Digital disruption, change resistance and cyber are top Board concerns

24 January 2018 Consultancy.uk

Board members perceive a much riskier environment in 2018 compared to 2017. The rapid speed of disruptive innovations and dramatic changes that new technologies may have in the marketplace is, across all corners of the globe except Africa, the top threat. Not surprisingly, according to new report – while economic conditions are generally improving, previously untouchable organisations are finding themselves faced with threats that could take them out of business.

A study, conducted by consulting firm Protiviti in cooperation with North Carolina State University, has asked over 700 executives globally to assess the top risks they face in their industry/business. The analysis broke down risks into thee categories: Macroeconomic risks; those likely to affect their organisation's growth opportunities; Strategic risks; those that the organisation faces that may affect the validity of its strategy for pursuing growth opportunities; and Operational risks, threats that might affect key operations in executing its strategy.

Digital disruption

The analysis reveals that board members are seeing a riskier environment, with nine of the top 30 risks rated by them as having a “significant impact.” At the top of the threat landscape of executives is the rapid speed of disruptive innovation. This strategic risk is one which rocketed to the top for 2018, surpassing concerns about the economy and regulatory oversight, which have held the top two spots in all prior years when the researchers have conducted this survey.

In 2017, digital transformation consulting became a $23 billion industry, as panicked companies sought the aid of external experts in order to avoid being outflanked by innovative competitors. Sixty-seven percent of the respondents rated this risk as a “significant impact” risk. The top risk for 2018 reflects respondent-concerns that disruptive innovation or new technologies might emerge that outpace an organisation's ability to keep up and remain competitive.

Top 10 Risks for 2018Advancements in digital technologies and rapidly changing business models have enabled a new generation of start-ups to challenge long-term market incumbents for their share of consumer revenues. Respondents were consequently focused on whether their organisations could become agile enough to respond to sudden developments that alter customer expectations and change their core business model quicker than such competition. For most large companies today, it's not a question of whether digital will upend their business but when. Concerns of this nature therefore ramped up for 2018 from fourth overall last year to the number one concern this year – as well as being in the top five risk factors for every one of the stakeholder groups that Protiviti analysed.

Resistance to change

Coupled with concerns about the emergence of disruptive innovations, the business leaders polled highlighted a major concern as being an overall resistance to change within the organisation. With the need to morph organisations to suit a rapidly changing market, should a company meet with pushback from within its own ranks, this could majorly hamper transformation efforts, and concede vital ground to agile competitors. Respondents are therefore growing even more focused on tackling any lack of willingness to make necessary adjustments to the business model and core operations that might be needed to respond to changes in the overall business environment and industry.

Many organisations have discovered over the past decade that a strategic error in the digital economy can be lethal. If major business model disruptors emerge, respondents are concerned that their organisation may not be able to timely adjust its core operations to make required changes to the business model to compete – as exemplified by Kodak and Nokia in the age of the smartphone.

According to a previous Protiviti report, in order to tackle this, leaders are increasingly looking to internal audit for the right risk culture. Internal audit leaders are increasingly leant upon to help their business develop the right risk culture, presenting the internal audit function with a clear opportunity to play a transformative role in responding to the evolving needs of key stakeholders, who want assurance that the organisation is aware of and addressing all types of potential risk.

Cybersecurity

Another key topic of concern for global board members is managing cyber threats. A tumultuous 2017 saw a number of high profile hacks hit major institutions such as the NHS, and even top cybersecurity consulting provider Deloitte. Threats related to cyber security are therefore still a sizable concern as respondents focus on how events might disrupt core operations. This risk continues to be one of the most significant operational risks for three of the six groupings examined.

Concerns relating to privacy and identity protection continued to rank high among the top risk concerns for 2018. In 2017, cyber breaches cost the worldwide economy in excess of $280 billion a year. The presence of this risk in the top two is likely to continue to be prominent for some time to come, with new frailties being revealed in top computing systems on almost a daily basis – notably including a fault found at the start of 2018 in every single iOS computer’s Intel chip.

Top risk for companies with large revenues

Regulation

Regulatory change and heightened regulatory scrutiny also ranked high in the responses of board members’ major concerns. Thanks in no small part to the high-profile launch of the GDPR in May 2018. This risk continues to represent a major source of uncertainty among the majority of organisations. 59% of respondents considered this a “significant impact” risk, and the particular variant has been in Protiviti’s top two risk concerns in all prior years for this particular survey.

However, compared to last year’s results, while they are still a major concern, regulatory worries are less at the forefront of businesses’ concerns in 2018. Indeed, as recently as 2016, regulatory factors were top of the pile. Political gridlock and checks and balances in governing institutions appear to have, for now at least, hamstrung further significant change on the regulatory front, while in the United States, the Trump administration has continuously sought to deregulate industry, rather than increase the regulatory burden of corporations.

Company culture

In fifth, meanwhile, board members fear that their company culture may not be conducive to escalating risk issues in a timely fashion. Respondents continue to assert a need for attention to be given to the overall culture of an organisation to ensure the escalation of risk issues. This risk issue first appeared in Protiviti’s 2015 risk survey, and has featured in the top-end risks each year since. While the issue has not risen beyond fifth this year, the level of concern regarding it is at a two-year high, with 61% of respondents rating this risk as having a potentially “significant impact”.

Interestingly then, three of the top five risks for 2018 relate to operational risk concerns, and each has the greatest increase in risk ratings from 2017. Two of those risks relate to cultural issues – resistance to change and the organisational environment hampering the identification and escalation of risks. Concerns about the emergence of competitors who can leverage digital-based technologies to trim operational costs is also an increased concern, and barring a major change, will likely remain a key factor come 2019, as companies continue to exhibit a veracious appetite for digital innovations.

Top risk for companies with mid-sized revenues

New risks

Two risks moved into the top list of risks for the first time this year. Respondent concerns were seen to be growing surrounding their ability to utilise data analytics and big data to achieve competitive advantage and to manage operations and strategic plans. Those questioned seem to sense that other organisations may be able to capture intelligence that allows them to be more nimble and responsive to market shifts and changing customer preferences.

In the digital age, knowledge wins and advanced analytics lie at the heart of unlocking insights that can differentiate firms in a competitive the market. Additionally, respondents voiced concerns about the ability of their organisation to adjust existing operations to meet performance expectations as well as competitors. This is especially heightened by the concern that new competitors may be able to leverage digital capabilities that allow them to introduce new business models more cost effectively. Hyper-scalability of digital business models and lack of entry barriers enable new competitors to emerge and scale very quickly in redefining the customer experience, making it difficult for incumbents to see it coming at all and react in time to preserve customer loyalty.

When asked about the magnitude and severity of risks for not reaching profitability targets over the next 12 months, CEOs had a score of 5.9 on a scale of 10, while three important counterparts in the Board, Chief Financial Officer, Chief Information Officer and Chief Audit Officer, scored respectively 6.3, 6.3 and 6.4. This could show that CEOs are generally more relaxed on the topic, or, as the executive who takes overall responsibility for the health of a firm, their concerns are more likely spread over wider areas than short-term profitability alone.

Differences were also visible across regions, as while all bar Africa agree on the top risk – the strategic threat from the rapid speed of disruptive innovations – there are variant local flavours. Not surprisingly, concerns over low interest rates, economic conditions and volatility in financial markets are Eurozone organisations' top three risks. However, the decrease in the concern over economic conditions from 7.3 to 6.2 suggests that business conditions are improving for European-based organisations.

Top risk for European companies

North American respondents identified cyber threats and succession challenges and the ability to attract top talent as top five risks. African respondents, who identified concerns about political stability and economic conditions as primary worries, also included succession challenges and talent retention in their main five issues to face. Respondents from the Asia-Pacific region were the only group to identify the risk of uncertainty surrounding key suppliers as a top five risk, which is most likely because supply chains in many Asian companies are based on a low-cost model that no longer support present day growth imperatives.

Digital dominates

Despite localised variables, the researchers highlighted that digital is still the dominant theme. “The concern from being able to adapt to disruptions and change course appears to be at the forefront for all executives.” This is a major challenge, but also offers a unique benefit: the unique aspect regarding disruptive change is that it represents a choice, said the authors, leaving executives to choose which side of the change curve they want their organisations to be on.

The researchers further elaborated, “Organisations need to make a conscious decision about whether they are going to be the disruptor and try to lead as a transformer of the industry or, alternatively, play a waiting game, monitor the competitive landscape and react only when necessary to defend market share.”

However, how this question is answered is of paramount importance, with the study concluding, “With the speed of change and constant advances in technology, rapid response to new market opportunities and emerging risks can be a major source of competitive advantage. Conversely, failure to remain abreast or ahead of the change curve can place an organisation in a position of becoming captive to events rather than charting its own course. For those organisations choosing not to actively disrupt the status quo, their challenge is to be agile enough to react quickly as an early mover. If organisations are not proactively thinking about how they might respond, they may be too late to deal with the impact.”

Related: The top 10 business risks for executives and multinational companies.

News