Businesses Predict Digital Transformation to Be Biggest Risk Factor in 2019

By Mengqi Sun – The Wall Street Journal 

Board members and executives are particularly focused on potential operational risks.

Directors and executives sense the business environment will become more perilous in the coming year and are increasingly concerned about the operational challenges surrounding digital transformation, according to a new report published Wednesday.

Existing operations and legacy technology infrastructure pose a risk to companies that can’t transform quickly enough to compete against companies that were “born digital,” according to research conducted by North Carolina State University’s Enterprise Risk Management Initiative and management consulting firm Protiviti Inc. This risk factor surged to the top spot for 2019, up from 10th place in the 2018 report.

The rise is an acknowledgement of the growing threat of a constellation of risks facing companies, including the viability and resilience of business models and shifting customer preferences. Workplace dynamics, such as resistance to change, and the ability to hire in a tight labor market are also factors, the report says.

“Organizations need to gear up and align the culture, people, processes and intelligence gathering to embrace this rapidly changing environment,” said Protiviti Managing Director Jim DeLoach.

Large companies that have long histories and extensive operations could find it particularly difficult to adapt quickly to competition posed by younger companies that digitize products and services or use technology to operate more efficiently, said Mark Beasley, a professor at N.C. State’s Poole College of Management and director of the Enterprise Risk Management Initiative.

“It’s turning a major ship into the sea,” said Dr. Beasley. “It’s not a small business, it’s much harder and more complex for companies.”

Duke Energy Corp. is working to manage many of the risks outlined in the report.

The public utility is using robotics and data analytics to transform its business to meet customers’ demands and to lower costs, as the company faces lower growth and state regulations that restrict its ability to easily raise prices, Duke Energy Chief Risk Officer Keith Butler told Risk & Compliance Journal.

The Charlotte, N.C.-based company is putting sensors on equipment to monitor operations, and it is hiring data scientists and training its workforce to better use digital tools in a tight labor market.

“We have the ability to reskill some of our employees, and we need to bring in some data scientists and that kind of talent, and try to invest in that kind of workforce,” Mr. Butler said.

The Protiviti report, based on a survey conducted in the fall of 2018, received 825 responses from around the world.

Respondents, whose roles varied from board members to chief executives to chief risk officers, were asked to rate 30 individual risks on a 10-point scale, with a score of one reflecting no impact and 10 reflecting extensive impact to their business. The study then averaged the score for each risk factor and categorized the responses into six industry groups and by organization size and type.

The researchers said the respondents gave higher ratings to all of the top 10 risks for 2019 than they did in 2018, suggesting a greater perception of risk in the global business environment.

Participants in the survey also expected the risks surrounding succession and retaining top talent to have a bigger impact in the coming year, while concerns over macroeconomic conditions restricting growth fell out of top 10 for the first time.

Other top issues facing businesses include regulatory changes, cyber threats and a work culture that may not encourage the identification and escalation of problems.