Top Risks for 2018: Disruptive Innovation, Resistance to Change

Jim DeLoach, Managing Director Host, The Protiviti View

Having had a year to digest the aftermath of the U.S. election-driven economic, global trade, regulatory and other jitters that may have skewed the global risk outlook for 2017, executive perspectives on the top risks for 2018 have refocused on technology-driven change, and how well organizations are prepared to manage that transformation.

Earlier this month, Protiviti and North Carolina State University’s ERM Initiative published a joint survey, Executive Perspectives on Top Risks for 2018. The report, and an executive summary, are available for download on the Protiviti website. Mark Beasley, the Deloitte Professor of Enterprise Risk Management at North Carolina State, Pat Scott, Executive Vice President, Global Industry and Client Programs at Protiviti, and I reviewed the results in a December 14 webinar. I wanted to share some of the highlights.

We surveyed 728 executives and directors at companies around the world, representing a cross-section of industries, and asked them to prioritize 30 risks on a scale of 1 to 10, with 10 being the highest level of concern. Risks were grouped into three categories: macroeconomic, strategic and operational.

In 2017, concerns about regulations and the global economy created an anomalous spike in the results, elevating macroeconomic risks to the top of the list for the only time in the six years we’ve been doing the study. Those concerns subsided for 2018, and this contributed to a dip in the overall perceived severity and magnitude of risks. Diving deeper into the numbers, however, reveals a story that is more consistent with what my colleagues and I (and I bet, you) are seeing and hearing in the marketplace.

The top risk — ranked by executives and board members as having a “significant impact” — is that the rapid speed of disruptive innovations and/or new technologies may outpace an organizations’ ability to compete or manage the risk appropriately without making significant changes to its business model. The second highest risk highlighted a cultural concern related to overall resistance to change within the organization.

These two risks present a conundrum. On the one hand, the survey respondents are concerned with the opportunities and risks associated with disruptive change. On the other hand, there is concern regarding the organization’s potential lack of willingness to make necessary adjustments to the business model and core operations that might be needed to respond to change.

Cyber threats represent the third-rated risk and loom large in the top five risks for companies of all sizes and for three of the six industries highlighted in the survey – as has been the case for a number of years. That, too, is consistent with the overriding concern that technology is evolving at a pace that is hard to surpass, or even match. In the case of cyber risk, it’s a matter of technology advancements outpacing the security protections companies have in place.

The other top risks cascade from there: A culture that fails to identify and escalate risks issues; succession challenges and the ability to recruit and retain tech-savvy talent; an inability to utilize data analytics effectively; and legacy processes that hamper speed to market and innovation. In other words, top leaders worry whether organizations are “fit” for change — an awareness that should, and likely will, lead to specific actions to make companies more resilient.

Although risk culture — specifically, in this case, the ability of an organization to identify and escalate emerging risk issues in a timely manner — ranked fifth in this year’s survey, Mark, Pat and I all flagged this as the common theme underlying most, if not all of this year’s top perceived risks. Emerging risks can be dangerous if the organization’s leaders are not aware of them, as that is a sign they may be out of touch with business realities.

For other top risks, and deeper analysis, including a breakdown of concerns by region, industry and company size, I refer you to the report.

We live in the digital age. New market entrants are often “born digital.” The challenge for older, established companies is to both recognize and respond to change. Even when executives and board members of established incumbents are aware of new technological developments that threaten to disrupt the business model, it’s not easy to determine exactly what to do about it and execute that plan. As many organizations have discovered in recent years, the wrong bet can be lethal. This year’s report gives me reason to be optimistic, however, because it tells me that leaders know the risks as well as the opportunities associated with digital innovation and are focused on finding the right tools, resources, talent and processes to face 2018 and beyond with confidence.

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