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Is Talent the Best Defense?

Little wonder why so many CEOs have restless nights. Europe and the U.S. are facing unprecedented political uncertainty, technology is developing at a breakneck speed and even the world’s biggest corporations are not safe from social media backlash.

Against this backdrop, Aon’s 2017 Global Risk Management Survey (GRMS) found that brand damage, economic slowdown, increasing competition and changing regulations were the top four risks. Meanwhile, disruptive technologies, failure to innovate and lack of talent are the threats projected to increase in severity in the coming years. Are businesses prioritizing the right risks?

According to the survey, the tech sector is most aware of the threat posed by failure to innovate, and other industries can learn from their industry’s risk rankings. More and more industrial sectors are getting swept up in the “Fourth Industrial Revolution” – where everything from machinery and household appliances to robots are being connected to the Internet of Things (IoT). The tech sector’s current concerns are important: What is affecting it today will likely affect almost every other company in the years to come.

In Depth

The need to innovate – together with disruptive technology – are high priorities for the tech industry, according to the GRMS. While staying ahead of the innovation curve is a daily mantra for the tech sector, many industries have not ranked innovation slowdowns as such a prominent threat – yet.

The failure to innovate and disruptive technology, coupled with attracting and retaining top talent, increasing competition and brand risk, will maintain the Top 5 status for the technology sector for the foreseeable future. These factors will also increase for other industries that are going through digitization and digital disruption.

Innovate or Fade Away

So why are other industries ranking innovation slowdowns as a lower priority? As regulators scrutinize the “sharing economy” and “peer to peer” businesses like Airbnb and Uber, perhaps companies in more established sectors believe it’s just the disrupters that are vulnerable to new legislation.

Could the low ranking also be a symptom of the complacency among established firms that inadvertently enable disruptive organizations to flourish in the first place? After all, many big brands – from Kodak to Borders – have disappeared partly because they failed to see the bigger picture. Borders, the established book retailer, according to Time magazine moved in a different direction despite consumer trends: late to the web, invested in CD sales as downloads were gaining popularity, and more physical stores emerged as consumers moved to e-commerce. Additionally, Kodak, the firm that invented the first prototype digital camera, thought photo sharing was going to help the printing business. As it turned out, digital photo sharing was the new business, the Harvard Business Review says.

See also: 3 Major Areas of Opportunity  

Established businesses can fail to anticipate disruptive risks because they are too focused on protecting market share – even if they recognize the importance of adapting to newer consumer trends. And while these companies may understand the theory of disruption – identifying and anticipating customers’ needs and responding to them in new and more efficient ways – they can lack the skills to identify the most effective ways to turn theory into practice.

Failure to innovate and meet customer needs has been ranked 6th in the last four Aon surveys, but is predicted to rise to number 3 by 2020. In just a few short years, this risk is projected to be the top risk in Asia Pacific, and number 2 in North America, as these regions continue to compete for top talent in everything from consumer electronics to renewable energy technologies.

Understanding the Core of Innovation and Disruption

Disrupters are shaking up traditional business models by meeting customer needs in a more efficient and responsive way. From taxis and hotels to the music industry and newspapers, established businesses in almost every sector are at risk from mavericks who have found better ways of doing things. These revolutionaries can be start-ups like Airbnb or Spotify, or blue-chip firms muscling in on a new endeavor, like Apple and Google joining the race to develop driverless vehicles.

At the heart of this is data and analytics. The growing commercial value of data describing a user’s online behavior – the core concept set to revolutionize the way the world works – is also core to the rapid rise of players like Snap. But where tech firms excel at gaining insight into customer needs from detailed data analysis, not every company has yet to find out how to gather, interpret and successfully apply data to help enhance, or even transform, their own business models.

This is why businesses should closely monitor the tech sector’s forward-looking concerns. Those who understand and anticipate emerging risks will have a stronger chance of overcoming them. The rest risk being overtaken by up-and-coming rivals who better understand both consumers and the rapidly changing business landscape.

A failure to innovate and respond to customer needs can directly impact an organization’s bottom line. In the last 12 months, it led to a quarter of firms reporting a loss of income, more than from cyber crime and hacking (reported by 10 percent), or political risk (reported by 23 percent). Companies also report less preparedness to remedy the problem. Today only 59 percent report ‘readiness’ for dealing with this risk, down from 64 percent in 2013.

All this shows that perceptions of risk are changing. With this change in perception comes a need for new approaches to overcome such emerging threats. And to develop those new approaches requires the right people.

Talent: The Ultimate Solution?

In 2011 Apple overtook Exxon Mobil to become the world’s most valuable firm. And now four of the top five companies in terms of market capitalization – Apple, Alphabet/Google, Microsoft and Amazon – are from the tech sector. Investors have put their faith in ideas and creativity as much as natural resources and physical assets. Meanwhile, Microsoft’s $26 billion acquisition of LinkedIn shows the enormous value of a company which had quickly become a dominant talent and recruitment networking tool.

Since innovation reflects forward-thinking , attracting and retaining the right talent to implement such strategies might be a company’s best bet to stay ahead. And potential recruits need more than competitive salaries: They are after a strong brand with a good reputation and workplace flexibility that recognizes good work.

For those with skills in fields like cybersecurity, big data and predictive analytics, it is a seller’s market as demand outstrips supply. There has been a global skills shortage in these areas for the last few years, and this remains a serious challenge. Add to this a tightening labor market as unemployment falls in major economies, and the potential strengthening of borders in the U.S. and the U.K., which limits talent supply even further, accessing top talent becomes a greater challenge.

Despite an appreciation of the rising challenge of skills shortages, failure to attract and retain talent dropped from 5th in 2015, to 7th in the 2017 survey results. But again, technology firms – who tend to be ahead of the curve – rate it at number 3.

Talent Beyond Tech

Skills shortages are not just an issue for tech companies, even if other sectors may not yet fully appreciate the importance of talent in their business plans. For instance, failure to attract and retain talent did not appear in the Top 10 for the energy sector in this year’s survey. “From my point of view, this makes it an underrated risk for the sector,” says Bruce Jefferis, CEO Energy & Mining, Aon. “Historically, talent retention coupled with innovation has been a key driver for the energy sector and it will continue to be a key risk in the longer term.”

See also: 4 Hot Spots for Innovation in Insurance  

With the Fourth Industrial Revolution likely to affect almost every sector, other industries should start to take note. With talent pipelines increasingly needing to be planned as much as 10 years out, failure to start planning today could lead to even greater disruption in years to come.

Why Customer Experience Is Key

Disruption is inevitable, and no organization is immune. Findings from McKinsey suggest that the current pace of disruption is happening 10 times faster than the Industrial Revolution, at 300 times the scale, and with 3,000 times the impact. This is an unprecedented opportunity for businesses to thrive, but at the same time an unprecedented threat to slower-moving organizations, which may end up allowing themselves – or their industry – to be disrupted.

“We are at the precipice of unbelievably powerful advancements driven by technology. We no longer have to ask if we can do it, but if we should do it, and, if we do, how do we do it responsibly,” says Eric Boyum, managing director, technology and communications industry, at Aon.

Embracing disruption – both managing it and anticipating it – is crucial for businesses to thrive during this change. But what constitutes disruption, and how does it differ from innovation? Putting the customer experience first and truly understanding audience needs is critical. From agility to forward-thinking industry trends, established organizations can learn from newcomers and help their teams innovate on behalf of customers – key to thriving amid change.

In Depth

Today, innovation and disruption confront many industries, driven by a host of entrepreneurial firms looking for opportunities to beat incumbents at their own game. The situation becomes even more interesting, however, when entrepreneurs are a leading force in creating a new game.

Boyum, who works with some of the world’s leading technology companies, offers a key distinction between innovation and disruption: “All those that participate in disruptive movements can be considered innovators – however, not all those that innovate are necessarily disruptors.”

Randy Nornes, executive vice president, Aon Risk Solutions, elaborates: “Disruption does not come from typical competitors,” where most companies traditionally focus their defensive efforts. Instead, disruptors often originate from outside the industry being disrupted – which means established players don’t recognize what’s happening until too late. The disruptor then captures and develops a market, eventually unseating incumbents.

See also: Key to Digitizing Customer Experience  

When Apple released its first smartphone in 2007, it probably wasn’t looking to transform the transportation industry. But it turned out that putting a GPS unit in the pockets of billions of people across the world would crack open a whole universe of commercial applications inconceivable to the original inventors. Uber, the paradigmatic “disruptor,” was quick to see the opportunity.

Smartphone technology was available to everyone. Uber’s ability to capitalize on Apple’s innovation and aggressively outpace incumbents in the taxi industry through offering cheaper, more flexible rides, marked it out as a true disruptor. It is now the most valuable private company in the world.

Apple itself was, of course, also a disruptor. It jumped on the then-new technology of file-sharing with iTunes and disrupted (many would say fatally) the physical music retail industry. Spotify, in turn, disrupted iTunes by putting subscription streaming ahead of paid downloads.

It’s not just about innovating and making products better – it’s about anticipating consumer needs. This type of disruption often comes from new players, as opposed to traditional competitors. “The company that provides the most taxi rides does not own any taxis; the company that rents the most rooms does not own any rooms, and the company that distributes the most media does not generate any content,” Boyum says. “These companies are, of course, Uber, Airbnb and Facebook.” They got there not by being the best in their field at providing a certain product but by providing a completely new one.

Data for the People

“We’ve seen entire industries emerge because they promise something to the end-user: a better customer experience,” Nornes says. Uber could have made bigger, plusher taxis. Instead, it correctly saw that what travelers wanted out of their experience wasn’t necessarily luxury but affordability and convenience of a kind that traditional taxis had yet to provide.

Through a data-driven understanding of audience or a market, disruptors seek to prioritize customer experience and work to improve the status quo – often creating a new one. “A lot of sharing economy companies focused on technology and new ways of capturing data,” Nornes says. “In the transportation world, disruptors leveraged the GPS technology that’s inside a smartphone to create a superior service.” In turn, this data has been used in other ways to improve the ridesharing services. An Uber passenger can feed back data via ratings, which the company can then leverage to further optimize user experiences and create a model that is, to an extent, self-regulating.

This data-led process of transformation is set to intensify. By 2020, there could be 20 billion internet-of-things devices worldwide. Understanding the emergent narratives of consumer behavior that this enormous mine of data produces will be the first order of business for tomorrow’s would-be disruptors.

The Ripple Effects of Disruptive Innovation

“The most important lesson to learn is that disruption can happen to everyone – no one is immune,” Boyum says. This disruption can come in many forms, other than direct competition.

Nornes asks: “How do you deal with independent contractors? How will regulations evolve? What are the talent implications – do companies have the necessary disruptive talent to keep ahead of competitors?” Some of the more wide-reaching implications of disruption could include:

Insurance & Regulations: Businesses don’t operate in a vacuum – from insurance to regulations, they are governed by a complex network of secondary services, which will also have to adapt to disruption. Current insurance policies are built on certain assumptions about how customers engage with products or services. Initially, Uber struggled with getting its drivers insurance coverage, as providers had no products that accommodated the unique risks of non-employee drivers – of course, disruption here also means an opening of markets for new products.

There must also be responses to the shifting nature of work in the gig economy. Is an Uber driver a freelancer using an app, or should he be treated – and compensated – as a full employee?

Employment & Talent: Headlines proclaiming an unemployment doomsday at the hands of automation are abundant. Don MacPherson, partner, Global Engagement Practice at Aon Hewitt, frames this as a hiring and retention issue: “Are we still going to be able to bring people into this organization as we’re seen to be shedding jobs that are now obsolete?”

But, he explains, organizations should relish the opportunity to transform their talent and training strategies. Incumbents should look at what innovators are doing: What types of talent are they bringing on? How flexible is that talent? And, perhaps most importantly, are they fostering functions like R&D, which will allow them to leverage their disruptive capabilities in a competitive environment?

Societal Impact: Models that disrupt multiple industries, like the sharing economy, also have widespread societal implications. A firm like Airbnb disrupts far more than just hospitality incumbents. Homesharing can create incentives for more buy-to-rent activity, which causes distortions in rental markets as prices rise. This, in turn, can provoke regulatory responses from local governments – which affect the whole housing landscape, rather than just the operations of one company. And so they have, in Paris, San Francisco and New York.

The onus is on the disruptors to communicate the benefits they bring for all stakeholders. For instance, customers enjoy ridesharing because it’s more affordable and convenient, but reducing the number of cars on the road also helps fight pollution. Similarly, flat-sharing could emphasize the tourism revenue it generates.

See also: Smart Things and the Customer Experience  

Disrupting for Tomorrow

If companies can perform this balancing act – from embracing new technologies, models and services around consumer needs, to preparing for the unknowns that disruption can bring – then they can find huge success in the coming years.

“Disruption is the result of dramatic innovation. And whether business models rise and fall on this is not the point,” Nornes says. Disruption is a bigger trend than the fortunes of an individual company – it’s the rise of new ways, perhaps better ways – of doing things. By recognizing evolving customer needs and forcing new ways of thinking within an organization, companies and their leaders can make sure they are on the right side of history.