Research

Risk megatrends in a changing world

The Willis Towers Watson Global Risk Index

September 26, 2017

Few businesses today have the luxury of operating within a geographic or industry bubble. Around the world, interconnected political, economic and commercial factors influence the direction and destiny of companies, both large and small, across a range of sectors. As a result, risks that once could be understood and managed locally have become ever-more challenging and global, while new risks seem to appear almost daily.

To chart the current topography of the global risk landscape, Willis Towers Watson surveyed more than 1,500 business leaders around the world about the most significant risks to their organizations’ future. Perhaps not surprisingly, regulatory risk and geopolitical instability topped the list by a wide margin, with new technology and strategy challenges rounding out the second and third positions. Talent optimization and operating model challenges completed the top five.

The five risk megatrends frequently interconnect and impact one another, but a closer look into the risk drivers in each reveals a regularly recurring thread: talent. Critically, talent issues are at the root of many of the risks viewed as most threatening by participants, yet often near the bottom of their concerns. Our takeaway? To remain ahead of risk, business leaders may need to focus more attention on the source, rather than the symptoms, of their challenges.

The five global risk megatrends

Ranking is a composite of the severity of impact and the ease of management

The five global risk megatrends

Behind the megatrends

Regulatory/Geopolitical instability

Our survey participants ranked regulatory and geopolitical instability as the greatest risk to their business, both today and in the future. Companies must face the challenge of operating in societies which are continuously unsettled by disillusionment with governance, social fragmentation, political pressure and international competition. For the C-Suite, the most challenging impact of this is the lack of consistent policymaking, both locally and internationally. Companies are encountering great uncertainty on the scope, reach and consistency of regulation, yet must ensure to follow changes appropriately to avoid legal condemnation or reputational damage.

Questions to consider
  • Will regulation continue to develop so inconsistently? Do companies have strategies in place to mitigate the impact of changing regulation?
  • How will companies be impacted by the increasing influence of multilateral rule-making?
Potential solutions Willis Towers Watson can provide
  • Career management
  • Special Contingency Risks Solutions (K&R, PA)
  • Political Risk Protection
  • Trade Finance Solutions
  • Cyber Risk Solutions
  • Local Regulatory Guidance

Business risks around the globe

Business risks around the globe

New technology

Technology is a many-headed beast but causes some common concerns for business leaders. Foremost among them are issues linked to cyber risk and data privacy. A substantial, overarching risk associated with technological innovation is the adequacy of corporate IT infrastructures in enabling companies to keep pace with markets. In a related point, the findings allude to the need to become more reliant on outside suppliers, potentially opening companies up to additional third-party vulnerabilities.

Questions to consider
  • How do companies measure their exposure to cyber risk and mitigate against the potential technical, reputational and financial costs of a breach?
  • How do companies improve the flexibility of their existing IT frameworks?
  • What partners and alliances will best serve future market needs?
Potential solutions Willis Towers Watson can provide
  • Cyber Risk Solutions
  • Professional Indemnity cover
  • Data Digitalisation
  • Future of Work
  • Business Interruption Solutions

Strategy challenges

Competition from emerging markets and new, technology-led market entrants, and a redefinition of the customer experience in many industries are all testing the mettle of boards. The premiums placed on strategic and financial flexibility and agility are on the rise, while the need to mitigate traditional business risks such as interest rate and currency fluctuations has not gone away.

Questions to consider
  • Can companies use knowledge and experience in conjunction with technology to disrupt the disruptors?
  • How do companies improve strategic maneuverability — for example, through partnerships, strategic investments, incubators and funding structures?
Potential solutions Willis Towers Watson can provide
  • Talent risk Consulting
  • Employee Benefit and Design
  • Employee Insights and Engagement
  • Global Benefits Solutions
  • Core Analytics
  • Operational Risk Consulting

Collision course: how talent risk intersects with other risks

Why do we believe that identifying and anticipating underlying talent risk is so crucial to fully addressing many facets of the other risk megatrends? Let’s illustrate with a few examples.

The mix of people and technology that will help companies achieve competitive advantage in the future provides the most obvious source of intersecting risks. Artificial intelligence, automation and ever-more-sophisticated algorithms are already breaking down jobs and tasks in new ways. Consequently, companies increasingly need different types of skills at different points in product or service delivery. They won’t necessarily be able to rely on having these in-house, which means placing greater emphasis on contingent workers and third-party companies. That reliance can introduce greater exposures to cyber risk and supply chain vulnerabilities. Equally, changing needs and expectations in areas such as customer service, data security and cyber resilience are introducing potential new pivotal roles and pinch points in company operations that will need to be addressed through training and recruitment programs.

As competition for access to emerging, in-demand skills inevitably increases, there are implications for the ways that companies engage with, reward, retain and lead a potentially more diversified and dispersed workforce that could have significant effects on company strategies and operating models.

And while there doesn’t seem to be much overlap between talent risk and regulatory risk, the reputational risks from the contravention of burgeoning environmental, ethical and customer protection standards more often than not arise from company culture and reporting structures. If we focus on financial services, for example, the recent trend toward more principle-based regulation in many corners of the world puts increased onus on expert judgment and independent validation when making submissions. As this trend spreads, will companies be adequately staffed to meet their obligations?

Similarly, if the geopolitical winds blowing toward greater isolationism pick up, a reduction in global workforce mobility and the wider imposition of cross-border trade tariffs offer a significant risk for multinational companies in particular. We are already seeing evidence of companies responding to these threats as the wider implications for where work is completed and the talent needed to do it become more apparent.

Talent optimization

As technology and demographics continue to disrupt the traditional workplace, companies must consider how their talent requirements are changing. It is therefore surprising to see respondents in the global risk survey view talent as one of the lower-severity risks. Does this indicate that workforce management is still regarded as a soft issue in many businesses, one step removed from the bottom line? Or, of greater concern, does this suggest that the C-Suite has not fully considered the extent to which technology is, and will continue, to reshape work and impact talent requirements in the near future? Regardless of talent risk’s overall ranking, there is a good deal of consistency among senior executives about the most pressing workforce risks, namely difficulties in attracting and retaining key talent, plugging skill shortages and having an appropriately mobile workforce.

Questions to consider
  • How does the talent vision fit with the workplace of the future? Does it take into account the rapidly increasing automation of work, the changing demographics and the rise of the contingent workforce?
  • Willis Towers Watson’s 2016 Global Workforce Study reinforced the value of effective leadership. How will leaders lead, influence and engage people in the future workplace?
  • Which roles are most susceptible to change in the face of automation? What are the capability, cost and risk implications associated with automation?
  • Do companies have appropriate strategies to readapt their operating models to ensure talent is deployed in a costeffective, efficient and impactful manner in the AI-enabled workplace of the future?
Potential solutions Willis Towers Watson can provide
  • Executive Compensation
  • Global Benefits Solutions
  • Talent & Rewards
  • Pension Advisory
  • Directors and Officers’ Protection
  • Personal Accident & Travel

Operating models

Clearly, operating models are a reflection of their time. The evolving business environment, expressed in many of the risks identified, will inevitably shape the directions that companies take in the future. However, senior executives see labor availability and supply chain certainty as the major threats to adapting operating models in the short to medium term. Increasing environmental obligations and, in some industries, vulnerabilities to natural disasters and epidemics are also frequently cited concerns.

Questions to consider
  • Are companies defining labor in too narrow a fashion?
  • How do firms optimize supply chains? Does re-shoring or near-shoring have a bigger role to play?
  • Is environmental risk assessment making use of the latest available modeling capabilities?
Potential solutions Willis Towers Watson can provide
  • Business Continuity Planning
  • Weather Index Solutions
  • Ergonomics Solutions
  • Captives
  • M&A Due Diligence & Integration Planning

Summary — many risks come back to people

Many of the risks ultimately pivot on the actions and reactions of people.

The global risk survey provides a snapshot of the major business risks that company leaders believe they have to address in the short and longer term. By definition, these are megatrends, with a kaleidoscope of elements within them. Today’s questions such as, “Has globalization had its day?” or “Do we have the right people in the right places to achieve our objectives?” or “What does our technology blueprint look like?” will inevitably take on new shapes and shades.

As such, companies need to retain a sharp focus on the risk assessment, management and mitigation strategies that will help them deal with risk and turn it to their advantage where they can.

But no matter how you shake the kaleidoscope, many of the risks ultimately pivot on the actions and reactions of people (see above, “Collision course: how talent risk intersects with other risks”). At present, this is a potential elephant in the room that is gradually casting a bigger shadow for some business leaders whose natural instincts, the findings suggest, may be to prioritize what are seen as the hard business issues.