3 New Rules for Dealing with Digital Era Risk

Posted January 25, 2023 | Leadership |
3 risk rules

Digital era opportunities and dangers challenge traditional approaches to risk management. For decades, organizations vested risk oversight in legal, compliance, and HR functions. Despite the fact that tech-driven business models demand far more dynamic and adaptive approaches, entrenched corporate behaviors, incentives, and bureaucracy often stall strategy and thwart innovation. In a recent Amplify article, Cutter Fellow Noah Barsky shared 10 unconventional “rules” that can shatter that inertia and help senior leaders identify, assess, and manage digital era risk. In this Advisor, we offer a refresher on three of those rules: establishing an anti-vision, separating digital strategy from operational technology, and outlawing entrenched revenue drivers.

Establish an Anti-Vision

Too often, leaders agonize over wordsmithing vision and mission statements, only to learn they rarely anchor and guide employee actions. Hollow rhetoric results in unfulfilled aspirations, weakened competitive position, customer disengagement, workplace churn, and diminished financial performance.

Executives would be better served by mulling the strategic consequences of inaction. Fear of demise can be a great change motivator. What might the future hold if the company does not adapt and transform? Can key stakeholders truly accept and afford rigidity’s downside?

A discussion of the cost of inaction raises many unsettling questions. To start, if digital transformation achieves all of its operating goals for the next three years, will the company be strategically relevant at that time? Are budgets and targets credible? Is operational obsession placing the enterprise in strategic jeopardy? Do employees spend scarce time chasing reports, managing metrics, and sacrificing long-term viability? Have leaders occupied their time with daily activities and abandoned their fundamental responsibilities as mindful stewards?

Statisticians often refer to such choices as the tradeoffs between Type I (false positive) and Type II (false negative) errors. This is similar to medical diagnoses that result in over-testing (inefficiency) or missed maladies (ineffectiveness). Digital transformation fits this analogy well, as a company’s viability rests on its success.

Like all strategic ventures, digital transformation requires capable oversight and meaningful accountability. Metrics must drive value-capturing outcomes, rather than memorializing measurable outputs. With meaningful executive leadership and credible performance goals, companies can sharply raise employee engagement and success odds. Otherwise, digital aims devolve into yet another change management project with a predictable ending.

Separate Digital Strategy from Operational Technology

Executives are struggling to maintain operational excellence while accelerating digital strategy. Ultimately, strategic competitiveness will not be determined by how well or poorly companies upgrade their systems, but by how well they reimagine their digital futures. That’s why C-suites can never afford to use operational readiness to filter strategic initiatives.

Frequently, as tactical projects flounder, falter, and fail, digital strategy is easily deferred, derailed, or ignored. To remain competitive, executives must focus on the urgency of digital strategy over commoditized tech improvements.

Rather than focusing on project management checklists, backlogs, and resource gaps, senior leaders must ask if the company has a deep stable of professionals who can deliver operational excellence and strategize — separately. Leadership must let tacticians maintain and upgrade infrastructure while equipping true strategists to shape the company’s future.

That imperative fails when executives are themselves incrementalists or legacy functional leaders who lack the experience, foresight, and creativity to execute strategy. That flaw is magnified in rapid, competitive markets that demand candor and insight, unencumbered by daily operational goals, needs, and barriers.

Companies serious about the digital era must recognize the fundamental difficulty in prioritizing strategy acceleration and be bold enough to act differently.

Outlaw Entrenched Revenue Drivers

Overreliance on flawed, rigid, entrenched revenue forecasting is another widespread corporate problem. Grandiose strategic ambition and promises should never displace business fundamentals.

In efficient enterprises, revenue variances are well anticipated and addressed. New and existing customer-buying behavior, when analyzed thoroughly, predicts future top-line growth and likely returns on marketing investment. When C-suites truly understand why customers stay or switch, there are few “surprise” results.

Lofty strategic visions often lose sight of basic customer spend metrics: what, why, how, and how much customers buy and the likelihood of future loyalty. Many simplistic valuation methods focus on total revenue growth rates, but customer-based corporate valuation (CBCV) focuses on customer-unit economics, including acquisition costs, retention rates, purchase frequency, and average transaction measures. Most C-suites have ample data to rethink forecasting. 

Solutions can start with three overlooked, data-driven business stewardship questions: (1) what value would investors or lenders assign to revenue projections? (2) do customer-unit economics match strategic vision aspirations? and (3) which signals warn of potential revenue decline? Weighing transaction-level revenue streams against the aggregate costs to acquire and retain customers provides the critical cash-flow estimates investors seek.

From a C-suite perspective, such predictive analytics mitigate costly customer churn and reveal whether strategy aims will meet tomorrow’s market targets.

[For more from the author on this topic, see: “10 Rewired Risk Rules for the Digital Era.”]

About The Author
Noah Barsky
Noah P. Barsky is a Cutter Fellow, a member of Arthur D. Little’s AMP open consulting network, and Associate Professor at Villanova University School of Business in the executive and graduate business programs. His research and teaching focus on performance measurement, business planning, risk assessment, and contemporary financial reporting issues. Dr. Barsky develops and delivers executive education programs for various Fortune 100 companies,… Read More