The evolution of risk in the face of technology

In every sector, business models are quickly evolving in the face of technology. That opens up vast opportunities to operate more efficiently, develop completely new services or business models, and to serve new customers. It also presents fresh risks that connect every aspect of the business, from supplier relationships to delivery of products and services, to customer relationships.

“What we’re going through now is the start of an information age that is as big as the industrial revolution,” says Larry Collins, Vice President of E-Solutions at Zurich Insurance Group. “Yet it will get used in business in some ordinary ways.”

Innovators are remaking familiar business models, using technology to emphasize convenience, speed, instant gratification and reduced cost, as well as grabbing market share from rivals.

This can give smaller, more nimble businesses a comparative advantage over their larger rivals. However, even though it’s easier and cheaper than ever to use technology to compete with big rivals, few small and medium-size enterprises (SMEs) are taking full advantage of it.

“You can look at any business model and there are always ways for technology to enhance the quality of the service,” says Paul Jones, deputy director of the Futures Entrepreneurship Centre at Plymouth University in the U.K. However, the smaller the business, the more likely it is to apply technology to operational, day-to-day functions that will bring an immediate return. Because of this lack of focus on long-term strategy, 70% of small businesses in the U.K. never grow—they stay the same size until they eventually go out of business, he says.

The digital revolution also raises risks. First, a missed opportunity, such as not keeping up with technology, is in itself a risk. A company without a Web site is hiding from customers and missing a chance to increase sales, Dr. Jones says. That’s important, as a survey of SMEs in the European Union shows that finding customers is their top problem. Another survey, by McKinsey, shows that SMEs using Web technologies grew twice as fast, had double the export revenue as a percentage of total sales and created twice as many jobs as companies that used the Internet sparingly.

Another risk is getting the timing or the technology wrong. Companies that act too quickly risk not only jumping on the wrong tech bandwagon, but also just not devoting enough thought to making the technology work for the business or integrating it in a useful way, Dr. Jones says. In smaller organizations, key individuals tend to multitask and might not be as effective as they should be in deploying new technology.

Cyber security is possibly the biggest risk. In a world where knowledge is the strongest currency and where everything is networked and online, intellectual property is valuable and easy to steal. “If it’s online, it can be hacked,” Mr. Collins says.

Martin Delaney, general manager and technology leader at the Innovation Value Institute at Maynooth University in Kildare, Ireland, agrees. “The more technology is dispersed across the organization, the greater the organizational risk of not managing the security and cyber risk aspect,” he says. While IT shouldn’t be compartmentalized but integrated into every department, there continues to be a role for a central IT department and chief security officer to manage cyber risk.

The risks are woven together in ways companies might not realize. An SME intending to avoid cyber risk by not selling online is missing out on customers for whom going to the brick-and-mortar location isn’t convenient—and is at risk of cyber attack anyway, if any of its computers are online for other reasons. Investing in the wrong technology can be costly not only as an expenditure, but can also hurt revenue if it leads to disruptions in production or causes customer complaints.

So how do companies succeed in the digital revolution?

1. Be on the cutting edge, not the bleeding edge, of new technology. “You don’t want to be the very first, because some technologies will fail. Others will fail but resurrect,” Mr. Collins says. “You don’t want to be the earliest adopter, but if you’re still early it’s going to give you the competitive advantage to cut costs, expand markets or grow margins.”

2. Start with the basics and take a three-step approach to delivering growth. First, “look at what costs you money, then find or create technology that will reduce your costs. Second, ask how can I expand my market horizontally? How can I find new uses for my product that won’t cost me a lot more money to get into the marketplace? Technology can help,” Mr. Collins says. Third, look vertically, to what other products can be made with the same materials, especially if you can move into knowledge-based niches that are less sensitive to price. The companies that fail to grow and eventually shut down are those that never get beyond the first step.

3. Look at broad themes rather than the latest software or gadget. Yes, someone in your company needs to keep an eye on technological developments, so you don’t learn about them long after your competitors. However, it’s easy to fall into a trap of trying to keep up—technology is changing so quickly that it’s a race that’s hard to win. Instead, examine the big themes, like mobility and the ability to reach customers anywhere or to improve convenience, or sustainability and the ability to satisfy customer preferences for green products as well as new regulations.

“The mistake businesses make is they assume technology is the answer,” Mr. Collins says. “Technology merely enables the answer. The answer is how do people interact and react to the world around them. The technology has to support customer demands and needs, even if the customer doesn’t know they need it today. The customer didn’t know what the Internet was until it appeared. Once it appeared it became indispensable.” The Internet is estimated to have accounted for 21% of economic growth in mature economies from 2006-2011.

The change can be swift. Digital music quickly curbed compact-disk sales. Blockbuster Video had 9,000 stores a decade ago; after bankruptcy and being acquired by Dish Network Corp., it has but a handful and is moving into streaming movies. A decade ago, Twitter was just being created and smartphones were unknown. As of last year, a billion tweets were sent every two days and nearly a billion smartphones were sold. The digital revolution is touching traditional, physical sectors as well—Uber is shaking up the taxi industry and Airbnb the hotel industry.

Looking forward, Mr. Collins gives the example of 3D printers, which companies are starting to use to supply just-in-time parts by churning them out at the customers’ factories. The printers may require a technician to oversee the machine and do maintenance but other costs, such as distribution, are eliminated. “This is going to start in the industrial world, and the question is whether they can take it to the consumer economy. Can you print a table and chairs? Can you print a shirt?” he says. “Stores will still be around for a while, because they serve as distribution networks.”

4. Technology is only as good as the talent using it. “The IT side of business needs to be close to management, not just shut inside the IT department,” says Mr. Delaney. He tells of a company whose marketing director was dissatisfied with an investment in data analytic software. IVI concluded that the problem wasn’t with the software or the IT team but with the marketing department, which didn’t understand how to do analytics. The problem was solved with a small investment in training and hiring on the marketing side. It also illustrates how IT and analytics can reach into what have traditionally been thought of as unrelated disciplines. A global survey of small and mid-size enterprises by Oxford Economics for SAP also shows that 32% of SMEs found developing internal skills for data analytics to be a big challenge.

5. Take a holistic view of your business capabilities for technology. Companies require capabilities to handle the business value, financial management, leadership and governance, and sourcing and enterprise architecture of IT. “If you have a weak link, you’re not going to win,” Mr. Delaney says. A company might not be able to afford all the capabilities. “A medium-size business probably can forgo enterprise architecture, but will need leadership and governance.”

Used well, technology is a gift for SMEs While small businesses might not have deep pockets or a big IT staff, it has never been cheaper or easier to buy off-the-shelf technology to improve efficiency, reduce costs, facilitate customer service, reach new markets or turn a business model on its head.

“The digital revolution is a gift to small and medium-size organizations,” Mr. Delaney says. “It’s more problematic for big companies because the speed at which they can change is slower—they have inertia. Smaller companies can move much more quickly and don’t need the big cost infrastructure that was needed as recently as 10 years ago for leveraging technology. It’s not about the next piece of technology that’s going to present itself; it’s about the innate capability of the organization to understand how to deploy and leverage that technology in their organization.”

The challenge for SMEs is no longer the technology itself, but the creativity and willingness of company leaders to use it strategically to grow.

The takeaways:

• The digital revolution is affecting all companies, whether the impact is on business models, delivery of products and services, relationships or business practices.
• This presents many opportunities but also risks, which are interconnected in ways that aren’t obvious.
• Keeping up with both the risks and opportunities is difficult, particularly for businesses that have fewer resources.
• However, cheap, easy, off-the-shelf technology is a boon for SMEs that find innovative ways to put it to use.