In the face of new, complex challenges now is the time for organisations to reset their approach to risk. Host Emily Khan is joined by Dr Jonathan Gillham, Chief Economist and Director of Econometrics and Economic Modelling at PwC UK and Stephanie Bruce, Chief Financial Officer at abrdn plc to explore this new landscape and how it creates the need for a new perspective. Hear about the opportunities, challenges and practical steps that will help you start to rethink risk. Listen and subscribe today.
Hello everyone and welcome to this episode of our Business in Focus podcast. I am Emily Khan, a director here at PwC, and I am your host for this episode. In this episode, we'll explore why now is the right time to reset on how we look at risk, the new world of challenges and opportunities to consider, and why collaborative approach could be the way forward. After 18 months of uncertainty, our rethink risk research has a strong case for a new approach to risk. To bring the issues to life today, I am joined by two people, who've been instrumental to the research, Stephanie Bruce and Dr Jonathan Gillham. Stephanie is Chief Financial Officer, Abrdn plc and chair of our research steering group. She's been doing a valuable job of chairing a group of leaders from all industries to challenge us to think differently about the risk landscape and how we should approach it. Dr Jonathan Gillham is our chief economist here at PwC UK, and his team have led the thinking on what the economic outlook tells us about where we might be headed, and the risks and opportunities these scenarios present. Very warm welcome to both of you, fantastic to have you here today. Perhaps, to get us going, you could introduce yourselves and tell us a little bit about why this topic is of interest to you. Stephanie, would you like to go first?
Hello, Emily and Jonathan, great to be speaking with you today. For me, if I reflect back on the last period, there has been so many superlatives used since March 2020, and a much used descriptive when we are in the risk arena has been uncertainty. We can all agree that we've navigated this period of significant uncertainty, but in doing so, we’ve demonstrated great resilience in addressing what was really in effect being the compound effect of two particular risk drivers, and those being, managing health and safety across our workforces, families, society, together with mitigating as much as possible the impact of the adverse economic conditions then also came to bear both in businesses and individuals. For me, as we move forward, post this, really this first phase of COVID, these drivers will change again, and we're going to create quite different consequences. Those consequences will be both direct and indirect for the risk arena; therefore, it seems to me very important that we consider and evaluate this next phase. On that basis, it's actually very hard for me to be anything other than very interested in this whole topic that you've set out here on rethinking risk.
It has been fantastic to have your input to that thinking and really great to have you here today. Jonathan, would you like to share your introduction?
Thanks very much, Emily. Risk is very important in my world, because as Stephanie has already mentioned, there's been a huge amount of uncertainty in the economy. But what often gets lost in the discussion and the narrative around risk, is the cause and effect relationship. People understand that uncertainty brings a drag to the economy, it creates uncertainty, particularly for investors or businesses that want to grow or businesses that want to, perhaps, do more trade overseas, but the key issue is connecting the vague understanding of where there is uncertainty in the economy into outcomes. So what does that actually mean, how does this uncertainty actually really translate itself through the economy.
Thanks Jonathan. We've been talking to a lot of business leaders about this being a moment in time to reassess the risks and opportunities that uncertainty presents. Jonathan, you and I’ve been working together on combining a short and a long-term view to do some predicting, as it were. Maybe, I could come to you first, to share some of that thinking about how the long-term economic scenarios are beginning to play out in the short-term and where you think organisations should be focusing, where they do this rethinking of risks that we're talking about?
Where we focus this piece of analysis is in terms of the economic impact. If you think in terms of GDP, productivity, job creation, and we've broken that down into four scenarios, where we've looked at particular types of risks on the labour market, on the consumer, on international trade, and also how that interacts with the government. There's big change ahead in the labour market, particularly in terms of digitalisation and automation around labour supply shortages, consumer preferences are changing, people are shopping in different ways, they’re buying more stuff online, but they're also far more locally conscious. They're also far more focussed on the ESG side of things, and where the products are coming from and the ethics associated with that.
International trade has obviously contracted quite substantially as a result of the pandemic, but that was a pattern that was actually preceding the pandemic. Supply chains were becoming shorter, as capabilities in terms of manufacturing and production, in particular, started to grow around the world, and countries started to converge and upskill their workers. Government has a huge role to play in all of this. It needs to help prepare a lot of the economic inequality that has occurred as part of the pandemic. It can't do that without money, and it's a very difficult time for government in terms of reducing public services. It probably is under quite a bit of pressure, particularly here in the UK to actually be spending more to support many of the public sector workers that have worked tirelessly to support us through the pandemic. That creates challenges then on the tax front, because the government needs to balance the books. Our programme of research has tried to connect the dots on some of these critical issues, and highlight what they might actually mean for businesses today.
Stephanie, I'd be interested in your take on this, clewarly you've got responsibility for risk at an organisational level in your role, but also in your career experience. How does some of those trends, Jonathan has just talked about us exploring play out in terms of tangible areas of action and focus?
When you go to those four categories that Jonathan highlighted, they are the consequences that we're now facing into; and therefore, they absolutely play out. Some more than others directly in the business corporate world in terms of labour and skills changes, shortages in some areas, but certainly changes. The key point around consumer preferences is very current, because obviously it drives the growth agenda, but the other thing I'd also say is that we've almost got to sometimes want to lift ourselves back out of only thinking about COVID-type risks. We know, for example, an increase in very much more than a significant level of cyberattacks, and not to mention the actual increasing impact and volume of climate events. Also, of course, more broadly the increased social unrest that we're seeing, which is very much going to drive societal change, and a demand for societal change across a number of different communities.
The other thing I would also reflect on is that the consequences of that, the expected economic recovery and the conditions that Jonathan has referred to, will actually also be experienced quite differently by different groups, at different paces, at different phases, and obviously in different geographies, will have an impact. Therefore, the response that we should expect to see out of that fourth area that Jonathan highlights in terms of government, I think we can also anticipate will be different, will be varied, and they may feel very nationalistic, the way different organisations and forums will respond to that volatility, inevitably will be different. It boils down to our three key principle drivers that I see coming out of the consequences, technology, and how it drives both risk and opportunity. The political dynamic, which very much feeds Jonathan's fourth cohort there around government, and that's really national and global drive. Then the societal driver referred to earlier, and really what the role of the state will be for all the reasons that Jonathan's just said, they've got a lot of difficult positions to try to manage. Therefore, the rethinking of risk for me is really about how we've got the series and suite of actions, which we will have to continue to be agile and how we think about them to manage both those direct and indirect consequences, which will inevitably continue to change.
That point about how they affect organisations differently, is really important, and it chimes with the pandemic. We saw it manifest in different ways for different groups, but that everybody had to respond somehow. There's some parallels between that and some of these issues that we're talking about, that they're big systemic risks. They require ecosystems to work together in a different way to respond to them. You referenced there cyberthreats, that's something that is affecting us all. We talk here at PwC a lot about building a secure digital society being something we have a collective responsibility for. Jonathan, I know in your research, you've been thinking about some of those shared challenges and things that we need to work across organisational boundaries on, maybe you could bring a couple of those to life for us to explore in a bit of detail together now.
Often when we talk about risks, there's opportunities that are attached to them, but only if the risks are addressed properly. If we talk about the opportunity for upskilling, that could boost GDP by around 6.5 trillion by 2030. It could really help the global economy overcome some of the negative economic consequences of the pandemic, but how to get to grips with that. It does require significant training, and it does require, perhaps, universities, higher education institutes to actually change perhaps the offer, that they're actually giving to people, who are enrolled in their systems; but to do that, that requires collaboration between businesses in terms of making clear what they actually need and the type of skills, the government to actually help provide funding for those courses, the university system itself or the higher education systems to be actually be able to provide those courses.
Then also workers being given the flexibility and the opportunity to actually properly engage. Also, we need to dispel some of the myths. A lot of the new technology that is coming in, in the area of artificial intelligence, virtual reality, drones, whatever it might be, those technologies, they're not necessarily replacing people's jobs. What they're doing is enhancing people's productivity, is giving them an opportunity to learn new skills, to engage with this technology, and actually perhaps make their jobs more interesting and more dynamic, and more exciting, but unless that engagement happens, then that could be quite substantial consequences for socioeconomic inequality, for economic activity moving away from where people live, and that could lead to more localised job losses.
Another area where we've looked into is supply chains. The trend of globalisation, whilst still progressing in many senses, has perhaps been moving more towards regional trading blocks. So with trends like that very prevalent, what we're starting to see is more reshoring CEOs actually seeing these as permanent changes, as structural changes to business operation. With those trends in mind, businesses need to think about, ‘well, how is that actually going to start to affect my cost base,’ because they need to build that resilience now into their supply chains, because really that is what consumers are expecting, they’re hoping for, it builds brand trust. Without that understanding, and without that resilience, that can start to restrict consumer choice that can knock directly into sales.
Thanks Jonathan. Stephanie, I'm conscious that you've been leading the discussions we've been having with leaders from across a range of industries about the shared challenges, perhaps you could share your reflections on how organisations could tackle them.
COVID has accelerated some of those activities that we already had seen starting to happen in a pre-COVID world, particularly in terms of skills gaps and training that Jonathan has referred to. Training is going to be absolutely critical, and there needs to be a collaboration in terms of the education authorities and the private sector in terms of what are the needs and how are they going to be met. There's definitely optimism that because of the acceleration, that communication should now actually happen more effectively than it had been doing so in the past. That is definitely a key aspect around skills arena. The issue that also comes through in a number of these areas, from an industry perspective, is actually also understanding that some of the incentives and the supports that can be put in by different countries that provide very much part of the supply chain, government and state objectives very much in terms of where they may create very supportive business environments through stimulus packages, through incentive programmes, through tax arenas, in a variety of different geographies. It's very much part of the overall global supply chain.
A combination of actually people understanding very acutely now the impact on supply chains, as Jonathan has said, really at a practical level, but also thinking about actually how those may well be disrupted again in the future, because of more national political decisions that are taken. That has definitely heightened in the risk arena. Certainly the dialogue would highlight that organisations are much more aware of actually having to understand the different trajectories of different stimulus packages, because whilst they might be skewed to a particular skill set or a sector at this point in time, and that can be really positive, it can create a great opportunity. It can also create a real challenge in sourcing if they are changed quickly, and they can be changed quickly in order to achieve a policy objective. The recent sudden implementation in China of regulations relating to private education companies, for example, where, in a very short period of time, the whole landscape was changed, which therefore has consequences. It has consequences for equity stocks in that particular arena, but it also had consequences for those who were in that spot supply chain, supporting those private education companies.
It's been more able to be agile to understand some of those changes that are coming, but then to be able to respond to those. There is much greater awareness now as well of the other regulatory changes that again have exist, have been possible levers, but are now more likely to be used in terms of national and global agendas, and those are such things as anti-trust policies, limiting fintech companies on how they control their growth as they move into regulated sectors, and of course, raising requirements on wages and social security to provide additional tax receipts, again which we have all seen in the UK. Businesses are very aware of the need to monitor and to actually think about that, the agile response that they will bring to play. Another part that also comes through is discussions in terms of the industry leaders, was that actually the social landscape had also changed as a result of technology almost overnight, as everybody moved to remote working. Initially, that had impact for just how the workforce was going to operate, but as Jonathan referred there, actually longer term, it may well create quite different operational and socioeconomic risks that we haven't necessarily dealt with before, but there's definitely a real sense that very careful communication is required by organisations for their employees to help them understand that it's not necessarily all about job reduction or cost management. It's about changing the style of the job and actually allowing employees to operate in a different way and that's going to require quite careful communication and encouragement, so that real key talent is in fact retained, engaged and motivated. That's again probably something that has been very much accelerated in terms of remote working, moving to blended working, hybrid working, but making sure that the engagement with employees has moved forward quite considerably, in a relatively short period.
Thanks Stephanie, and you've really brought to life in that answer just how wide ranging the discussions have been via rethink risk, and all the different themes that it draws together. Conscious that we've tried to cover all of that very quickly in the conversation today and we're almost out of time, but listeners can delve into that research online very soon. One of the things that we try and do on these podcast is get into practical advice. That's a pretty challenging bridge from where we've been dealing with these quite broad topics, but I am going to put that challenge to you. If you could give our listeners, one or two pieces of really practical advice, faced with this landscape that we've been discussing today, what would those be?
Jonathan I'm going to come to you first, if I may, for a couple of pieces of practical advice for people that are thinking about this after listening to this discussion.
Well it's become very apparent through the research that we've been doing, is that risks can combine both in the short and the long-term, and so just trying to unpick that in your risk register. We've spoken a lot about the need to upskill, the need for retraining. How does that fit your business in the short-term, how does it affect that in the long-term. The long-term training opportunities and the advancement of technology will be quite different to what you need to understand over the next 12 to 18 months, so try to put that separation in place. Another area where we find more and more clients engaged with, is the use of data and analytics to actually better understand the likelihood of risk occurrence. What we've seen recently is very high impact risks manifesting themselves on the economy in businesses and society, but risks that perhaps people would have thought would have been very low probability, perhaps once in a lifetime event. That's a very traditional way to construct a risk register, but practically understanding more about that probability of the risks occurring and using the data and analytics to really underpin a solid evidence base, is where we've started to see businesses start to take real advantage, and like I said, turn those risks into opportunities.
Thanks Jonathan. How about you, Stephanie, what would you add to those suggestions?
Yeah, I referred just previously about the need for monitoring. If you think about the last 18 months, the big corporate agenda has all been about resilience in terms of getting through day by day and making sure that the organisation's come out on the other side of the pandemic. Let's be honest, largely most companies have done that really effectively. It's really important that monitoring continues, because it really does two things. It is going to enable our readiness to respond to the next phase of the volatility that we've highlighted today in this discussion, but also it does actually enable almost a creative and collaborative thinking within an organisation. One particular thing we've learned through the pandemic is actually this need for collaboration, that Jonathan has referred to earlier, between organisations. Actually, if we can monitor quickly enough, and look at those risk indicators, it can be actually quite powerful, actually, how are we going to operate between organisations, because the more that we can harness the power of the talent that we all have in organisations and the power of the technology to address these risks, it will be much more successful position, and frankly we all want to be successful in delivering to customers, managing our service providers, and the supply chains. Regardless of whether it's public or private domain, we want to be in strong and positions of strength to ensure that we meet the future shocks, and there will be more, but also at the same time progress to long-term prosperity.
There's a couple of really practical points, just to your question, Emily. If you think back around how we've operated. I would really advocate harnessing all the lessons we've learned on how agile we can be, how we think and how we execute, we’ve just been through an event that up until now, had only ever really existed in stress tests, or as Jonathan referred, in risk registers, and we've proved we can be resilient. It's quite clear that risk identification and management is a core strategic priority. The real benefit is if we can harness this creative ability to address the issues and to drive the action. Then finally I would really commend that if we can capture the speed and the pace that we have shown in a whole different organisationally in the public sector on how we make decisions, that will be really powerful. Risk management should be current and really has benefited in this period, from harnessing a much quicker speed, a much better style of responsiveness and decision making, and that would be really powerful to take forward.
Thanks so much, Stephanie, and thanks to both of you. Everything that you've just said really shines with the themes that have come through in the research and the rethink risk agenda for action, that we are sharing.
That is it for today on this episode of Business in Focus. Stephanie and Jonathan, thank you both so much for joining us for that fascinating conversation, and of course thank you to everyone for listening. If this conversation has got you thinking about how you can rethink risk, please do visit our website at pwc.co.uk/rethinkrisk, where you can find out more about the research we've discussed today, and a whole host of practical insights on how to approach risk. Finally, don't forget to subscribe to keep up to date with future episodes. Thanks everyone, please do join us again soon.