GLOBAL RISK LANDSCAPE 2018 - The innovation imperative - BDO

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GLOBAL RISK LANDSCAPE 2018 - The innovation imperative - BDO
GLOBAL RISK
 LANDSCAPE
      2018
The innovation imperative
GLOBAL RISK LANDSCAPE 2018 - The innovation imperative - BDO
CON T E N TS

04-07
Executive summary

08-09
A hazardous new environment

1 0 -12
The ability to navigate risk

13
Becoming customer-centric

14 -17
The case for innovation

18 -1 9
The innovation-operation dichotomy

20 -2 2
To be innovative and agile

24 -2 5
A culture for success

26
Demographics & methodology
GLOBAL RISK LANDSCAPE 2018 - The innovation imperative - BDO
GLOBAL RISK LANDSCAPE 2018            03

                                 THE
                                 INNOVATION
                                 IMPERATIVE
                                 Foreword by Nigel Burbidge,
                                 partner / global chair,
                                 Risk & Advisory Services, BDO.

PE RFO RM A N C E LE V E L S     The BDO Global Risk Landscape 2018 report        High-performing businesses face a different
E X PL A I N E D                 has captured a defining moment in the            type of risk from mid- to low-performing
                                 evolution of the corporate landscape. The        businesses; for them, “macro” risks are
                                 business world is being transformed in terms     the greatest challenge, and they embrace
H igh performance              of barriers to trade, technology, political      innovation. For low performers, the
 (upper tercile)                alignments and environmental concerns.           capacity to innovate is reduced, and internal
  Business exceeds the           Central banks are beginning to unwind            challenges are the more pressing issue.
  competition across all key     a decade of economic experimentation,
  performance metrics            creating macroeconomic hazards that could        Cultural reform needs to be a longstanding
                                 blindside businesses that are used to the        commitment as businesses seek to become
M
  edian performance             world of zero interest rates.                    more innovative, and the extent to which
 (middle tercile)                                                                 this reform has been successful is broadly
 Business achieves sustainable   Digital businesses that have become de           what we see within the report. Reading
 performance but struggles       facto monopolies in their space are suddenly     its contents, the senior management of
 to eclipse the majority         facing existential threats and challenges that   businesses will need to consider and reflect
 of competitors on key           arise from the very reason they exist – the      upon their own operations.
 performance metrics             capacity to analyse data and provide insights.
                                                                                  Making that happen is fundamentally a
 L ow performance              With businesses in sectors as diverse as         cultural issue, and it may require a firm’s
   (lower tercile)               shipping, automobile manufacture, retail         leadership to accept the discomfort of change
   Business lags behind the      shopping and fund management fighting the        in the short term in order to secure longevity.
   majority of competitors on    disruption from digitally enabled newcomers
   key performance metrics       and innovative incumbents, the ability to        We close this report by asking industry leaders
                                 adapt to the new environment has become a        to consider their businesses’ risk profiles
                                 greater determinant of leadership in industry    going forward by assessing their readiness
                                 than size, or in some cases profitability.       to innovate and their ability to respond with
                                                                                  agility. At a time of increased regulatory
                                 While we have found that innovation and          reform and economic upheaval, there is no
                                 appetite for innovation correlate strongly       doubt that the evolutionary pressures that
                                 with commercial success, it is the risk          threaten the existence of businesses are
                                 environment that makes them so important.        increasing in strength and number.

                                                                                  Complacency has always been a killer for the
                                     Cultural reform needs to                     incumbent enterprise, while sustainability
                                                                                  is the greatest challenge facing a small-to-
                                 be a longstanding commitment                     medium enterprise. If a business is not agile
                                 as businesses seek to become                     right now, it may find that it is not a viable
                                 more innovative                                  business in the medium to long term.
GLOBAL RISK LANDSCAPE 2018 - The innovation imperative - BDO
04    GLOBAL RISK LANDSCAPE 2018

EXECUTIVE
SUMMARY
In a changing landscape of risk,
commercial leaders are the strongest
source of innovation.

The pace of change, triggered by changes in       enough to be able to play a role in making
demand and environment, has caught many           decisions about it in your business.”
business leaders by surprise, threatening their
very existence. Over the past three years, our    As this pressure increases, the business
Global Risk Landscape reports have found          environment has begun to transform from
that competition and an increasingly tough        one of longstanding brands based on physical
trading environment have squeezed margins         infrastructure to increasingly incorporating a
so tight on existing business models that         new set of players that are more flexible in a
something had to give.                            physical and commercial sense.                       B LI N DS I D E RISK S:
                                                                                                       LOW PE RFO RM I N G
Although the range of risks that businesses       Consequently, we are seeing a divide opening         BUS I N ESS ES I N FOCUS
face is familiar, there is a growing schism       up between those businesses that embrace
between the commercial leaders – innovators,      change and actively engage in it, and those
who are more inclined to look at external risks
– and those businesses whose commercial
                                                  that are being forced to change. That gap is
                                                  increasingly obvious when innovation levels
                                                                                                                              100%
performance is weaker, and who are more           are correlated with commercial success.                                     of low-performing
challenged by operational risks. Businesses                                                                                   businesses are
need to innovate, often technologically, in       A DA P T I V E AG I LIT Y                                                   unprepared
order to manage risk. Those that do not will      Businesses that favour agility, meaning the                                 for increasing
face greater competitive pressure in addition     capacity to foster and harness innovation                                   competition
to macro threats.                                 to evolve a business and generate value, are

                                                                                                                              85%
                                                  typically those that are also successful. Within
“From the very large businesses down to the       our research, this notion is supported by the
smallest businesses, digital transformation       finding that 100% of businesses rated by
is adding an additional risk challenge to         respondents as “high-performing” (opposite) also                            of low-performing
                                                                                                                              businesses
board room knowledge,” says Julia Graham,         had a greater appetite for agility. This is often
                                                                                                                              are failing to
deputy CEO and technical director at risk         represented by technology-led transformation.
                                                                                                                              innovate to meet
management association Airmic. “They                                                                                          customer needs
are not expecting the board to understand         For Graham, it is the risk environment itself
everything to do with the digital age. For me,    that drives this phenomenon: “One of the
it is the new finance; you have to understand     top-three risks that I see is the failure to
                                                  innovate and adapt to the opportunities
                                                  presented by technology, because if you don’t
                                                  your competitors will.”

                                                  This selective pressure is echoed by Nigel
    Rules are increasingly                        Burbidge, partner / global chair, Risk &
being built around principles                     Advisory Services at BDO: “If businesses do
                                                  not demonstrate an ability to think outside
designed to futureproof them
                                                  the box, to innovate and to be agile they will
against changes in technology                     get left on the scrap heap of history; they
and commerce                                      just won’t exist.”
GLOBAL RISK LANDSCAPE 2018 - The innovation imperative - BDO
GLOBAL RISK LANDSCAPE 2018             5

The two areas of risk that have increased most       push against the barriers of existing regulation,   I N N OVAT I N G C H A N G E
since 2017 – supply-chain and environmental          authorities pull them back after corporate          Businesses that are medium- or low-
risk – are reflective of the wider risk              commitments have been made. Rules are               performing often face internal struggles as
environment. Politically, trade barriers are going   increasingly being built around principles          they attempt to build operations that match
up and environmental challenges are increasing.      designed to futureproof them against changes        the rest of the industry. The risks they face
                                                     in technology and commerce.                         typically concern resources and competition,
The importance of agility reflects the                                                                   requiring them to focus on the process of
changing patterns of behaviour among                 That creates a tension between innovation           change and the management of stability
customers at not only retail and corporate           and the commercial imperative. Our research         without creating inertia. To begin to move
levels, but also in terms of the capacity of         found that the primary impact of innovation         forward, these businesses must understand,
businesses to manage both external risks             for high-performing businesses is on their          first, their current state and the challenges
and operational risks. Online information            customer-centricity. This reflects their need       it creates, and, second, where they must get
and accessibility to business counterparties         to innovate in order to grow and strengthen         to. Finally, they must develop a strategy that
has pushed competitiveness levels up the             existing customer relationships. Failure to         will effect positive change.
curve across industries, while new ways              innovate – even due to a regulatory barrier
of developing and delivering products are            – means that business can be lost. It may           The barriers to change can be financial or
challenging supply chains, geography and             move to a competitor with an alternative            cultural, but inevitably they stem from senior
legal frameworks.                                    model, or even to a different jurisdiction in       management. Hesitancy about beginning a
                                                     the 24/7, global business environment. As a         change programme – 46% of businesses say
For business leaders, this can create additional     result, it must be considered a critical risk to    their strategy is only at the planning stage
pressures. As their innovations lead them to         the business.                                       – can have serious long-term consequences

100% 91%
 f high-performing
o
businesses have appetite
                                                       f high-performing businesses
                                                      o
                                                      have elevated innovation on the
                                                                                                         #1
                                                                                                          impact of innovation for
                                                                                                           high-performing businesses:
for greater agility                                   boardroom agenda                                     customer-centricity
GLOBAL RISK LANDSCAPE 2018 - The innovation imperative - BDO
06      GLOBAL RISK LANDSCAPE 2018

for the viability of the business. The                   The greatest challenge that all businesses
challenge here is to understand which path               face is understanding how the customer, as
to follow when change is occurring at such               an agent of change, will affect its future way
a rapid pace.                                            of operating. Therefore, innovation must
                                                         allow a business to support the feedback
A serious risk is that change begins to unfold           loop with its customer base, and to push that
at uneven speeds within the business, and in             information into the change process.
different directions. If several definite futures
are targeted by teams that lack a single,                It is tempting for business leaders to look
unifying vision, the business will not move              at their businesses in the abstract, or
as one. Rather than guessing at the future,              to look at other businesses’ models for
the safest option is to become futureproofed             guidance. In fact, to adapt culturally, a
through agility, enabling a business to cope             business needs to engage at the front line
with all possible futures and leaving the                with customers and guide its operational
legacy models behind.                                    teams with aspirational goals, so that its
                                                         future model can be built into its DNA as
There is a tension between the organisational            a business. Embedding this process within
effectiveness of a business and the level of             the culture of a business determines an
innovation it can commit to; it must at some             inherent direction of travel in strategic
point fix processes in order to achieve efficiency       and tactical decision-making that can
and generate a return on the investment it has           accelerate the process of change – but,
made. Risk is not only a source of innovation –          most importantly, ensures that it is
it can stem from innovation.                             consistent across the business.

LE V E L O F FU T U RE PROO FI NG
% of respondents

       16%                         30%                        26%                        28%

No current strategy           Strategy for future        Futureproofing in          Futureproofed
for futureproofing            proofing in development    process – my business      – my business has a
– my business has an          – my business has          is in the process          sustainable business and
outmoded business and         identified a sustainable   of implementing a          operational model in
operational model and         business and operational   sustainable business and   place and has invested in
technological upgrade is      model and has defined      operational model and      the right technology to
still at the planning stage   a strategy for upgrading   upgrading technological    ensure long-term success
                              technological capability   capability accordingly
GLOBAL RISK LANDSCAPE 2018 - The innovation imperative - BDO
GLOBAL RISK LANDSCAPE 2018 - The innovation imperative - BDO
8     GLOBAL RISK LANDSCAPE 2018

A HAZARDOUS
NEW ENVIRONMENT

In an increasingly pre-emptive                Change can create instability. In the reactive        Developing agility requires businesses to
                                              model of regulation, governments respond              have already engaged in the process of
regulatory landscape,
                                              to instability with regulation. However,              innovation in order to give them options
regulation produces the most                  the pre-emptive model of regulation is                that other businesses do not have.
powerful blindside risk.                      increasingly common as authorities seek
                                              to manage the changing world in order to              Given the current regulatory environment,
                                              prevent instability.                                  it is perhaps no surprise that regulatory
                                                                                                    risk is seen as the greatest blindside risk
                                              The European Union (EU) does this out of              by all respondents across geographies and
                                              necessity, as it harmonises rules across its          industries, jumping one place since 2017.
                                              member states in order to form a single               Authorities have the capacity to change the
                                              market for different industries. Single               way a business can engage with its clients,
                                              jurisdictions, such as the United States              the costs of doing so, and the costs of
                                              and China, move towards pre-emptive                   engagement ahead of the emergence of any
                                              regulatory models where they see the                  real-world concerns.
                                              potential for negative disruption, for
                                              example with crypto-currencies.                       Even for respondents classifying
                                                                                                    themselves as “futureproofed”, this
                                              Risks that cannot be predicted – blindside            external risk factor was seen as a major
                                              risks – cannot be prepared for. The only              concern, representing the highest risk for
                                              capacity a business can use to respond                66% of respondents.
                                              to blindside risk is its capacity to change
                                              the way it operates at speed: its agility.            The movement of “people” as a blindside risk
                                                                                                    moved from 14th into the top ten, at seventh
                                                                                                    place, which is also reflective of the pace of
                                                                                                    change, and of the potential for businesses
                                                                                                    to find themselves without the right skills to
                                                                                                    manage in a transformed environment.
#1 B LI N DS I D E RISK S BY LE V E L O F FU T U RE PROO FI N G
% of respondents                                                                                    Macroeconomic developments – the
                                                                                                    second-highest-scoring concern across all
                                                                            Macroeconomic           respondents, up from third-highest in 2017
                                                                            68%
                                                                                                    – can likewise have an existential impact
          Failure to        Increased      Technological Increased                     Regulatory   upon a business, particularly as new trade
          innovate          competition    changes       competition                   risk
                                                                                                    agreements and barriers are established.
          100%              100%           100%          76%                           66%
                                                                                                    Recent cases in point include the imposition
                                                                                                    of tariffs upon imports of metals into the
                                                                                                    US and the renegotiation of Britain’s trading
                                                                                                    arrangements with the EU.

                                                                                                    These direct measures not only affect
                                                                                                    specific businesses; the consequences
                                                                                                    for other trading arrangements can have
                                                                                                    major knock-on effects. These might range
                                                         E

                                                                       SS

                                                                                     D

                                                                                                    from impacts on other trade agreements
                                                      AC

                                                                                  FE
                                                                   RE
                       AN

                                                                                 O
                                                   PL

                                                                                                    and changes in economic status through
                                                                   G

                                                                              O
                       PL

                                                                  RO
                                                 IN

                                                                             PR

                                                                                                    to the creditworthiness of industries and
                   O

                                                              -P
                                              AN

                                                                            RE
                   N

                                                             IN

                                                                        TU
                                            PL

                                                                                                    entire countries.
                                                                       FU
GLOBAL RISK LANDSCAPE 2018 - The innovation imperative - BDO
GLOBAL RISK LANDSCAPE 2018                  9

TO P 10 B LI N DS I D E RISK S
% of respondents

 Regulatory risk                                                                                                                                     62%
 Macroeconomic developments                                                                                                                       60%
 Environmental                                                                                                                             56%
 Supply chain                                                                                                                            53%
 Geopolitical                                                                                                                        52%
 Increasing competition                                                                                                              52%
 People                                                                                                                            49%
 Computer crime / hacking / viruses / malicious code                                                                    43%
 Failure to innovate / meet customer needs                                                                              42%
 Capital / funding                                                                                                 40%

The competitive pressure that medium- to               Agility can assist in reducing the impact of       The key thread uniting all of these factors
low-performing businesses report as a major            macroeconomic effects. Whilst most direct          is the element of change relative to other
risk is reflected in the move of “increasing           impacts are typically sectoral, they can also      businesses. If businesses are facing a
competition”, which has jumped three places            affect elements of service and product. It is      hostile environment, their key advantage
in the ranking, from ninth to sixth place.             thus possible for a sector leader to anticipate    will be in responding to that environment
                                                       such effects ahead of competitors, and to          more effectively than the competition,
Supply-chain risk – one of the two biggest             optimise client relationships and costs to         and – regardless of specific environmental
climbers since our 2017 survey results – is            better suit the new world order.                   factors – without significantly
naturally affected by the macroeconomic                                                                   increasing their costs as they do so. The
environment. The breakdown of free trade               While ranking lower on the list of fears for all   institutionalisation of greater business
agreements as Britain leaves the EU, the               respondents, and in sector-specific analysis,      agility should be understood not only as a
renegotiation of the North American Free               greater competition, technological changes         response to the risks reported, but as a key
Trade Agreement, and the imposition of tariffs         and a failure to innovate stood out as the         strategy for securing the future success of
such as those affecting steel imports into the         most pressing concerns for businesses that         a business.
US are creating tensions. The other highest            did not see themselves as futureproofed.
climber – environmental risk – owes its
increased salience to an ever-increasing tide of
concern about pollution and climate change.
                                                       #1 B LI N DS I D E RIS K BY S EC TO R
“Even looking at economies like China,
which historically was relatively polluted,
we see significant changes,” says Burbidge.
“There is an increasing recognition amongst
governments and a lot of consumer groups
that we only have finite resources.”
                                                              Geopolitical                                        Environmental

                                                       Financial          Private         New Energy       Healthcare     Manufacturing         Natural
                                                       Services           Equity        and Environment                                        Resources

     If businesses are facing a
hostile environment, their key
advantage will be in responding
                                                                      Regulatory risk                     Increasing competition           Supply chain
to that environment more
effectively than the competition
                                                       Leisure and      Professional          TMT              Real Estate                     Retail and
without significantly increasing                       Hospitality        Services                          and Construction                   Wholesale
their costs as they do so
GLOBAL RISK LANDSCAPE 2018 - The innovation imperative - BDO
THE ABILITY
TO NAVIGATE RISK

                                                   FO RREST E R B RE A K S AG I LIT Y DOW N
Strategic rather than                              I NTO T H RE E M A I N C AT EGO RI ES:
                                                                                                   Software innovation
                                                                                                   Ability for real-time experience and
tactical thinking is the key                                                                       continuous, incremental development
to agility in innovation.                          MARKET (CUSTOMERS):
                                                                                                   Sourcing/supply chain
                                                   Market responsiveness                           Agile sourcing processes and supply-chain-
                                                   Detailed knowledge of customer preferences      flexing skills
If you are leading a shoal of fish, you            and ability to predict their needs
navigate the environment to ensure your                                                            When respondents were asked to assess
survival. Within the shoal, survival is            Channel integration                             their own attainment across these
determined by the guidance of the leaders          The ability to share information and deliver    dimensions, they corresponded clearly with
and the size of the shoal.                         consistent experiences across channels          performance levels (see Fig 02).

Innovation is the capacity to react to             ORGANISATIONAL                                  When Steve Jobs visited Xerox’s famous
evolutionary pressure; the actual reaction         (PEOPLE AND CULTURAL):                          Palo Alto Research Center in the late 1970s
is determined by its agility. Tesla spends                                                         – as part of a deal that included Xerox
around twice as much on R&D as other               Knowledge dissemination                         taking shares in Apple – he saw technologies
car manufacturers as a proportion of sales         Knowledge is shared accurately and              that would later make Apple a revolutionary
(approximately 12%, according to Bernstein         efficiently, creating a unified understanding   personal computer business. By the time
research). However, this amounts to around         across the organisation                         Apple launched its MAC computer in 1984,
€1 billion a year, whereas VW has the                                                              Xerox had still not commercialised these
greatest annual R&D spend in the business,         Digital psychology                              technologies, due to its focus on the copier
at €14 billion – some €6 billion more than         High trend awareness and digital skill sets     and printer industry. It is a case study
second-placed General Motors.                      exist across the organisation                   often recited as a warning to innovators,
                                                                                                   but contains elements that illustrate the
In September 2017, VW delivered plans              Change management                               challenge of transforming operational
to be the largest manufacturer of electric         Culturally receptive to change, and with        excellence into innovation.
cars worldwide by 2020, fighting through           embedded change-management capability
its pollution scandal to deliver record sales                                                      “You have the innovators in one place,
in 2017. By contrast, rival PSA, which own         PROCESS (IT AND SYSTEMS):                       and they are valued for innovation,”
Citroën, DS, Opel, Peugeot and Vauxhall,                                                           says Burbidge. “But then the good ideas
expects to be producing solely electric            Business intelligence                           must get captured and pulled into the
models only by 2025.                               Robust information management and               mainstream part of the business to be
                                                   distributed analytics                           delivered and grown. Whilst the
Analyst firm Forrester defines business agility                                                    innovators are still coming up with the
as “the quality that allows an enterprise to       Infrastructure elasticity                       new ideas, they are not necessarily in
embrace market and operational changes as          High cloud awareness and embracement of         control of that business; they are a part
a matter of routine”. Returning to the shoal       cloud options                                   of a team. The problem is that they do not
metaphor, a business that is not innovative                                                        always mix very well. Like oil and water,
is stuck in the centre of the shoal; it can only   Process architecture                            someone has to keep stirring the pot to
see and respond to its competition, not to         Developed process skills and core system        keep the components in suspension with
pressures that threaten them all.                  independence                                    each other.”
GLOBAL RISK LANDSCAPE 2018                   11

B E N E FITS O F AG I LIT Y                                                                                                                   Fig 01

% of respondents

       68%                        51%                        41%                 35%                      26%                    23%

 Improved customer         Greater process /           Faster product       Competitive                 Improved            Ability to act on
   satisfaction and         cost efficiency               delivery         differentiation            collaboration        new opportunities
      retention                                                                                                                   faster

                                                                                                                                              Fig 02
AG I LIT Y BY PE RFO RM A N C E

   High performance             1 = Low agility – limited awareness / understanding          3 = Agile – high awareness / understanding but
                                and no ability to execute                                    limited ability to execute
   Median performance
                                2 = Moderate agility – moderate awareness /                  4 = High agility – high awareness / understanding
   Stable performance           understanding but limited ability to execute                 and proficiency in execution

                                                                                                                         90%
                                                         Market
                                                     responsiveness
                                                             3.5

                          Sourcing                            3.0                 Channel                                 believe agility
                        supply chain                                            integration                               would enable them
                                                              2.5                                                         to respond to the
                                                                                                                          risk of changing
                                                              2.0
                                                                                                                          market conditions
                                                                                                                          more effectively
                                                              1.5

     Software                                                 1.0                                     Knowledge
    innovation                                                                                       dissemination

                                                                                                                         100%
                                                              0.5

                                                              0

                                                                                                                           f high-performing
                                                                                                                          o
                                                                                                                          businesses have
     Process                                                                                          Digital
   architecture                                                                                     psychology
                                                                                                                          appetite for
                                                                                                                          greater agility

                     Infrastructure
                        elasticity
                                                                                 Change
                                                                               management
                                                                                                                         13X
                                                                                                                          more likely to be
                                                        Business                                                          highly agile if a
                                                      intelligence                                                        futureproofed
                                                                                                                          business versus one
                                                                                                                          with no strategy
Based on Forrester's The 10 Dimensions Of Business Agility model
12     GLOBAL RISK LANDSCAPE 2018

Clearly, there is a strong correlation
between commercial success and agility.
Of the businesses involved in the research,
100% of high-performing businesses had
an appetite for greater agility. By contrast,
64% of low-performing businesses
                                                REFOCUSING
                                                RISK
displayed the same appetite. Yet there are
risks for businesses even if they have been
agile up to this point.

According to Chris Haley, head of New
Technology and Start-up Research at             Businesses that demonstrate agility             If a business’s leadership is struggling to
Nesta, “Over time, there is a natural           are typically also those tackling risks         make a business function as it ought to, it
tendency for [businesses’ processes             imposed by the wider environment. They          will have little capacity to lift its eyes to
to become] more streamlined and                 do not have to fear the capabilities of         the road ahead. Likewise, businesses that
better adapted to exploit the ordinary          their rivals, and instead are focused on        are looking ahead need to have confidence
opportunities towards which the firm            the dynamics that exist beyond the scope        that they can react to both the threats
is focused, which inevitably means less         of their competition that nevertheless          and opportunities that they see.
flexibility for new or extraordinary            determine the viability of a business.
situations. Changing this is hard, and                                                          Agility is dependent upon innovation:
typically means either breaking some            On the other hand, those businesses             a business needs to have a creative
existing processes, or else side-stepping       that are lacking agility are focused on         element if it is to change in line with the
them through the creation of new units.”        localised risks, for example, failing to        business environment; but it must also
                                                meet customer needs. The key difference         allow its management to concentrate
Across all industries, the key benefit of       between the two types of business is the        on leading the business forwards on the
agility was perceived to be improved            level of strategic vs tactical engagement       field of play, instead of trying to get it in
customer satisfaction and retention (68%),      required by senior management.                  shape for the game.
followed by greater process / cost efficiency
(51%) and faster product delivery (41%).
In the on-demand, 24/7 environment in
which digital businesses operate, real-time
responsiveness can make the difference
between fulfilling an order and enabling a
transaction, or presenting a barrier to the
                                                TO P T H RE E B LI N DS I D E RIS K S BY AG I LIT Y
customer that puts them off your business.
                                                % of respondents
Whereas the thought leaders in industry
have taken the philosophy of “customer-
                                                L AC K I N G AG I LI T Y                                   D E M O N ST R AT I N G AG I LI T Y
centricity” to heart, the commercial            (av. agility score 2.5/4)
leaders have managed to operationalise
that concept by investing in innovation.
The opposite of agility is bureaucracy,         Increasing competition                                                           Regulatory risk
which stifles the ability of businesses to      44%                                         1                                             35%

respond to customer demands.

For Dr Angus Young, senior lecturer at
the Department of Accountancy and               Failure to innovate /
Law at Hong Kong Baptist University,            meet customer needs                                                               Environmental
                                                38%                                                                                       31%
“The important thing is to get the entire                                                   2
organisation engaged, from the back all
the way to the front line.

“The problem with bureaucracies is that         Computer crime / hacking /
they only care about the work that is           viruses / malicious code                                                            Geopolitical
                                                37%                                                                                       27%
done at their level. So if frontline staff                                                  3
are trying to be flexible, that will not
succeed if work is then filtered through
a bureaucratic department. They must
have the freedom to act on decisions
that have been made.”
GLOBAL RISK LANDSCAPE 2018             13

BECOMING
CUSTOMER-CENTRIC

The future belongs to             Customers buying anything, from                       The evidence is clear that, while all businesses
businesses that embrace the       mortgages to wholesale timber have,                   found that changing customer behaviour
                                  directly accessible to them, a world of               means that a successful innovation strategy
new power of the customer         data, which did not exist even 15 years ago,          is critical to staying competitively relevant,
in a global, direct and           and which fundamentally influences the                this priority was stressed most forcefully by
                                  choices they make between suppliers.                  medium- and high-performing businesses.
transparent marketplace.
                                  Often, they also have direct access to suppliers.     Third, fast reaction makes for better service. A
                                  For old-fashioned providers of goods and              business must be aware of the potential financial
                                  services, this is a fundamentally disconcerting       returns that can be gleaned from innovation,
                                  level of face-to-face contact. It is not optional,    and of the need for agility in bringing it to the
                                  and it cannot be obfuscated. If you do not offer      forefront of the business. Respondents said that
                                  a decent price and a good service, it will be         the greatest benefit of agility was improved
                                  obvious to your customer base.                        customer satisfaction and retention.

                                  Some firms have embraced this. In China,              As Dr Young noted, “The staff should not
                                  for example, tech conglomerate and online             be trained to rely on familiarity and long-
                                  marketplace Alibaba has used its customer             established practices as part of their job.
                                  data to support a fund-management offering,           Training should be about helping staff to
                                  moving directly into a new industry through           think about customer or user experience.
                                  the innovative use of its strength to support         With this in mind, innovation includes
                                  diversity of products and services.                   ensuring that all customers have a positive
                                                                                        experience when dealing with the staff and
                                  The marketplace is global, direct and                 the business’s products or services.”

#1
                                  transparent. This has three effects on
                                  competition.                                          Among high-performing businesses,
                                                                                        customer-centricity and competitive
benefit of agility:               First, building the capability to interact with       relevance were also seen as being far more
improved customer                 customers on their own terms is crucial. If           important than efficiencies around cost and
satisfaction and retention        your business is accessed online, via mobile          processing, which were picked out more often
                                  or via social media, you need to manage that          by medium- and low-performing businesses.
                                  function. Poor service at the front-end can

#1
                                  lead very quickly to frustration and reduced          When these results are placed in context,
                                  confidence in the rest of the organisation.           it becomes clear that high-performing
                                                                                        businesses seek to identify environmental
                                  Second, businesses must be aware of                   factors that will impact their business, and
 ositive impact of innovation
p
for high-performing businesses:
                                  their clients and their competition. Senior           adaptations that will support them in reacting
customer-centricity               management must therefore be plugged into             to those factors. They are thus both far more
                                  a feedback loop from the front office and             attuned to their customers, and therefore able
                                  externally facing parts of the business, which        to become the provider that their customers
                                  guide product and service delivery. That is not       want to see, ahead of the competition.

70%
                                  to say a business should simply react to current
                                  client demand, since, by the time demand              Low-performing businesses are focused
                                  reaches critical mass, it can already be too late     on their rivals and on their own internal
                                  to service. In order to lead the field in any given   operations, and are therefore exposed to
 f high-performing businesses
o
feel changing customer            industry, a business has to anticipate demand         larger risks – macroeconomic and regulatory,
behaviour makes a successful      by reacting to the early signs of change, using       for example – that they can only infer, but do
innovation strategy critical      data to build a picture of trends in behaviour.       not observe directly.
14    GLOBAL RISK LANDSCAPE 2018

THE CASE
FOR INNOVATION
Innovation, driven by commercial leadership,
requires the repurposing of already familiar
resources in new ways.

For a business, innovation is evolution,         The third horizon is seen as a “successor” to
and, like evolution, its pace is determined      incumbent business, offering new ways of
by the pressure to change set against the        working that arise from activity within the
potential for change. In the past, scale and     second horizon, which functions as a bridge
heritage guaranteed resilience; but today        between the first and the third.
the most sought-after trait is the ability to
adapt and innovate.                              In 1981, Michael Bloomberg spent his
                                                 severance from Salomon Brothers building

                                                                                                  93%
The pressure to change can have myriad           a new business, Innovative Market Systems
sources. Among our respondents, 93%              (IMS). Although his business did not invent
believe that the disruptive impact of            technology, it innovated using available
regulation means that a key contributor to       technologies that activated the potential        believe that the
                                                                                                  disruptive impact of
staying competitively relevant is a successful   for change, and thereby created a new way
                                                                                                  regulation makes a
innovation strategy. The other major             of supplying the data that capital market
                                                                                                  successful innovation
blindside risks highlighted on p.12 each also    traders needed. Rival Merrill Lynch invested     strategy key to staying
contribute to evolutionary pressure.             in the business, now named Bloomberg             competitively relevant
                                                 LP, which was founded with the aim of
If each generation of business leadership        improving the customer’s ability to perform.
represents a new evolutionary cycle, then
businesses should be aware of the differences    Throughout the history of industry,
between these cycles, as they will correlate     businesses that have developed new ways
with levels of innovation.                       of working have succeeded in changing their

“Innovation is required. It is a must, a
basic ingredient for corporate success,”
                                                 industries, often outpacing incumbents with
                                                 greater resources, as Apple did with respect
                                                 to Sony in the process of digitalising the
                                                                                                  50:50
                                                                                                  split on new market
says Dr Young.                                   retail music business.                           entrants making
                                                                                                  a successful
Defining innovation is crucial. It is not the    In such cases, innovation can materialise        innovation strategy
same as invention in the sense of a scientific   as a result of the technological capacity        key to staying
breakthrough, but rather the repurposing of      to deliver new service models and the            competitively
familiar tools to support a new way of acting.   commercial imperative to make things easier      relevant
The authors of the seminal book The              for the customer.
Alchemy of Growth outlined the three-
horizons model for identifying how systems       While it serves the interests of customers,
change. In this model, the dominant              innovation can also be disruptive to the wider
system at present is the first horizon,
reflecting incumbent and stable systems.
The second horizon represents ongoing
innovation and the potential futures it
creates, with many possible outcomes. These
                                                                                                  68%
                                                                                                  of businesses
include the absorption of innovation into
existing models by changing the first horizon,
                                                      To truly innovate, a business must invest   have increased
                                                                                                  prioritisation of
and the creation of new innovative models        in the people and culture necessary to build     innovation on the
of working.                                      innovation into the core of its operations       boardroom agenda
GLOBAL RISK LANDSCAPE 2018                15

                                                                                                                    evolutionary pressures have increased the
                                                                                                                    pace of change substantially over the past
                                                                                                                    two decades. As Burbidge says, “All of these
                                                                                                                    things are happening so quickly that the
                                                                                                                    traditional business models and norms that
                                                                                                                    existed for many years just cannot be taken
                                                                                                                    as read any more.”

                                                                                                                    Among respondents to the research, 81%
                                                                                                                    found that the speed of technological
                                                                                                                    change means that a successful innovation
                                                                                                                    strategy is critical to staying competitively
                                                                                                                    relevant. A real risk for businesses that do
                                                                                                                    not innovate is that they will be left behind
                                                                                                                    by the competition, or that the changing
                                                                                                                    environment will render them obsolete.

                                                                                                                    “If you look at the retail businesses and
                                                                                                                    traditional high street businesses, they are
                                                                                                                    being crucified by e-retailers,” says Burbidge.
                                                                                                                    “That’s having an impact not just on the
                                                                                                                    retailers themselves, but also the businesses
                                                                                                                    owning properties in the high street. They
environment, including competitors and                   Equally, self-driving electric cars are                    are in for a long-term play and have to
regulators, and the flows of information and             transforming a model that had been                         assess what they are going to use these
value that surround them. When innovation is             stable throughout the 20th century. While                  premises for in the future.”
disruptive, it can appear to share characteristics       there have been several reported deaths
with “instability”, which regulators typically           from accidents involving self-driving cars,                However, the respondents were split 50:50
seek to avoid by imposing rules.                         proportionately many more have resulted                    over the extent to which new market
                                                         from accidents caused by human error.                      entrants were driving innovation. One
Innovation can therefore trigger evolutionary            As a result, lawmakers need to consider                    can see that incumbent businesses are
pressures by itself. Examples of this                    a balance between actual safety and                        able to take their operations and deliver
include the legal cases brought against “gig             perceived safety based on the growing body                 an enormous change if they can become
economy” businesses such as Deliveroo                    of statistical evidence.                                   innovative. Businesses have done this in
and Uber, which saw challenges to the legal                                                                         the past by reinventing their business, as
definition of freelance employment as it                 Both cases represent a key challenge                       Apple did, branching out of computer
relates to workers’ rights.                              for industry today; new technology and                     hardware and proprietary software to

BOA RD ROO M PRIO RIT ISAT IO N O F I N N OVAT IO N BY PE RFO RM A N C E LE V E L
% of respondents

    We are not particularly        We are aware of it but prioritise     It is becoming increasingly evident that          It is now top
    worried about this             other issues at the moment            we have to make this a key priority               of the agenda

High
performance               1%     8%          54%                                                                        37%

Median
performance               2%      26%                                  47%                                                            26%

Low
performance               6%            50%                                                                 37%                                             7%

Average                   3%        29%                                  46%                                                               23%
16     GLOBAL RISK LANDSCAPE 2018

deliver platform-independent software, an
online music marketplace and a dominant
smartphone brand.

Investing in innovation can deliver a
much stronger upside than making capital
investments. Analysis has found that
businesses that invested in R&D in advanced
economies over the past 50 years have
been well rewarded in terms of commercial
success. One study found that the rates of
return from R&D were “positive in many
countries, and usually higher than those to
ordinary capital”, reaching 75% in some cases,
while the social returns were “almost always
estimated to be substantially greater than the
private returns”.

Investment must be more than financial.
To truly innovate, a business must invest in
the people and culture necessary to build
innovation into the core of its operations.
That will allow it to develop with a clear

    Innovation is required. It is
a must, a basic ingredient for
corporate success
D R A NGUS YOU NG

TO P T WO G RE AT EST POS IT I V E I M PAC TS O F I N N OVAT IO N
By level of futureproofing
% of respondents

  NO CURRENT STRATEGY                          STRATEGY FOR               FUTUREPROOFING               FUTUREPROOFED
  FOR FUTUREPROOFING                           FUTUREPROOFING             IN PROCESS
                                               IN DEVELOPMENT

      58%             57%                        60%         58%           63%         60%             65%          61%

    Market           Cost /                   Cost /      Competitive   Customer-       Cost /      Customer-    Competitive
  expansion /       process                  process       relevance    centricity     process      centricity    relevance
  penetration     efficiencies             efficiencies                              efficiencies
GLOBAL RISK LANDSCAPE 2018               17

                                                   Among high-performing businesses,                  In short, a business must have a top-down
                                                   innovation has been pushed up the priority         strategy that guides innovation internally.
                                                   chain to board level, so that 37% see it           It must be conscious of the external
                                                   as a top priority, far more than among             factors that are driving it to change, and
                                                   medium-performing (26%) and low-                   the possible mechanisms – technological
                                                   performing (7%) businesses. Over half of           or otherwise – that will facilitate
                                                   low-performing businesses prioritise other         innovation. It must also ensure that its
                                                   dynamics at present.                               purpose and strategy is disseminated
                                                                                                      across the organisation, in order to keep
                                                   Senior management buy-in is fundamental            the whole business moving in a single
                                                   in creating momentum to innovate, but              direction and at a constant speed, thus
                                                   other elements are needed to control the           avoiding internal disruption.
                                                   direction in which the business travels. There
                                                   is no consensus among market participants          The risks of failing to innovate are high; such
                                                   as to the key drivers for innovation; 67%          a failure can demote a business into the
                                                   feel that changing customer behaviour              second tier, or even render it redundant. But
                                                   renders a successful innovation strategy           innovation needs to be carefully managed
                                                   critical to remaining relevant, but a third of     and controlled, not simply unleashed and
                                                   respondents dismiss its impact.                    left to itself.

                                                   POS IT I V E I M PAC T O F I N N OVAT IO N BY PE RFO RM A N C E LE V E L
                                                   % of respondents

                                                     High                Median        Low           Average
                                                     performance         performance   performance

                                                   Cost / process efficiencies
                                                                                                                                52%
                                                                                                                                                  62%
                                                                                                                                           57%
                                                                                                                                           57%

                                                   Customer-centricity
                                                                                                                                                       64%
                                                                                                                                            58%
strategic direction, and therefore move                                                                                       49%
effectively towards a shared goal.                                                                                                         57%

                                                   Competitive relevance
The drivers for a particular business are likely
                                                                                                                                                 60%
to be determined by what type of business it
                                                                                                                                52%
is. Among both high- and medium-performing
                                                                                                                                          56%
businesses, customer-centricity is perceived                                                                                              56%
as one of the greatest benefits of innovation,
while efficiency and competitive relevance         Market expansion / penetration
are shared as the most positive impacts by                                                                                      52%
businesses at all performance levels.                                                                                          51%
                                                                                                                                          56%
                                                                                                                                    53%
Projects can be instigated that combine these
elements, though there is also a risk that         Brand / reputation
projects will move in different directions or                                                             37%
at different speeds.                                                                                             41%
                                                                                                                        46%
Nevertheless, we can deduce some positive                                                                         42%

outcomes from the results themselves.              Profit
One in five futureproofed businesses                                                                 34%
prioritise innovation, compared to one in ten                                                          36%
businesses that have no current strategy for                                                             37%
futureproofing – a strong correlation.                                                                 36%
THE INNOVATION-OPERATION
DICHOTOMY

Is it innovation or operational effectiveness that
is more important in ensuring business success?
GLOBAL RISK LANDSCAPE 2018              19

The challenge in testing new ideas is that        This polarisation of industry can be                   doesn’t make money in that period, you are
it takes time, and that requires a business       necessary where viable disruptive                      throwing your money down the drain.”
to commit to a model for a fixed period in        activity must avoid being crushed by the
order to prove the idea. This is not a matter     competitive weight of larger businesses,               Consequently, senior management need to
of mere theory. For every Google there is a       and where those businesses are to identify             develop a mechanism in which money can
Theranos, and that creates real risk.             future opportunities for growth without                be invested in some of these businesses
                                                  risking instability.                                   in such a way that an investor can see
“What is the best way of managing a business                                                             a return over a much shorter timescale,
so that on the one hand it’s innovative, it’s     A potential challenge to this model in the             so that they consider an investment
agile, but on the other hand it has sufficient    future is that the pace of change may mean             worthwhile, retain their capital, and thus
controls sitting around it in terms of            that innovation risk affects the viability of          resolve the dichotomy. Without that, not
governance, that doesn’t frighten investors       the governance/investment cycle.                       only will funding be lost, but industry will
off?” asks Burbidge. “The market is yet to come                                                          suffer as the pipeline of innovation dries
up with a wholly satisfactory answer to that.”    “Historically, a new idea and a new product            up, weakening agility in turn.
                                                  could grow a business to a certain size,
The question is: How much resource should         and it would float on the stock market,”               “Innovation invariably involves risk,” says
a business commit to innovation as against        notes Burbidge. “That business would have              Haley at Nesta. “Even when an innovation
existing business practices when investors        75 years of life in it. These days, instead            is ultimately successful, there are often
need to see the sorts of returns that             of 50 or 75 years, you might be putting                measurable short-term decreases in
stem from operational success? Among              money into a business that might have a                performance as the business first adapts to
respondents to the research, half saw a           five- or seven- or eight-year lifecycle. If it         the new way of doing things.”
balance between operational effectiveness
and innovation as central to their business’s
success. Among businesses that thought
one was more important than the other, the        T H E I N N OVAT IO N - O PE R AT IO N D IC H OTO M Y
majority identified operational effectiveness     % of respondents
as the higher priority.
                                                        11%                    27%                 47%                  12%                  3%
This dichotomy partly reflects the
maturity of a business. In many
industries, smaller start-ups are able
to provide the “creative” element
to establishing functional business
models. In the pharmaceutical industry,
there are many smaller businesses
whose innovations are taken up and
industrialised by the pharma giants. In
finance, smaller “fintech” start-ups are
developing everything from the bitcoin
transaction infrastructure to online-
only banking models that build loyalty             Operational            Operational         Innovation and       Innovation is      Innovation is far
through social media activity. Meanwhile,          effectiveness is far   effectiveness is    operational          more important     more important
the incumbent banks support these                  more important         more important      effectiveness are    to the success     to the success
                                                   to the success of      to the success of   equally important    of my business     of my business
enterprises with innovation labs through           my business than       my business than    to the success of    than operational   than operational
funding and guidance.                              innovation             innovation          my business          effectiveness      effectiveness
20     GLOBAL RISK LANDSCAPE 2018

TO BE INNOVATIVE
AND AGILE
The balance between energetic innovation
and consistent delivery requires strong,
strategic leadership.

Resilience is the characteristic that businesses                          each other; 32% of respondents cite internal
strive for, and achieving it demands a careful      TO P BA RRI E R S     governance and bureaucracy as the most
balance of different capabilities, without any      TO SUCC ESSFU L       significant barrier in both cases.
one becoming too dominant.                          I N N OVAT IO N
                                                                          The size of a business can play a role here,
“Resilience depends on many things, including       % of respondents      as well; the checks and balances that allow
the ability to adapt and innovate,” says Haley.                           management to control a large business
“In many areas of life, efficiency and resilience    Internal             effectively, and impose strong governance to
are opposed; that is to say, squeezing               governance           create transparency in relation to executive
                                                     and bureaucracy
redundant systems and unused capacity may            32%                  behaviour, creates risks in the context of
improve efficiency, but often reduces one’s                               agility. They can constitute bureaucratic
capacity to cope with unexpected shocks.”                                 impediments to innovation and reactivity. As
                                                                          a result, partnerships are often used to try to
There is clear statistical alignment between                              blend more innovative, agile businesses with
commercial success and innovation in                                      larger, less nimble peers.
our research, which is a call to action for
businesses that are struggling to innovate.                               “Increasing numbers of large corporates
Yet there are many risks when engaging in                                 are choosing to work with start-ups in the
the process that can make it challenging                                  hope that these younger businesses will
for businesses either to innovate or to                                   bring new thinking, help solve problems, and
commercialise their innovations.                                          rejuvenate staid corporate culture; however,
                                                                          such collaborations bring their own set of
The application of different project-                                     challenges and are difficult to get right,” says
management models, such as Agile and the                                  Haley. “Other businesses are concentrating
                                                    Inadequate /
“fail-fast” methodology, is more common in          outdated technology   more on encouraging entrepreneurial
newer businesses, and these can help them           14%                   attitudes among their staff.”
to change in a more responsive way than
older Waterfall methodologies.                                            The risk of supporting inadequate or
                                                                          outdated technology is seen as the second-
That said, there are risks in employing some                              highest barrier to both innovation and agility,
of these models, although they have found                                 cited by 14% of respondents. Inevitably,
success in context. Scaling up models such          Funding               innovation requires a technological
                                                    11%
as Agile can be difficult, as they require                                underpinning, and change requires a flexible
a level of feedback and communication                                     infrastructure and use of application
during the project that is optimal when                                   programming interfaces to support
developers, testers and business users are                                connectivity between systems.
not disproportionately different in number,
or separated by time zones and geography.           Short-term
                                                    performance targets
                                                    8%
Whether one is assessing a business in terms
of its potential for change (innovation)
                                                                              Squeezing redundant systems and unused
or its capacity to realise change (agility),        Risk-averse           capacity may improve efficiency, but often reduces
respondents note that the two dynamics              leadership
                                                    8%
                                                                          one’s capacity to cope with unexpected shocks
are closely intertwined. The main barriers
to both are perceived to be very close to                                 C H RIS H A LE Y
It is not only heavy-duty legacy technology     be more difficult if a business is not seen
that inhibits transformation. New               to be at the leading edge of innovation, as      BA RRI E R S TO AG I LIT Y
technologies are being introduced to            many businesses found when they sought to
industry, from 3D printing to distributed       build digital capabilities in competition with
ledgers that alter IT infrastructure            the likes of Facebook, Google and Amazon.
requirements, in order to support different     That point was given added weight by the                                Internal governance
                                                                                                       32%
ways of working. New, on-demand                 common citation of “risk-averse leadership”                             and bureaucracy
provisioning of computing power and cloud       as being among the barriers to both
storage requires businesses to maintain an      innovation and agility.
open approach to working with third parties.
These can represent a challenge even for        The corrective to a staid and risk-averse                               Inadequate /
                                                                                                       14%
businesses with new technology if they are      leadership team is the demand for new                                   outdated technology
still built around older operating models.      blood, even from within a business, in order
                                                to facilitate the emergence of new ideas. The
Based on our data, considering the top three    ability to locate and train the right people,          12%              Risk-averse leadership
choices of the main barriers to innovation,     combined with a capacity and capability for
“funding” is the biggest problem. An absence    innovation, was seen as the second most-
of funding can indicate that management         important element (51%).
                                                                                                       12%              Talent
is not providing buy-in and support for new
projects, which can point to wider problems.    “To an extent it’s a culture thing,” says
                                                Burbidge. “A business that is agile and
Having the right culture and encouragement      constantly moving probably attracts the sort           11%              Funding
from senior management is imperative            of person who responds well to that, and
for developing a business that achieves         enjoys the challenge of something different
both innovation and agility, with 77% of        every day. An agile business will be able to                            Short-term
                                                                                                        8%
respondents citing it as the most important     change [in order] to be at the cutting edge.                            performance targets
element in innovation. It is not just that      But the issue you can potentially have is that
the right management culture supports           after you have shaken the tree, you have
creativity within a business – there is the     moved things around, and then actually
risk that attracting talent from outside will   there isn’t any further you can go.”
22    GLOBAL RISK LANDSCAPE 2018

M OST I M PO RTA NT I NG RE D I E NTS FO R I N N OVAT IO N
% of respondents

 Culture to foster and
 support innovation                                                                         77%

 Access to right people                                                                     51%

 Capacity and capability                                                                    51%
 for creativity

 Access to funding                                                                          49%

 Use of relevant
                                                                                            45%
 new technology

 Willingness to challenge                                                                   42%
 organisational norms

 Third-party collaboration
                                                                                            39%
 (including customers)

 Ability to capture ideas
                                                                                            39%
 throughout organisation

 Strong visionary
                                                                                            38%
 business leadership

 Data and insight                                                                           37%
 on customer

 Ability to drive
                                                                                            31%
 customer adoption

Nevertheless, greater agility is perceived         seek change without the necessary
to facilitate a more successful innovation         commercial model. Balance is required
strategy by 94% of respondents, enabling           between these elements.
them to create and market products more
competitively. Having both thus confers a          “You might have a successful business that
significant advantage. The leadership of a         has come up with some paradigm-shifting
business must therefore ensure it is providing     changes to the market that they are in, but
the funding and cultural support for creativity,   then the market or the consumers in that
and that the technological underpinnings are       market don’t necessarily want to go any
in place that work with the demands of the         further and the business is still trying to
customer base and wider environment.               push the market into different places,” notes
                                                   Burbidge. “By doing that, they can topple off
As Dr Young notes, “The culture must not           the tightrope because they are pushing the
just be top-down; although it starts from the      market into places that [aren’t] appropriate.
top it has to run through the organisation,        That can happen if you have an imbalance of
with various rewards to acknowledge and            people who are restless and want to move
encourage innovation via the HR policy             the business in different directions.”
and employment environment, in order to
nurture innovation rather than complacency.”       Strong leadership can support a manageable
                                                   level of innovation within a business,
It is also crucial that innovation and agility     maintaining a consistent, enterprise-wide
are understood in context, and not placed          programme that ensures the whole business
on a pedestal to the detriment of all other        moves together as one – keeping ahead of
activity. A business must support the              the opposition without risking tripping over
growth it generates, and not constantly            its own feet.
GLOBAL RISK LANDSCAPE 2018   23
A CULTURE
                                         Leadership can rule by command, but it only
                                         earns commitment if it leads by example.
                                         The culture of a business is determined

FOR SUCCESS                              by the attitude and actions of senior
                                         management. It is further strengthened by
                                         the processes and structures they put in
                                         place to support it.
Innovative management must be combined
                                         “Complacency has no place in a successful
with sound structures of governance.     business,” says Dr Young. “Business
                                         policies need to reflect zero tolerance for
                                         anyone that cannot step up to meet new
                                         challenges. This does not mean those who
                                         fail to live up to expectations [should] be
                                         punished or discriminated against. The
                                         right attitude and policies [are] to provide
                                         every opportunity for employees to
                                         demonstrate a ‘can do’ attitude and receive
                                         proper training to nurture growth and
                                         development in each person.”

                                         The research undertaken for this survey
                                         demonstrates the importance of innovation
                                         and agility for businesses that are rated
                                         as “high-performing”. It also outlines the
                                         advantages of building both within a business,
                                         and the perceived barriers to doing so.

                                         There are a number of paradoxes that need
                                         to be challenged in order for businesses
                                         rated as medium- to low-performance to
                                         up their game. Investors typically want a
                                         sound governance structure that provides
GLOBAL RISK LANDSCAPE 2018               25

them with a balanced way of managing             of their industry. That is not a futureproof
and controlling a business. The processes        strategy – it is a passive strategy.
that enable such a structure to exist are a
consequence of historic malpractice, and the     BUS I N ESSES N E E D TO A DO P T
consequent development of best practices.        T H E AT T RI BU T ES O F T H E I R M OST
                                                 I N N OVAT I V E CO M PE T ITO R S, A N D
Even today, questions are rightly raised         CO NS I D E R T H ESE TA KE AWAYS:
around businesses seen as highly innovative
but less open to the norms of corporate          »» H
                                                     as your leadership got an appetite
governance. The recent fining of senior staff       for innovation?
at medical testing innovator Theranos has
been an example of this. Volatility in tech      »» D
                                                     oes the wider business understand and
stocks can be seen whenever innovative              support the approach to innovation that
models face legal challenges.                       senior management is taking?

On the other hand, some of the more              »» W
                                                     ill the business be able to realise the
innovative businesses remain privately held;        potential of its innovations? Does it have
they have been set up and run by a visionary        the necessary agility?
or inventor who had a brilliant idea and
threw everything into it. However, for every     »» A
                                                     re the resources – in terms of financial
one or two successful businesses in that            and human capital – in place to
bracket, there are hundreds of failures.            operationalise the business’s innovations?

Where businesses can combine leadership          »» If all of this can be managed, how can the
with innovation and agility, they can begin          new model of the business be realised
to focus on the macro risks: regulatory,             without disruption, taking into account
macroeconomic and geopolitical concerns.             the likely impact on the wider market?
They lead their “shoal”, and they can
see what will be the best path forwards          Nokia went from the global leader in mobile
for them. Failure to combine leadership          phones, over a decade ago, to a business
with agility and innovation leaves laggard       that is struggling to retain relevance, while
businesses to follow their rivals, and to rely   its rivals – including Samsung, Huawei and
upon the protection afforded by the size         Xiaomi – continue to innovate. The lesson
                                                 is not only that the ability to innovate and
                                                 be agile is key to achieving and maintaining
                                                 success, but that risks must continually be
                                                 confronted and overcome in order to maintain

#1
                                                 a business’s position as an innovator.

                                                 Achieving this is not a matter of appearances.
                                                 It requires all-encompassing changes that
                                                 must be reflected in every aspect of the
ingredient for                                   business. As T.S. Eliot said, “Only those who
successful innovation:                           will risk going too far can possibly find out
the right culture                                how far it is possible to go.”
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