All enterprises are subject to risks that have the potential to disrupt business models and damage reputations overnight. Senior leaders – across industries and geographies – indicate they anticipate increasing risk in 2019. This is only one finding from the Executive Perspectives on Top Risks 2019 report Protiviti and NC State University’s ERM Initiative.
This survey asks business leaders to assess the likely impact of 30 risks on their organizations in the coming year. The report delivers analysis by industry, geography and business size, as well as for-profit versus nonprofit status, and analyzes the perspectives of both board member and executive respondents. We were pleased that the 2019 report reflects more geographically diverse participation than any prior year.
With the report as a background, I was asked to offer my perspective on the business environment during an interview on the Cheddar business news network. We discussed increasing business risk, digital readiness, practical applications for new technologies, competition for top talent, and how macroeconomic factors play into the risks that are top-of-mind for senior leaders.
Risk Is Intensifying
For 2019, our respondents perceived a riskier environment overall, rating 83 percent of the risks higher this year than last. This perception no doubt reflects current economic and political uncertainty and social unrest throughout the world. The survey findings align with what we heard out of Davos last week. The overwhelming conclusion coming from world leaders is that 2019 is expected to be rockier than 2018.
Digital Readiness and Regulatory Scrutiny
Digital transformation is a main driver of risk, creating uncertainty about traditional business models’ viability and regulatory demands. The top-rated concern in 2019 is that existing operations may not meet performance expectations or allow the company to successfully compete against ‘born digital’ firms.
Firms across all industries are worried about the rapid pace at which new technology is deployed. They want to know how they can stay competitive while still meeting client expectations for privacy and security.
A large piece of this worry is companies’ ongoing dependence on legacy IT infrastructures and capabilities to operate, even as innovative customer experiences require new, lighter and more agile digital technologies. This is especially true in the financial services sector. New, “born digital” competitors are unencumbered by mainframe systems or investments in brick-and-mortar storefronts. Existing chiefly online, their business models can respond to changing market conditions almost instantly. Their cost of entry and operation is lower, sharpening concerns among traditionally-run businesses.
If digital readiness is one kind of concern, increased regulatory scrutiny is another: New technologies bring new regulatory risk, and businesses will be challenged to meet new compliance obligations at the same time as they try to keep up or stay ahead of innovation – not an easy task. Political developments in the U.S. and Europe, and a slew of privacy regulations already passed, point to a 2019 that will likely see more of the same. “Techlash” – a consumer and regulatory backlash against technology companies like Facebook – is a risk that the tech sector needs to keep in its sights and respond to in an appropriate manner.
An interesting example of an intersection between cutting-edge technology and regulation is blockchain. I was asked during the interview whether blockchain’s march to assimilate into routine business operations was surprising. Not long ago, blockchain seemed a technology in search of a problem. Uses of blockchain have matured however, resulting in more practical applications. HSBC’s recent announcement that it settled $250 billion in forex trades using blockchain in 2018 demonstrates the traction blockchain is gaining, even if those dollars are a fraction of HSBC’s forex volume.
Regulators are keenly aware of the rapid development of the technology and have begun to stake their positions, notably in Europe, where the focus appears to be on discovery and regulatory cooperation rather than outright banning of the technology.
Operational and Strategic Versus Macroeconomic Risks
The 30 risks in our survey were classified as operational, strategic or macroeconomic, but those classifications overlap and are not mutually exclusive. While participants did not select any macroeconomic-classified risks among their top ten, the top ten risks selected do touch upon macroeconomic conditions. Leaders’ concerns with new technology disrupting existing strategies definitely has a macroeconomic component. Another disruptor, cybercrime, threatens operational resiliency, and we know that such crime is now the weapon of choice of state actors, not simply individual hackers. A state-sponsored attack can cause an economic disruption globally, as we saw with NotPetya, and so it clearly raises macroeconomic concerns.
Machine learning, advanced analytics, artificial intelligence and other technologies, once regarded as experimental, are core competencies now. They’re required capabilities to fuel new customer insights and deliver new customer experiences. Businesses are in a fierce competition for employees who can support and deploy these technologies to deliver on new technology strategies. These resources are sought after by traditional and born-digital firms alike.
To attract these valuable individuals, to increase agility and resilience, businesses must develop a culture that is attractive to innovation seekers and doers and grow a new generation of leaders that understands and values new skill sets. More businesses will be focusing on resource management strategies in 2019.
The bottom line is that in 2019, the only constant will be change, and senior leaders seem well aware of that. Learn more about their perspectives, including extensive analysis and recommendations, in the 36-page Executive Summary or the 128-page comprehensive report, both available for free download.