Business leaders believe that the world is becoming less predictable, posing a threat to revenue
A survey by Australian insurance giant QBE found that solid risk management and disaster planning was the “antidote” to rising concern over the future.
The insurer’s annual predictability index tracks a set of business, economic, environmental, political and societal indicators to understand how easy it is to forecast future events at any given time.
“Companies have been saying for a number of years that the business environment is becoming more unpredictable, and this perception would appear to be supported by the findings of the index,” QBE said.
The study found that in the immediate future, businesses were facing unpredictability from Brexit and global trade wars. But looming in the distance is the threat from climate change, an aging population and new technology.
The ongoing uncertainty over Brexit is thought to explain why only 42% of UK business leaders surveyed said the business landscape over the next 12 months was predictable.
That compares to two thirds of bosses globally who said they knew what to expect from the future. Of those in big businesses, 82% said they considered unpredictability to be a bad thing for their company.
The index, which looks at a set of indicators dating back to 1978, showed that the world has become more unpredictable. In fact, almost all of the “least predictable years” in the index have occurred in the past 20 years, with the majority falling during the past decade.
“This increase in unpredictability is largely driven by deterioration in political stability since
the millennium, compounded by the economic and political fallout from the 2008 financial crisis,” said QBE.
The insurer noted: “Politics stands out as the biggest driver of unpredictability.
“Political instability started to rise following the 2001 terrorist attacks in the US and has continued over the last decade with a huge rise in electoral and policy-related instability.”
Meanwhile economic factors are the biggest concern for businesses looking three to 10 years into the future. However, the lack of predictability affects different companies very differently.
Manufacturing companies and retailers, for example, are vulnerable to disruption in trade or their supply chains, while service companies are more likely to be concerned with regulation and cyber.
“According to the index, the biggest impact of unpredictable events is loss of revenue, unexpected costs and decreased demand,” QBE said.
It noted that the further forward businesses looked, the less confident leaders felt about being able to predict what would happen. However, many of their companies have to plan more than a decade ahead.
QBE said: “Companies may have to invest in new business models at a time of fast changing technology and consumer trends.”
“Artificial intelligence and automation, for example, will have huge implications for the workplace and wider society, while political and environmental factors could lead to big changes in demand for goods and services.”
“Yet predicting the how and when is beyond most companies,” QBE said.
The insurer said that increased unpredictability compounded the problem of business planning and strategy setting, but noted that could be minimised is those organisations focused only on the most critical factors to them.
“There is a lot of noise surrounding important issues like Brexit and global trade disputes, and this is likely to continue for several years to come,” said QBE.
“But companies should step back from the media headlines and not get bogged down with the issues of the day - there are likely to be long term trends out there that are more relevant to the future success of a business.”
The insurer said the antidote to unpredictability is likely to be found in the development of risk management and scenario planning. It argued that better information would be the key to managing unpredictability in the future.
“We already see an increasing number of companies spending time on risk modelling and scenario planning, thinking about unexpected or difficult-to-predict events.” QBE said.
“However, the collection of risk data is often not as comprehensive and as structured as it could be,” the insurer noted.
The survey found that fewer than two thirds of respondents used economic data to help plan for their future. Nevertheless, three quarters said that they felt prepared for unforeseen events.
To combat those events, QBE said “what-if” thinking could help businesses prepare for the worst by identifying risks to critical services and supply chains.
“Whether it’s an unexpected election result or an extreme weather event, businesses are clearly operating in unpredictable times.”
“More sophisticated risk management and scenario planning could be the antidotes to growing unpredictability.”