GLOBAL RISK LANDSCAPE 2018 - The innovation imperative - BDO
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GLOBAL RISK
LANDSCAPE
2018
The innovation imperative
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 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.
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 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
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
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 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
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 model12 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 agendaGLOBAL 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 efficienciesGLOBAL 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 effectiveness20 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 YIt 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 providesGLOBAL 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.”You can also read
