Three simple rules for managing risk in a disruptive environment
EY Global CEO Mark Weinberger recently outlined three focus areas for organizations to more effectively manage risk in an environment increasingly beset by digital disruption and geopolitical risk. Firms should look to analyze risk in real-time, use ‘what if’ scenario modeling to inform future decisions, and utilize cross-disciplinary teams to better navigate compliance ‘grey areas.’
Recent tech business history is littered with companies that were too risk averse, missing out on massive opportunities in the process. Blockbuster declined to buy Netflix in 2000, eventually being destroyed by the company as it transitioned from mail-order DVDs to streaming. Yahoo turned its back on a 2006 handshake agreement to buy Facebook for $1 billion, a move that would have possibly prevented its decline to internet industry has-been.
According to a think piece from EY Global CEO Mark Weinberger, failing to take advantage of these upside risks (i.e. new opportunities) can be the most dangerous risk of all. Just look at Blockbuster and Yahoo. With digital disruption powering the future, seizing transformative opportunities can be the difference between winner-takes-all success and a slide into irrelevance if a company proves to be too slow to take action.
In addition to upside risks, companies also face downside risks (the possibility of something going wrong in the organization), as well as accelerating outside risks of climate change and geopolitical instability. However, Weinberger – who will be stepping down as CEO in July 2019 after leading the firm since 2013 – relates that consultancies like EY now have constantly advancing technology to help companies better manage their risk.
For example, their technology can more accurately forecast risk from advanced data analysis to predict how a decision can impact a firm’s future. “When businesses have a more focused view of these risks, they can feel more confident in their decisions – and help investors and other stakeholders trust that the business knows where it’s going,” says the EY CEO.
Weinberger outlines three rules for risk management in a time of disruption: 1) Analyze risks in real-time rather than looking at old data that takes too long to collect. 2) Model major changes around accurate ‘what if’ scenarios to predict cross-organizational impact. 3) Look at challenges from every perspective.
1) Analyze risk (in real-time)
“Five years ago, it often took at least a month to gather and analyze data from across an organization, so businesses were always looking backward,” Weinberger relates. “Now, we’ve developed tools using advanced analytics and artificial intelligence (AI) that analyze data and predict potential risks in real-time.”
EY’s tools can, for example, instantly see how new regulations affect a firm’s banking and financial transaction and whether they create new compliance issues or increase fraud risk. Those real-time risk solutions have also become more accurate with the addition of machine learning techniques over larger data sets. By adding analysis of oceanic and land weather patterns, as well as other correlated factors like public and school holidays, EY was able to give 20% more accurate pricing forecasts to an energy client.
2) Make us of ‘what if’ modeling
Additionally, risk modeling ‘what if’ scenarios can help clients answer questions about decisions they might make in the future – making those potential moves better informed and rationalized. According the Weinberger, the tools can help firms better chart their strategy, determining whether it’s riskier to open a factory in Michigan or Missouri, or whether robotic process automation adoption would decrease a company’s exposure to compliance issues.
3) Examine risks from multiple angles
With the rapid pace of digital change disruption, many industries emerge faster than the requisite regulations that govern them (e.g. platforms like Uber and AirBnB, drones, cryptocurrency, etc.). When it comes to adopting new digital offerings and examining the risk, large consultancies like EY have the ability to bring in interdisciplinary teams of financial risk, tax, regulatory, and cyber security professionals, as well as lawyers, to offer better answers in compliance grey areas,
Weinberger provides an illustrative example involving a century-old industrial manufacturing client: “They wanted to adapt their operations for the digital age, so we brought together a group of professionals who could visualize and think through all of the different implications that would come with that shift. As a result, we were able to help them implement a governance model that considers the risk profile across their strategic priorities. These changes reduced their exposure as they confidently implement new digital technologies to create a competitive advantage in a rapidly changing market.”
In a future age
As AI and machine learning continues to mature, they will refine risk prediction tools to give more accurate views of the future. According to the EY CEO, that might mean better geological measurement to predict volcano eruption (and preventively switch air or shipping routes), more accurate prediction of cyberattacks from business model analysis, and more precise prediction of political unrest (derived from aggregate polling data) in various markets.
“The potential for this predictive technology is virtually unlimited. If we get it right, we can be more confident about the future than ever before – and help ensure that people trust business to lead them forward,” Weinberger concludes.
