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May 18, 2016

Rethinking risk leadership

More companies are starting to use risk analytics, big data and human judgment to identify strategic risks early and track them with greater confidence

It no longer seems peculiar that auto makers like Daimler should be buying mobility app start-ups like RideScout. It’s been eight years since the German company acquired its first car-sharing service, Car2Go, and since then US counterparts such as General Motors and Ford have made their own mobility bets.

Turning risks from potentially disruptive technologies such as ride-sharing mobile apps into exciting opportunities is at the center of the risk-sensing activities that corporate boards and senior executives are increasingly undertaking in an effort to take a more holistic and comprehensive view of future risks they’re likely to face.

‘Many of the world’s largest auto makers are now moving quickly to try to address how they’ll compete and win in a world where the ownership model is changing and where the whole driving experience is changing,’ says Andrew Blau, who leads Deloitte Advisory’s strategic risk solutions practice. The bets they’re making ‘are a response to what I think of as a fundamental strategic risk: that consumers will ask for something different, that technology will change what’s possible, that the rules of the game for what it means to be a leading car maker are going to change. That’s the kind of strategic risk that’s visible in many industries today and that keeps boards and C-suite leaders up at night.’

Unlike more familiar kinds of risk that are often associated with something going wrong, strategic risks ‘come in part when you’re doing everything right, but the game changes around you,’ Blau adds. That’s the kind of situation many business leaders are currently confronting. When leaders learn how to use risk analytics, big data and human judgment to spot strategic risks early and track them with greater confidence, they’ll have a better understanding of the changes in the business environment that threaten how their company does business today and create opportunities for how it will do business tomorrow, he explains.

Take a project Deloitte did for a healthcare provider that wanted to commit to online delivery of its services. The organization began to use big data about consumer behavior, consumer adoption of technology and consumer mobility patterns to clarify the potential threats to its ability to realize value from its strategic bets. ‘It was a variety of things that had nothing to do with healthcare,’ Blau says. ‘The data the client needed wasn’t necessarily about the health of the population or [people’s] current ways of getting care. It was about consumer preferences around the way they receive information and about mobility patterns around the area the healthcare provider served.’ This helped the provider see what it needed to do to ensure its bet would pay off and what flexibility it would have if it saw changing conditions in the marketplace.

Given how much senior executives and board members already have on their plates, telling them there are now a broader set of risks they need to look out for isn’t helpful. Blau says the more fundamental question is: how can organizational leaders rethink their approach to risk?

In a recent poll by Deloitte Advisory, 27 percent of more than 3,300 respondents say their organizations are taking a more mature approach to risk sensing, having developed some set of possible future scenarios and outcomes, as well as mitigation strategies based on strategic risks they’ve identified. What’s keeping more companies from doing this is the constraints many board members say they feel from their existing obligations, which are largely driven by regulation.

Another factor is that ‘when we talk about strategic risk, the signals are often faint and often come from places traditional risk models don’t necessarily cause you to look for,’ Blau says. ‘The sources of strategic risk may be coming from a different industry or a different geography. Who would have thought the threat to the auto industry would come from the worldwide web?’

One major change boards need to make in their approach to risk is to make addressing it more dynamic, so it becomes an ongoing conversation about changes in a company’s marketplace, and how thinking about it can be integrated across a range of risk categories. Noting that the current business environment feels much more volatile, accelerated and complex than it did a generation ago, Blau says: ‘Some board members I’ve talked with are not just relieved but also excited to be having conversations about the future of the business. They feel it’s the highest value they can create, the highest level of service to the boards they serve on. It’s the conversation they really want to have.’