EMERGING TECHNOLOGY RISK
The risk landscape is transforming fast. Every day’s headlines bring new reminders that the future is on its way, and sometimes it feels like new risks and response strategies are around every corner. The strategies of new opportunities and new proposals for risk leaders— indeed, all organisational leaders— are already visible.
For leaders today, risk can be applied as a tool to create value and achieve higher levels of performance. This report profiles 10 trends that have the potential to significantly alter the risk landscape for firms around the world and change how they respond to and manage risk. Explore the factors, opportunities, and risks, for each trend.
- Cognitive technologies augment human decision-making
Fostered by developments in artificial intelligence (AI) and easy access to huge amounts of data, smart systems will assist, and at times even replace, human-led risk management.
Advancements in cognitive technologies, artificial intelligence, and data analytics are assisting firms go beyond traditional ways of managing risks by applying smart machines to detect, predict, and prevent risks in high-probability situations. Autonomic computing combines automation and cognitive technologies to make systems self-managing—and potentially self-defending and self-healing from risks.
- Massive growth in the volume of data available to firms
- Emergence of new and advanced AI-based algorithms
- Expanding pool of data science talent
- Adoption of behavioural analytics in risk management
- Identify applicable situations that are well-suited for cognitive technology solutions: Where the risk area is vital, large amounts of data are available, and current solutions are ineffective
- Apply visualisation to analyse and communicate information in a human-friendly way to enable rational decision-making
- Upskill personnel so that they are able to more effectively apply cognitive technologies to extract insights from data
- Complication in implementing complex cognitive tools
- Overhyped technologies unable to deliver on promises
- Inadequate trust and assurance mechanisms for AI
- Inability to source the right data
- Human reaction opposed to automated decision-making
- Unintended consequences of misguided predictions
- Regulations become pervasive
In a sensor-enabled, hyper-connected environment, firms will deploy pervasive regulations as part of their products, services, and business models to monitor and manage risk in real time.
Smart devices equipped with a variety of sensors, communications, and computing capabilities serve as risk monitoring and enforcement points. This presents an opportunity for firms to detect risk events, derive vital risk insights, and even take immediate actions in the environment. The result is real-time, pervasive, dynamic risk management.
- Lower rates, lower size, and increasing connectivity of sensors
- Increasing investments in smart devices
- Growing adoption of industry wearables
- Advancements in sensor technology
- Advancements in analytics
- Businesses operating as unified ecosystems
- Enhance operations and improve risk-related decision-making by integrating pervasive risk management in areas such as internal audit, supply chain management, finance, cybersecurity, and management assessment.
- Lower cyber security and funny business risk by using sensor-enabled devices to implement context aware identity access capabilities.
- Improve traceability across the supply chain, especially in security-sensitive industries such as food production and pharmaceuticals.
- Automate compliance monitoring and reporting by embedding risk management into business technologies.
- Manage risks introduced by investors by analysing investor behaviour through real-time data feeds.
- Heightened exposure to cyber risks as business processes rely more heavily on smart devices
- Greater availability of data revealing risks in areas that were formerly considered safe, resulting in new obligations to manage those risks or increased accountability
- Rising privacy concerns from personnel, investors, and business partners because of pervasive monitoring
- Increased complexity of filtering relevant information, given the vast amount of data generated
- Behavioural science informs risk insights
Advances in behavioural sciences will fuel efforts to comprehend risk perceptions, influence risk behaviours, and improve risk-related decision-making.
Behavioural science is the study of human behaviour through systematic research and scientific methods, drawing from psychology, neuroscience, cognitive science, and the social sciences. There is increasing demand for these skills in the business world—including risk firms.
- Increasing interdisciplinary research across fields such as cognitive science, psychology, economics, and neuroscience
- Renewed interest in making technology products intuitive for application
- Growing popularity of behavioural economics to inform decision-making
- Early successes in commercialising gamification
- ‘Design interventions’ to assist executives overcome the influence of cognitive preferences in decision-making
- Improved systems for monitoring high-risk individuals in sensitive roles
- More effective risk, forensics, and financial transaction-related business processes
- Risk of regulatory action in instance of perceived misapplication of behavioural interventions
- Reaction from personnel and executives who see the undesired effect of behavioural interventions on free will
- Unrapid (or no) return on investments in organising complex behavioural intervention
- Vigilance and resilience complement prevention as leading practices
Firms are realising that 100 percent risk prevention is infeasible, so investment in vigilance (detecting risk events as they happen) and resilience (containing and lowering the effect of risk events) will increase.
Firms are expanding their approaches to focus on vigilance (detecting patterns that indicate or even predict risk events) and resilience (the capacity to rapidly contain and lower the effect of risk events) as well. We can expect activities like these to rise in importance: monitoring emerging risks, identifying inconsistency in business processes, managing interruptions from third-party vendors, and preparing for risk-related industry disruptions.
- Growing recognition of inability to remove risks altogether
- Rapid advancements in data analytics, machine learning, and AI capabilities
- Greater sharing of information among firms as a result of the unified economy
- Rising risk of nation states investing significant resources into interruptive activities
- Assess and prioritise risks to determine where to invest in vigilance and resilience
- Identify and test cutting-edge, commercially available tools focused on vigilance and resilience
- Inability to detect significant risks due to inadequate data, tools, or expertise
- Ineffective resilience efforts due to complex interdependent operating structures or inadequate agility
- Risk transfer broadens in scope and application
Risk transfer instruments, such as insurance, contracts, and novel financial instruments, will increasingly be applied by firms to protect them from a wider range of risks – cybersecurity, climate change, geopolitical risks, business interruptions, and more.
In the past, few considered insuring such risks. Soon, it will become commonplace as commercial third-party insurance, risk-sharing agreements, captive in-house insurance, and other tools continue their ascent. Financial industry innovation is also generating novel financial instruments that transfer and monetise risk.
- Growing instances of ‘mega-effect’ events such as cybersecurity, political unrest, and climate change—and their growing financial and reputational effect
- Increasing globalisation and the rise of a unified economy leading to a series of risks
- Persistent inability of firms to completely remove risks through preventive managements
- Rising rate demand on firms to look for cost-effective ways to transfer risk
- Evaluate risk transfer instruments as an option to achieve business continuity and more predictable performance
- Establish risk-sensing mechanisms to identify emerging risks and determine if instruments could be applied effectively to transfer key risks
- Develop clear and rigid risk-sharing clauses in all partner contracts, and consider collective insurance with partners to address shared risks
- Potential for varied opinions, litigation, and disagreements with investors, partners, and suppliers over risk-sharing agreements
- Inability to determine the appropriate insurance premium for various risks
- Becoming ‘over-insured’ or purchasing insurance in nonvital areas
- Innovation leads, regulation follows
The industry will reward firms that take on strategic, high-risk innovations—even if they are separate from the scope of existing regulations.
As the pace of innovation quickens across diverse industry sectors, it is becoming more complex for regulations to keep up. Many businesses and other firms are taking on high-risk innovations as a strategy and reaping the rewards. Increasingly, the rapid pace of innovation is fostering the regulatory agenda.
- Rapid pace of proliferation of innovations
- Growing adoption of new business models, such as sharing-based, freemium, and subscription-based, leading to increased diversity of aspirants
- Industry convergence and indefinite of industry checks
- Deliberate check on the part of regulators so as to allow innovations to gain stream
- Growing investor passion and empowerment
- Lower regulatory risks by educating regulators and harnessing investor and public support
- Function with the industry ecosystem to establish self-regulatory strategies
- Clarify the firm’s risk appetite when evaluating projects that are distinct from the realm of current regulations
- Lowered gains due to investments in projects that operate in legal grey areas that subsequently become disallowed
- Fast-moving interruptive firms can rapidly gain industry share from incumbents before regulations are even put in place
- Undesired publicity from influencing efforts opposed to interruptive start-ups
- Risk becomes a performance enabler
As risks become more measurable and tangible, firms will be better able to determine an accurate upside value for risk—and encourage an appropriate level of risk-taking.
Many leaders are now viewing risks in terms of their potential to foster performance and value. As risks become more measurable and tangible, firms will be better able to determine an accurate upside value for risk—and encourage a desired level of risk-taking behaviour in a bid to balance risks and rewards.
- Focus on innovation and experimentation is creating a culture in which non-success is being viewed as a necessary step to success rather than something to be prevented in any event
- Analytics capabilities are assisting leaders link risk to performance
- New industry technologies such as wearables, image recognition, and AI are improving risk sensing and monitoring capabilities
- Interruptive new business models are fostering the need for increased risk-taking
- Decentralisation is creating flat firms where personnel are empowered and rewarded for taking on risks themselves
- Apply risk dashboards, visualisations, and scenario analysis to empower leaders with data to make risk-informed decisions
- Recognise and reward intelligent risk-taking
- Foster a risk-intelligent culture and empower personnel at every level to take on informed risk
- Exposure to risks beyond desired risk appetite
- Potential ineffective reputation and regulatory actions as a result of taking on excessive risks.
- Inability to correlate performance with risk due to inappropriate tools
- The unified economy requires collective risk management
As businesses engage more deeply with a large number of external investors, including ‘crowds,’ they will rely more heavily on them to identify, manage, and lower risks together.
Businesses and other firms are more connected to one another, and ‘crowds,’ than ever before. They share data, technology, and much more. As a result, they also share more risks. Increasingly, they are managing risk in a manner that reflects this new reality—transforming their risk processes through more open collaborative approaches that rise to the proposals of a unified economy and putting in effort to identify, manage, and lower risk together.
- Businesses operating as unified ecosystems are leading to more dependence on external investors.
- Crowd-fostered and sharing-based initiatives are gaining more acceptance among stakeholders such as investors, personnel, business partners, vendors, and suppliers—leading to new collaborative business model.
- Governments and firms alike are moving toward radical transparency.
- The increasingly ratings-fostered culture implies that promoters, investors, and products/services are all reviewed with increasing frequency—supplying businesses with data for risk analysis.
- Globally distributed business models leave brands more open to physical and virtual risks around the world.
- Apply collaborative practices like gamified crowdsourcing to lower the rate of risk management and improve its effectiveness.
- Form alliances with risk experts, researchers, and academia to stay abreast of the latest risks and mitigation approaches.
- Adopt an ecosystem-led approach for risk management by forming industry-wide partnerships and consortiums.
- Potential for incurring legal rates, regulatory action, and ineffective regulation if sensitive information is disclosed through partners or data sharing portals.
- Results could be unsuccessful if ineffective actors deliberately feed inaccurate data to alter the models.
- Interruption dominates the executive agenda
The constant risk of interruption resulting from emerging technologies, business model transformations, and ecosystem changes will force executives to make significant strategic choices to foster organisational success.
Business leaders are increasingly focusing on risks that could interrupt the fundamental assumptions of their firm’s strategies. Prioritising such risks has become increasingly vital. Yet, they also have the potential to form the basis of game-changing moves for a firm, if handled well.
- Globally distributed business models are increasing dependencies on investors across geographies, making brands more open to geopolitical risks.
- Growing connections between businesses are expanding the sources of potential interruption.
- Advancements in social, mobile, analytics, and cloud-enabled emerging technologies are creating opportunities for start-ups to interrupt incumbents.
- Traditional industries are converging to create new sectors.
- Business model innovation (such as sharing-based, freemium, and subscription-based) is causing firms to constantly reinvent themselves.
- Stakeholders are increasingly expecting more personalised products and services.
- Continuously monitor the changes in the environment to determine which could be truly interruptive.
- Revisit the approach to corporate strategy development to introduce more agility, adaptability, and responsiveness to emerging risks.
- Identify organisational gaps, built-in institutional proposals, and personal preferences of senior management that can affect action.
- Employ tools and techniques such as real-time monitoring, scenario planning, and simulations to foster higher levels of sophistication in managing risk.
- New start-ups and cross-industry players can come across firms with no strategic risk monitoring and identification mechanisms in place.
- Senior management can become overwhelmed by the sheer volume of complex, real-time data, leading to ambiguity and indecision.
- Innovation can be stifled by the firm’s core business assumptions or structural limitations.
10. Reputation risks accelerate and amplify
To thrive in a hyper-connected world dominated by mobile devices, social media, and evolving expectations from society, leaders will proactively address accelerated, amplified risks to their firms’ reputations.
In today’s hyper-connected world dominated by mobile devices, social media, and evolving expectations from society, information can spread quickly. This convergence of mobile and social media is intensifying the effect of reputation risks for firms and is causing them to fundamentally rethink their approaches to risk management and proactively address these accelerated, amplified risks.
- Social media is creating a more connected, unified world where information is rapidly amplified.
- Interruptive mobile technologies are ushering in a new era of hyper-availability in which people are always available and connected.
- An upsurge of socially conscious investors, and growing investor passion, is requiring businesses to be socially responsible and transparent.
- New multichannel promotional strategies built on social platforms allow for greater interactivity for investors and low regulation for brands.
- Globally distributed business models are increasingly dependent on third parties and other stakeholders.
- Develop new capabilities for proactive brand-related event management.
- Continually scan media sources with technology-enabled intelligence capabilities to monitor reputation risk.
- Initiate targeted campaigns and develop an external ambassador program to nurture external brand advocates.
- Foster a more risk-intelligent culture with tools, resources, and training opportunities to assist personnel see the reputation implications of their actions.
- Personal online activity of personnel can cause reputational inefficiency to the firm.
- Firms could be caused to respond to risk events in haste with no full investigation of the situation.