PreView - April 2018 Edition

PreView - April 2018 Edition

As organizations continue to evolve their risk governance practices and pursue new market opportunities, focused and relevant information about emerging risks is at a premium. The objective of Protiviti’s PreView newsletter is to provide input for these efforts as companies focus on risks that are developing in the market. We discuss emergent issues and look back at topics we’ve covered to help organizations understand how these risks are evolving and anticipate their potential ramifications.

As you review the topics in this issue, we encourage you to think about your organization and ask probing questions: How will these risks affect us? What should we do now to prepare? Is there an opportunity we should pursue?

Our framework for evaluation of risks is rooted in the global risk categories designed by the World Economic Forum. Throughout this series, we use these categories to classify macro-level topics and the challenges they present.

Inside this issue:

 

PreView April Category 1

 

Climate Change and the Interconnectedness of Global Risks


Emerging Risk Categories: Environmental, Geopolitical, Societal, Economic

Key Industries Impacted: Government, Food and Agriculture, Financial Services, Consumer Products and Services, Manufacturing, Energy, Transportation, Real Estate


According to The Global Risks Report 2018, published by the World Economic Forum (WEF), environmental risks, including but not limited to extreme weather events, natural disasters, and biodiversity loss and ecosystem collapse, ranked highest in terms of likelihood and impact. Additionally, the WEF suggests that the truly larger issue resides in the depth of interconnectedness that exists among environmental risks and risks in other categories — such as water shortage, involuntary migration, impact on critical infrastructure and the potential for regional conflict. The high frequency, overall cost, and cumulative economic and societal damage of weather and climate disasters have the potential to spill over and cause disruptions reaching far across the globe.


"The recent Vanguard and BlackRock letters to boards and CEOs send a clear signal that climate change risk and environmental, social and governance matters are of high priority to asset managers. Both public and private companies should consider these demanding expectations in broadening their focus beyond acceptable financial performance."

— Jim DeLoach, Protiviti Managing Director

Key Implications and Considerations

Sinking Cities and Water Crises

The interconnectedness of environmental risks with other major risks, such as water and food crises and large-scale migrations, make climate change a uniquely difficult, unprecedented and highly critical challenge to undertake. In many places in the world, aging or inadequate infra- structure cannot keep up with increasing demand from growing populations, and unstable political institutions cannot deal with the fast rate of change or collect the funds necessary to properly alleviate the problem.

Even established, well-defined governments and organizations with sound infrastructure and disaster-recovery plans can find themselves in crisis due to the unpredictability of weather as a result of climate change. Cape Town, an affluent metropolitan city in South Africa, which had received international water management awards in the past, found itself facing a looming water shortage early this year, following a record drought possibly worsened by climate change, coupled with an increase in population growth and overdevelopment. Residents are being warned of an impending “Day Zero”, at which time city officials will be forced to shut off access to clean water for four million people in areas where reservoirs are dangerously low.

For businesses, such unpredictable weather- related events can have a drastic impact on their day-to-day operations. Businesses must ensure they have continuity plans that adequately address potential water crisis situations, as well as effective plans for reducing water consumption in their operations over time.

 

Water Crisis: Who's Next?

While Cape Town’s water crisis has been at the forefront, an article published by National Geographic predicts that crises in other metropolitan cities are inevitable due to similar conditions — overdevelopment, population growth, and the upset of water supply-and-demand balance, intensified through climate change.

Mexico City — Government estimates acknowledge at least 20 percent of the 21 million Mexico City residents experience disruptions in getting water from their taps.

Jakarta — The city is sinking faster than the ocean is rising due to groundwater extraction.

Melbourne — Water managers predict that their city may run out of fresh water within the next decade.

"Climate change has become the biggest long-term threat to this city’s future. And that’s because it is linked to water, health, air pollution, traffic disruption from floods, housing vulnerability to landslides — which means we can’t begin to address any of the city’s real problems without facing the climate issue."

— Arnoldo Kramer, Mexico City Chief Resilience Officer

Supply Chain Disruption

Supply chains, and food supply chains specifically, are also highly susceptible to adverse impacts from a changing climate. The Food and Agriculture Organization of the United Nations reports that more than three-quarters of the world’s food supply is derived from just 17 plant and animal species, which is essentially Mother Nature’s own version of concentration risk. This implies that heatwave frequency and drought could cause a breakdown in the food system and widespread famine, hardship and political instability.

Global manufacturers are also highly impacted by supply chain disruptions. One lesson learned comes from Japan, which was struck by two major earthquakes in 2016, forcing Toyota, the world’s largest automobile maker, to suspend much of its production across Japan for a short period of time due to a shortage in parts and physical damage to factories. In response, Toyota developed supply chain databases to identify how an emergency could impact the supply chain and, as a result, began to standardize parts across multiple models to enable in-house production at alternate plants, if necessary, during periods  of crisis. While earthquakes are not necessarily climate change-related, companies may consider undertaking similar approaches as Toyota in order to mitigate the impact on operations due to unpredictability in supply chain disruptions as a result of unexpected disasters, including those induced by climate change.

Involuntary Migration

Finally, displacement of people as a result of severe natural disasters can cause strains on resources, infrastructure, housing and even international relations. This societal impact of involuntary migration is no more apparent than in the ongoing, politically generated Syrian migrant crisis; however, weather-related events continue to be the leading cause of displacement globally. Of the 31.1 million people displaced in 2016, over 24.2 million were forced out of their homes and lost their livelihoods due to weather-related disasters. Displacement could have a severe impact on businesses in the impacted area due to loss of both human capital and consumers.

Spotlight: Climate Change and the Insurance Industry

Amidst the potentially devastating societal and ecological ramifications of climate change, one industry faces direct financial impacts from the magnitude of environmental risks — insurance. In 2017, thanks to a trio of catastrophic hurricanes across North America, a pair of powerful earthquakes in Mexico and a rash of unusually large and damaging wildfires throughout California, insurers were hit with bills totaling about US$135 billion, according to estimates by German reinsurer Munich Re. That figure is the highest recorded in a single year; together with uninsured losses, the total losses for the year from natural disasters amounted to US$330 billion, behind only the 2011 losses incurred when an earthquake and the resulting tsunami in Japan spawned the Fukushima Daiichi nuclear disaster.

Extreme weather events (and extreme insurance payouts) have gone hand-in-hand with climate change. Both global temperatures and economic losses from environmental disasters have reached their peaks in the past decade. In fact, according to reinsurer Swiss Re, eight of the past ten years have seen economic losses (from both manmade and natural disasters) surpass US$100 billion. Despite some environmental measures taken in recent years, continuous climate change will no doubt continue to wreak havoc on infrastructure and increase the direct financial costs for insurance companies. This may cause reinsurers to reverse the decade-long trend of coverage price declines. It also underscores the importance of capital strength and risk identification and management for insurance companies to be able to withstand increased business costs and remain profitable in unprecedented environments.

Economic Cost of Natural Disasters

Economic Cost of Natural Disasters

Puerto Rico: Debt Crisis, Hurricane Maria and Depopulation

The effects of dramatic weather events spurred by climate change are especially catastrophic for areas with struggling infrastructure. The devastation of Puerto Rico in the aftermath of Hurricane Maria is a prime example.

In PreView Volume 3, Issue 1, we examined the growing debt crisis in Puerto Rico and the challenges it faces in regards to its financial health. We noted that the country defaulted for the first time in August 2015 and faced over US$72 billion in debt as of January 2016. As of September 2017, prior to the storm, that debt figure had risen to US$120 billion.

In its wake, the storm left behind an estimated $100 billion in damages, and six months later, the island is still struggling to rebuild and restore services. Puerto Rico has seen negative population growth since 2000, largely compounded by an ongoing recession on the island. Now, it is experiencing a major depopulation event, with estimates from the Center for Puerto Rican Studies anticipating that between 114,000 and 213,000 Puerto Ricans, out of 3.3 million island residents, will have relocated to the mainland United States by the end of 2018. Projections from the administration of Puerto Rican Governor Ricardo Rosselló estimate that the population will fall 10 percent, to below 3 million within the next decade.

This exodus of people will cause major shifts to the demographics of Puerto Rico, potentially resulting in brain drain and further crippling the economy. Companies in vulnerable areas must evaluate the flexibility of their operations in the case of disaster-related short- and long-term labor shortages.

 


 

Retreat of Globalization

 

Retreat of Globalization: A Closer Look


Emerging Risk Categories: Economic, Geopolitical, Societal

Industries Impacted: Manufacturing and Distribution, Technology, Consumer Products and Services, Government, Agriculture, Financial Services


In recent years, the election of U.S. President Donald Trump and the advent of Brexit and European nationalism have signaled a change in views regarding globalization versus protectionism, spurring vigorous policy debates. While globalization has been greatly beneficial to the world’s economy, some of the more developed countries’ leaders believe that it undermines their respective economies, particularly through its impact on jobs, wages and the middle class.

For those holding this opinion, the recent developments reflect a trend toward an economic policy that prioritizes individual countries’ needs and seeks to promote respective national interests. This shift of focus in the political agenda, combined with other factors, could herald a retreat of globalization — at least for the time being.

Most importantly, because advanced economies have historically stabilized the world economy through trade, these developments could cause a shift, leading to changes both domestically and globally, in a way that is difficult to predict.

Meanwhile, China has launched a US$900 billion One Belt One Road initiative to resurrect the ancient Silk Road, and South Korea has emerged as a leader in research and development investment “to secure export competitiveness” — a harbinger of a changing world order. Despite the jitters caused by the shift in the political debate, the World Trade Organization (WTO) announced strong trade performance in 2017, following a slump in trade in 2016. So while politically the world appears to be fragmenting, it is worth examining whether economic and financial indicators tell the same story.

The graphs below, recreated with WTO data, represent the change in world trade between 2006 and 2016.

World Merchandise Trade by Major Product Grouping, 2006-2016

World Merchandise Trade by Major Product Grouping

World Trade in Commercial Services by Category, 2006-2016

World Trade in Commercial Services by Category

Industry Considerations and Implications


Manufacturing

The global manufacturing purchasing managers’ index (PMI) indicates that manufacturing output is on the rise, corresponding with the increase in global trade activity. This information does not seem to suggest that globalization is in decline at this point in time  as far as manufacturing is concerned. However, the consequences of recently announced protectionist policies and continued trending toward protectionism are difficult to

predict. Manufacturing in the West has benefited from offshoring production to countries with lower production costs, particularly labor, and in turn these countries have also benefited. The globalization of labor has lifted billions of people out of poverty in Asia, Latin America and Africa, and allowed developing countries to grow economically. A retreat of globalization fueled by protectionist policies could mean that this advantage is lost, both  for developing countries and the manufacturing industry in the West, particularly if the resulting cost increases cannot be passed on to consumers or consumer demand declines.

One example of a manufacturing subindustry soon to be impacted by protectionist policies is the steel industry in the United States. President Trump has announced steep tariffs on foreign steel and aluminum (with some countries excepted) with the goal of increasing domestic production. Due to the higher cost of domestic steel and aluminum and the ubiquity of these metals in a number of sectors and products, these tariffs will impact the sourcing of anything from construction to technology to food packaging. This may lead to increased costs, which will eventually be passed down to consumers.

Not to be ignored in the midst of the effort to increase domestic production is the cost of labor. The average U.S. computer engineer earns six to seven times as much as his or her Indian counterpart. This factor, combined with other reshoring expenses, will likely offer strong incentives to companies to lower costs through robotics and automation. One report suggests that 1.2 million jobs in manufacturing are already under threat from robotics in the UK alone. This could lead to increased competition among lower skilled workers for jobs, even as it creates efficiencies for the manufacturers. This situation could lead to further calls for protectionism, regardless of whether the number of jobs is actually affected.

As it is now, protectionist policies combined with rising trade costs have led to shifting and uncertain dynamics in global value chains (GVCs), as some manufacturers seek to move production closer to the ultimate consumer. While the precise consequences

of this are difficult to predict, manufacturers must stay alert to supply chain risks and develop appropriate business and action plans to sustain operations in the event of sudden unexpected developments.


Agriculture

The globalization of agriculture has contributed positively to the overall global economy. It has served as an engine of growth in developing countries by making it possible for them to become food exporters while simultaneously increasing their food security.

However, developed countries have become concerned that global competition in food production hurts their local farmers. This concern has given rise to protectionist policies in agriculture, particularly in the EU and the U.S.

Protectionism creates winners and losers in agriculture and affects other industries that rely on it. While some local farmers may benefit, prices typically go up for consumers. Protecting agriculture raised food prices by an estimated US$1,500 per year for a family of four in the European Union in 1997. A more market-oriented model of agriculture, such as  is considered in the UK following Brexit, may help lower food prices and create a shift in the attitudes going forward, but the challenges of adopting such a model are considerable.

In addition, farmers can get caught in a retaliatory tariff action. China's finance ministry announced new tariffs as high as 25 percent on U.S. agricultural imports, in response to U.S. tariffs on Chinese metal exports and other goods, implemented by President Trump. A trade war, if it lasts or escalates, could undermine the intent of the protectionist policies and weaken certain sectors of agriculture, affecting its downstream distributors, shippers and consumers. This risk, highly dependent on changes in the political winds, needs to be considered by the industry and mitigated with various market and contracting strategies.


Financial Services

The retreat of globalization in the financial services industry is inherently difficult to pinpoint due to the number of parameters that could be measured. One method is to look at the way in which capital, in its many forms, flows across national borders.

Since the global financial crisis of 2008, cross-border capital flows have declined, partly because the banking market contracted dramatically as a result of the crisis. In 2016, for example, the amount of foreign direct investments was estimated to be between one-third and one-half of what it was pre-crisis in 2006. Further, recent data suggest a stabilization of cross-border flows rather than a return to previous levels. Although optimism for increased cross-border dealmaking exists in areas such as mergers and acquisitions, this is largely contingent upon the assumption that current global free trade agreements do not face any more restrictions or roadblocks. Given the inherent risk and cost of international trade, intensification of red tape and bureaucracy could make cross-border capital movement a less attractive prospect and threaten global financial networks.

It is also worth noting that the U.S. Fed’s monetary policy normalization will limit capital flows to emerging countries, further reducing global capital flows. An increase in trade barriers and diversification of regulatory requirements could potentially slow global investment and financial globalization generally.

One measure of globalization in financial services is the degree of alignment in national regulatory agendas. The case for alignment was thought to be obvious; however, following the recent protectionist wave of policymaking, it is not as clear-cut as once thought. A lack of harmonization could increase costs for consumers, create duplicative costs for financial services firms, and decrease cross-border trade. A report from the UK parliament, released in early 2018, states in its summary that, following Brexit, the UK will not necessarily follow the EU rulebook when it comes to regulation of financial services if the rules contradict the interests of the UK economy. This could create a distinct regulatory framework, possibly securing a long-term competitive advantage for banks in the UK relative to others in the EU constrained by existing regulations. However, the new framework may also allow for new cooperation between banks in the UK and other global financial institutions, which may mitigate the fragmentation otherwise feared. Due to the complexities of regulatory compliance, the positives and negatives are difficult to predict at this time.


Spotlight: Technology as an Enabler of Globalization

While protectionist policies are aimed at physical goods and services, the open nature of the internet and its global reach have allowed technology products and services that are web- or app-based to roam free across borders. One might say that globalization is enjoying a “safe harbor” from protectionism in the digital world, and as e-commerce and the digitalization of services grow, they may render protectionism obsolete. The largely open-border internet has provided developing countries with economic opportunities previously only gained via outsourced manufacturing. The increasing volume and prevalence of digital trade should thus cause us to reconsider how we view and measure globalization. Key statistics show that the rate at which the world becomes more connected via technology continues to expand, supporting the argument that in the digital world the threat of retreating globalization is minimal.

Technology as an Enabler of Globalization


"The point is clear: Now that the force of open, global digital communications has been realized, returning the genie back into the proverbial bottle will be next to impossible. That said, regulatory storm clouds loom on the horizon for the technology industry. The imminence of the European Union General Data Protection Regulation (GDPR) implementation, emergence of the Facebook controversy (and potentially other providers) over the privacy of personal information posted on social media, calls for tax regulations to catch up with e-commerce activity and the sharing economy, and continuing debate on net neutrality and internet fragmentation all point to the possibility of restrictive regulatory developments in the future."

- Gordon Tucker, Protiviti Managing Director

VR and AR

 

Coming to Terms With Reality, Both Virtual and Augmented


Emerging Risk Categories: Technological, Societal

Industries Impacted: Technology, Media and Communications, Consumer Products and Services, Government, Education, Healthcare and Life Sciences, Real Estate, Travel, Automotive


Virtual reality (VR) and augmented reality (AR) are transformative technologies used to digitally manipulate and simulate a real environment. Both are evolving rapidly and appear to be on the cusp of mainstream usage. While VR and AR are best known for their applications within the entertainment industry — AR mobile game app Pokémon Go made an estimated US$600 million in revenue in its first three months, for instance there is a promising future for these technologies in a variety of other industries. Commerce, education, healthcare, real estate and hospitality are among some of the industries pioneering ways to integrate VR and AR technology.

What is the Difference Between VR and AR?

Difference Between VR and AR

Worldwide Spending on VR and AR Hardware, Software and Services

Spending on VR and AR
“The entertainment industry demonstrated the possibilities of AR and VR, and few technologies have the potential to be more transformative. It has taken longer than many expected for these technologies to migrate into the workplace; however, we are starting to see real interest in them at many of our clients, and practical use cases are developing rapidly.”
— Jonathan Wyatt, Protiviti Managing Director
 

The VR and AR market size in 2017 was US$13.9 billion, and it is projected to grow to US$143.3 billion — a 931 percent increase in just three years. Likely contributing to this boom is an estimate of US$3 billion of capital that has been invested in AR and VR technology companies in Q4 of 2017 alone.

Industry Applications of VR and AR Technologies

Of the many industries looking to benefit from these growing technologies, we focus on four that are currently experiencing change as a result of VR and AR applications:

 
Commerce and Marketing
Multiple retail businesses have adopted VR and AR technologies as a marketing tool to attract more customers. IKEA has created an AR interface that allows customers to place furniture items in their own living rooms to preview how their purchase will look in real life. Makeup retailer Sephora has implemented an AR application to allow customers to virtually “try on” shades of makeup to find the perfect color match.
 
With the rise of experiential retail and a shift away from brick-and-mortar stores, many retailers may want to consider using creative technologies such as VR and AR to draw in new customers and maintain current ones.
 

 
Real Estate and Hospitality
Instead of physically touring a house or hotel room, prospective home buyers and travelers can wear a VR headset to take a virtual tour of a location, such as a home for sale, cutting down on scheduling conflicts with real estate agents and providing a more immersive browsing experience than the standard static images from websites. Some hotels have even created AR-enabled mobile app games to encourage their customers to explore hotel amenities, using hidden prizes and digital images to entice users to move around the hotel property.

 
Training and Education
VR and AR are also being recognized as useful tools in providing a wide variety of job- related training, as well as enhancing educational experiences at any level. The military and emergency services training centers use VR to transport trainees to a virtual scenario where risky procedures or tactical scenarios can be practiced without the real- world risks inherent to these situations. VR and AR can be used in the classroom to give students a realistic and immersive view of historical events in a discipline traditionally taught through lectures and reading.

 
Workplace and Manufacturing
Tools like Glass Enterprise Edition, the second iteration of the failed Google Glass AR glasses, are being adopted in the workplace to help employees conduct tasks more accurately and efficiently. Unlike the original Google Glass eyewear, Glass Enterprise Edition is designed for workplace use, rather than social use. AR-enabled Glass-style eyewear is particularly useful in manufacturing jobs, where the worker is able to see a digital prototype or step-by-step instructions for assembling or fixing a piece of machinery in their field of view, rather than constantly referring to a tablet or computer for the same information. This option increases productivity, as the worker is able to obtain information hands-free during tasks.

Key Considerations and Implications

Despite the excitement around these innovative technologies and applications, widespread adoption of VR and AR still faces multiple challenges.

Privacy and Data Collection

Google Glass, the AR headset that debuted in 2014, faced serious criticism for failing to make it obvious when the user is recording his or her surroundings — which eventually doomed the success of the gadget. In addition, large tech companies have recently come under fire for not being transparent about consumer data collection. VR and AR developers may need to find unique ways to ensure users’ data and privacy is protected in order to minimize consumer concerns.

Accessibility and Demand

A study by Foundry revealed that UK customers are willing to spend approximately £130 on a headset, whereas the average cost to produce this hardware is £500. Accordingly, headset producers will likely need to find ways to lower the price of their products in order to meet customer demand. For now, the high price tag of advanced headsets may exclude lower-income individuals from the immersive experiences of VR and AR, contributing to inequality concerns if (or when) VR and AR become enmeshed with everyday life.

Health Concerns

Vision problems, claustrophobia and motion sick- ness are all potential drawbacks of VR use after even a short period of time. Future developers and adopters of VR and AR technologies will need to take these health risks into consideration as consumers weigh the pros and cons of adopting this technology.

Spotlight: How VR and AR Can Effect Behavior Change

There is growing evidence suggesting that VR and AR may be effective in influencing behavior change. This could prove useful in improving individual mental welfare, as well as societal interaction. Some of the early experiments with these technologies to influence positive behavior change include the following:

  • Treating mental health issues: The healthcare industry leverages VR and AR  for treating patients’ anxieties such as stage fright, interview-induced stress and phobias. These technologies allow medical professionals to standardize and manipulate the patient’s environment and repeat treatments as needed. VR has also been used to help soldiers deal with PTSD symptoms in a controlled environment by exposing them to triggers while in the presence of a therapist.
  • Addressing social biases: The National Football League (NFL) in the U.S. will begin using VR to address harmful biases related to race and gender, by portraying the user as a different race or gender and creating simulated work conflicts. The NFL and other companies using this type of training hope that it is more effective than the standard courses currently offered, and that the positive effects of virtually “walking a mile in someone else’s shoes” will create long-lasting changes in workplace behavior and help mitigate engrained biases.
  • Changing eating habits: The team behind virtual reality food experience firm Project Nourished is working on a virtual reality eating experience, using gyroscopic utensils, aromatic diffusers, and 3D-printed food to simulate the taste of typically unhealthy foods in more nutritious food vehicles. This technology is aimed not only to help those trying to reduce intake of unhealthy foods, but also to act as a form of eating therapy for individuals battling eating disorders.
  • Creating awareness: Stanford University’s Virtual Human Interaction Lab has studied how VR experiences with a coral reef can impact people’s attitudes toward conservation. When individuals can virtually swim through the reefs using VR headsets and hand-motion monitors, they experience embodied cognition, a phenomenon that occurs when body motions associated with a topic being studied facilitate learning and engagement. The team hopes that individuals who are able to interact with the reefs will feel more closely impacted by coral reef destruction, and will be more likely to rethink their real-world behavior.

 

Smartphones and the Text Generation

 

Smartphones and the Text Generation


Emerging Risk Categories: Societal, Technological

Industries Impacted: Technology, Telecommunications, Consumer Products and Services, Financial Services


As with any type of immersive technology, smartphones have quickly become an ingrained part of our everyday lives. In a relatively short period of time, the functionality of these devices has grown to allow for a seemingly endless array of uses, transforming the way we communicate with one another, interact with the world around us, and share and consume information. The change in communication precipitated by smartphones is as profound as that brought about by the introduction of color television sets to the mass market in the 1960s, and in a similar way, it has spawned numerous studies to assess the impact of the technology on its users and their behavior. Of particular interest to researchers and the broader public are its impacts on younger people, specifically those belonging to the iGeneration, or iGen — individuals born between 1995 and 2012 who have never lived without the internet. As researchers continue to discover and wrestle with the implications of these immersive devices, and as the iGen comes of age and enters the workforce, a number of important questions and considerations arise.

Phone Ownership Statistics by Demographic

Phone Ownership Statistics by Demographic

Smartphone Use by Age Group

Smartphone Use by Age Group

Key Considerations and Implications

 
Health and Addiction
Among the various negative consequences associated with smartphone adoption is the impact on children’s well-being and social skills. A growing body of evidence suggests that increased smartphone usage can result in a wide range of concerns, including sleep deprivation and mental health problems. With the average American child now receiving their first smartphone by age 10, the time spent on these devices accessing the internet and engaging in social media has fueled fears of a new kind of addiction — one that makes young people even more susceptible to issues such as body image disorders and cyberbullying. Increased attention to these matters will continue to take the forefront of public discussion regarding the relationship between children and this technology. Companies in this space will need to assess and find ways to mitigate the negative impacts if they want to lead in the development of these immersive personal devices.
 

 
Privacy, Security and Parental Controls
More screen time and deeper engagement with social media by the iGen has led to the creation of an earlier, and perhaps more robust, digital footprint than previous generations. As tech industry leaders and policymakers continue to debate the proper safeguards surrounding cybersecurity and data collection and sharing, the iGen remains arguably the most at risk of privacy abuses. Smartphone companies are being urged to consider how to build in effective parental controls and restrictions that can protect against certain content and usage. In addition to calling for more studies related to the health impacts of smartphones, two relatively large shareholders of Apple issued a public letter to the iPhone maker in January 2018 urging for new tools and optionality to make Apple’s products safer for younger users, including restrictions on access to certain applications and content. The ability to respond to these concerns is a differentiator in the smart technology space.

 
Consumption Habits
Smartphones and other portable devices have significantly expanded the scope of e-commerce by offering the ability to conduct online purchases from anywhere, any time. While research company eMarketer estimates that by the year 2021 more consumers will conduct their online shopping from their smartphone than a desktop or laptop computer, the iGen is seemingly already there. Advertisers have realized this too, as targeted campaigns to reach this audience have an increasing presence on mobile platforms. The amount of time spent engaging with certain retailers, both directly and indirectly, while using a smartphone, certainly drives consumer behavior, and not just what purchases are made but how. Mobile payments and online banking are growing exponentially — led by the millennial demographic, 75 percent of whom use a mobile banking application, compared to less than half of baby boomers and even fewer seniors. It is reasonable to expect that as soon as the iGen acquires similar purchasing power, they are likely to use mobile payments almost exclusively — something retailers and the banking industry need to be prepared for.

Spotlight: Communication and Workplace Dynamics in the Era of Smartphones

Prior to the arrival of smartphone and tablet technologies, work life and personal life were inherently, and perhaps now to some, nostal- gically, separate. Work-related responsibilities were relegated to the office, and the ability to be accessible outside of normal working hours was, by nature of the times, limited.

The introduction of mobile devices and the proliferation of smart technology have changed that dynamic. And while mobile devices with email capabilities have been available since the early 2000s, the generational divide in how such technology is used is deeper than ever, and not always properly considered.

For the iGen, smartphones have always been an integral part of daily life and have profoundly shaped preferences in communication styles and habits, some of which fundamentally differ from older generations. For example, numerous studies have cited that younger professionals overwhelmingly prefer text and email as their primary methods of communication, as opposed to conversation via telephone or in person. To many, these forms of communication are favored because they offer the opportunity to ponder  a more careful reply, rather than having to respond instantaneously. Ironically, the “telephone” feature is now only the fifth most used application on the smartphone.

Interactions between customers and businesses are changing, too, due to the ease of commu- nication using smartphone technology. Chat apps are replacing email as the preferred mode of business-to-customer interaction because millennials believe that such interaction resolves an issue more quickly and conveniently than going through other customer service channels.

With respect to the increasingly blurred line between work and personal time, the ability to send and receive work-related communications outside of the office has resulted in an increased amount of time that employees are accessible. Fifty-eight percent of workers cited that technology gives them more freedom to work when and where they want to. This is a concern  to some employers. In a recent survey, 19 percent said they believe that their employees are productive for less than five hours per day, with 55 percent citing smartphones as the culprit. While some companies have taken steps to curb such productivity inhibitors by blocking certain internet sites on company-issued phones or banning personal cell phone use, for example, the challenge remains to balance the benefits of increased accessibility with the risk of giving up some amount of control over the employees’ time. With the iGen representing the largest percentage of smartphone owners across generational groups, this risk will only increase as these individuals enter the workforce.

A workforce armed with smartphones and on the go also poses a security threat for companies. Unsecured phones are vulnerable  to hacks and data breaches which can expose company files, intellectual property, servers and programs. Employees using personal devices often do not comply with companies’ phone password policies, or don’t want to allow the company access to their device to install the proper protections or delete data if the phone is misplaced. These risks need to be mitigated with the incoming iGen workforce.

Communicating with internet- and smartphone-native employees, who have an attention span as short as eight seconds and an inclination to multitask across three to five screens, continues to be a struggle for many employers. For a start, organizations should consider applying these strategies when creating operational and regulatory training messages for the millennial and iGen demographic: emphasize visuals, keep messages concise, and use infographics for content-heavy messages.”

— Rick Childs, Protiviti Managing Director

 

 

On the Radar

Automation and Its Effect on Inequality and Wages

The Institute for Public Policy Research (IPPR),  a policy think tank, recently released a report on employment in the digital age. The report warned that while robots and automation may not be bad for the economy, they may cause low-skilled workers to suffer disproportionately. Among other proposals, it argues for the creation of new models of capital ownership to ensure everyone reaps the benefits of automation.

Unionizing in the U.S. has been in decline since the late '70s. Research shows that the loss of voice at work for many workers is a contributing factor to income inequality. If the rise of automation continues to disenfranchise workers, it could serve as a catalyst that reinvigorates the use of collective bargaining. Paul Krugman has argued that bargaining power needs to be restored to labor, and that essentials, such as healthcare, should be guaranteed to every citizen. Further, several basic income movements have sprung up in more developed parts of the world, indicating a different approach to distributing the benefits of increased automation.

What policy modernizations are necessary to cope with the diminishing need for unskilled labor? Will more countries adopt versions of South Korea’s “robot tax”? Should countries seriously consider universal basic income? These questions loom large for policymakers, corporations and workers alike, while the fourth industrial revolution continues to transform the labor landscape.

China’s “One Belt One Road” Initiative — A Challenge to Existing World Order

While to some observers UK Prime Minister Theresa May’s recent visit to China indicates a willingness to trade, her refusal to endorse China’s One Belt One Road initiative shows a cautiousness in overturning the current world order.

President Xi Jinping of China announced in 2013 that he plans to revamp the ancient Silk Road trading route with the Belt and Road Initiative, also known as One Belt One Road (OBOR). This aspires to be the most ambitious infrastructure project the world has known, connecting 65 percent of the world’s population across 68 countries. The goal is to “kindle a new era of globalization” and improve trade relationships through infrastructure investments. But in a world so connected, new problems are sure to arise, with implications to consider.

Nine hundred separate projects have been developed for the OBOR initiative, at a cost of US$900 billion. While the Chinese government is making large investments in this project, several countries are taking on heavy loans from the Chinese government, potentially transforming international relations.

This initiative could have far-reaching conse- quences in geopolitical tensions, the economic solvency of several countries, international relations, and manufacturing and trade, with the potential for a revolutionary change in the existing world order.

 

 

Continuing the Conversation

The risk areas summarized above will continue to evolve, and there is no question that new risks will emerge and affect organizations globally. We are continuing the discussion we’ve started in this newsletter on our blog, The Protiviti View (blog.protiviti.com). Our blog features commentary, insights and points of view from Protiviti leaders and subject-matter experts on key challenges and risks companies are facing today, along with new and emerging developments in the market. We invite you to subscribe and participate in our dialogue on today’s emerging risks. You can also find additional information on our microsite: protiviti.com/emerging-risks.

About Our Risk Management Solutions

Protiviti’s risk management professionals partner with management to ensure that risk is appropriately considered in the strategy-setting process and is integrated with performance management. We work with companies to design, implement and maintain effective capabilities to manage their most critical risks and address cultural and other organizational issues that can compromise those capabilities. We help organizations evaluate technology solutions for reliable monitoring and reporting, and implement new processes successfully over time.

Contacts

Cory Gunderson
Managing Director
+1.212.708.6313
[email protected]
Jim DeLoach
Managing Director
+1.713.314.4981
[email protected]
Matthew Moore
Managing Director
+1.704.972.9615
[email protected]
Andrew Clinton
Managing Director
+44.20.7024.7570
[email protected]
Jonathan Wyatt
Managing Director
+44.20.7024.7522
[email protected]
Jason Daily
Managing Director
+1.312.476.6420
[email protected]
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