Protiviti and North Carolina State University’s ERM Initiative recently published their annual global risk report titled, Executive Perspectives on Top Risks 2019. This report focuses on the top risks executives are concerned could impact growth opportunities or create operational challenges in executing strategy. Here is the thirty thousand foot view, the global business environment is rapidly evolving. Technological advancements and economic globalization are breaking down borders in terms of the flow of good and services across international lines.
This rapidly changing global economy has created a new risk landscape executives across the world are having to adapt and prepare for. The Executive Perspectives on Top Risks 2019 report found four out of the five top global risks were related to internal operations and not external threats such as climate change or geopolitical issues. This study finds that executives are starting to become aware of the risks that exist from within which can derail the organization from meeting objectives. Operations that can pose a risk to growth opportunities and threaten the survival of the business in some cases. Let’s take a closer look at the operational risks keeping global leaders up at night.
Key Findings
To start off, let’s take a look at some key findings from the report focused on operational risks:
- Four of the top five risks for 2019 are related to internal operations (legacy IT infrastructure, attracting/retaining talent, managing cyber threats, resistance to change)
- Managing cyber threats is the only risk listed as having a significant impact across all industries
- Legacy IT infrastructures and attracting/retaining talent made the top five lists of risks across all industry groups
- Six out of eight geographical regions list at least two operational risks as having a significant impact on the ability to meet or exceed profitability targets
Top Operational Challenges
Of the top five risks in 2019, four are related to operational challenges which could have a significant adverse impact on organizations. The top three operational risks are legacy IT infrastructures, talent acquisition & retention, and cyber threat management. Let’s take a closer look at each one of these top operational risk.
Legacy IT Infrastructure
Legacy IT infrastructures are frustrating businesses around the world and are the top concern for businesses in 2019. This operational risk jumped from the tenth spot last year to the number one risk for global businesses. Five of the six industry groups surveyed listed legacy IT infrastructure as a top five risk. The main concern for global businesses is the threat of “born digital” competitors entering the market with lower overhead (e.g. no need for brick-and-mortar footprint) and the ability to scale IT operations to meet the everchanging needs of today’s consumer market.
Legacy IT infrastructure can directly impact customer retention if a company does not possess the IT infrastructure to align their operations with their customer’s digital expectations. Furthermore, “born digital” businesses can have the advantage of lower costs of entry into certain industries, putting more strain on current market leaders to upgrade their IT infrastructures to keep pace. Cloud technologies are a key strategy for businesses looking to leave their legacy IT infrastructures behind, however, adoption rates are not as accelerated as most would think.
A Forrester study found over 50% of global enterprises in 2018 were relying on public cloud technologies to implement digital transformation and assist with meeting customer expectations. The report went on to point out artificial intelligence (AI) and machine learning as being the leading accelerator for the adoption of cloud technologies. This will be an interesting risk to monitor to see how global businesses respond in meeting rapidly changing consumer preferences.
Talent Acquisition & Retention
The second top risk for global businesses is succession challenges and the ability to attract/retain top talent. This risk is driven mainly by the current tightening labor market in the United States supplemented by changing generational outlooks on employment and company loyalty. With the U.S. labor market hitting its lowest jobless rate since 1969, the demand for top talent is stronger than ever. With unemployment being low and the labor market tightening, employees now have the advantage. A 2018 Gallup report found 50% of all U.S. employees are currently looking for jobs. This is a major issue for employers when it comes attracting, retaining, and growing their workforce.
The rise of the gig economy and entrepreneurship are also challenging organizations when it comes to talent. Currently, there are an estimated 57 million people in the gig economy, representing 36% of U.S. workers. Technology is helping fuel the gig economy as anyone can work from anywhere these days. People are discovering they can lead a fulfilling life by being able to balance life and work through a gig-focused income model. As this gig economy trend continues, it will continue to put a strain on businesses who are challenged in attracting and retaining top talent to drive their businesses forward.
Social responsibility will also play a major role in talent attraction and retention in 2019. In today’s talent market, job candidates are looking to align their personal values with their potential employer. This is where socially responsible companies are winning the war on talent. A Harvard Business School study examined 180 U.S. companies between 1993 – 2009, what they found is “high sustainability” (those that adopt a significant number of social/environmental policies) companies outperform “low sustainability” companies over the long-term in both accounting and stock market performance. Employees want to work for companies that are good for society, that give back to their communities and actively participate in making the world a better place. For companies struggling to keep or attract talent, they may need to take a deeper look at just how socially responsible they truly are.
Cyber Threat Management
Number four on the top ten risks of 2019 is cyber threats. Cyber threats are nothing new and have been on the radar of global businesses for some time now. A study conducted by the University of Maryland found that a cyber attack occurs every 39 seconds. Furthermore, Juniper Research estimates that the average cost of a data breach in 2020 will exceed $150 million. This data shows that not only are cyber threats becoming increasingly more frequent, they are also becoming more severe.
No business is safe from cyber threats, hackers will target any industry from government to healthcare. Cybersecurity in today’s world is challenging as businesses must ensure their digital defenses are keeping up to speed with the rapid changes in technology and the ways companies do business. For example, today’s banks rely more on digital transactions and online financial management to serve their customers. This leads to a slew of cybersecurity risks as banks must monitor activity across multiple channels simultaneously which can be a massive challenge. Cyber threats are also interconnected with legacy IT infrastructures as organizations in the financial services sector may be exposing their business to unwanted cyber attacks targeting antiquated technology systems and software to gain access to customer data.
Although cyber threats are ranked as the fourth top risk in 2019, this threat only made the top five list for two geographical regions, North America and Europe. The report concludes this is most likely due to high-profile cyber targets (e.g. Fortune 100 companies) and strong cyber disclosure requirements. Cyber disruptions can cause severe operational damage and threaten the survival of most organizations. These threats also come with reputational risk as cyber attacks erode consumer confidence and trust in brands which trickles down to affect the bottom line. In the end, no consumer wants to do business with a company that cannot safeguard their data.
Wrapping Up
Organizations across geographic regions and industries are looking internally to risks that could adversely impact their achievement of profitability goals in 2019. In a time when external threats steal all the headlines, risks percolating from within are of the greatest threats to industries from energy to healthcare. This report should be an eye-opening revelation to leaders everywhere. Maybe we all need to take a closer look inside our own organizations to ensure we are ready to take on the challenges presented by a new global economy driven by technology. Organizations must keep pace with the business environment around them, for if not they could fall behind and never recover.
