and IT infrastructure, which was their top concern, respondents also highlighted a cultural concern related to overall resistance to change in their businesses.
6. Rapid speed of disruptive innovations enabled by new technologies. Business leaders are concerned that significant business model changes may be necessary to manage this risk.
7. Information security. Respondents are concerned that protecting privacy and ensuring information security may require significant resources.
8. Inability to utilise data analytics and big data to achieve market intelligence and increase productivity and efficiency. This inability could significantly affect business operations and strategy.
9. Timely identification and escalation of critical risk issues. Corporate culture shortcomings drove this concern.
10. Sustaining customer loyalty and retention. Respondents worried about demographic shifts in their business’ existing customer base and a change in customer preferences.
How to deal with the risks more effectively
Relative agility can make managing these critical risks a more tolerable task, Prime suggested in his presentation. “As you’re preparing yourself and dealing with and looking at these risks and trying to understand how your business can be prepared, you don’t want to just throw up your hands and say, ‘I can't deal with this.’”
Rather, he said, the mindset should be, “I need to be ready to adapt and address these risks in a way that is more effective than my counterparts in the industry.”
Respondents in the Deloitte survey expected to deal with the risks by making investments over the next two to three years particularly in cybersecurity programmes (47% of board members and 43% of CEOs) and in technology to strengthen risk management programmes (40% of board members and 34% of CEOs). Other areas expected to receive funding include programmes to improve operating models and processes (36% of board members and 37% of CEOs) and upskilling or hiring new talent (32% of board members and 35% of CEOs).
The authors of the Deloitte survey, however, suggested that by prioritising technology investments, board members and CEOs may underappreciate the importance of culture, leadership, and retaining and hiring the right people.
Coming up with and executing a strategy to future-proof the business is key to dealing with an increasingly risky business environment, according to the BDO survey. A future-proofed business is 13 times more agile than a business without a strategy, BDO suggests, which is why a large appetite for agility tends to reflect a high performer. Key benefits of agility were customer satisfaction and retention, greater efficiency, and faster product delivery.
Critical in future-proofing a business is to become customer-centric. Sixty-four per cent of high-performing participants in the BDO survey considered customer-centricity as the biggest benefit of innovation.
To embrace the power of the customer in a global, direct, and transparent marketplace, businesses should:
- Build the capability to interact with customers on their terms. To avoid frustration, ensure that the service at the front end is good.
- Have senior management be plugged into the feedback from the parts of the business that guide product and service delivery and use data to envision customer behavioural trends and demands.
- Understand potential returns that can be obtained from innovation and train staff to think about the customer/user experience.
But future-proofing a business also requires strong, strategic leadership. According to the BDO survey, having the right corporate culture and encouragement from senior leadership is most important for a business to develop the potential to change (77% of respondents), followed by locating and training the right people (51% of respondents).
At the most innovative businesses, the BDO survey suggests, the financial and human resources are in place to execute future-proofing strategies with the least disruption and the whole company supports the approach senior management is taking.
— Dan Holly is a freelance writer based in the US. Sabine Vollmer (Sabine.Vollmer@aicpa-cima.com) is an FM magazine senior editor.