Role of risk in digital innovation

Monday, 01 November 2021


    We know that in setting an organisation’s risk appetite, a board must strike the right balance between risk and reward. And in today’s era of rapid digital transformation, the risks of missing an opportunity can be extreme.

    At the time Australian pay TV company Foxtel began to embrace streaming services, the streaming revolution was already well underway. Millions of Australians were enjoying content on Netflix via VPNs based in the US. Foxtel had foreseen the digital disruption to its business, but had been held back by concerns that introducing a new product would erode its 30 per cent market share, explains the executive chair of Foxtel Fox Sports and Sky News, Siobhan McKenna.

    “While Foxtel was first to the market globally with a multi- sport streaming solution [in 2018], it was actually quite late with the launch of Binge and its entertainment streaming product,” says McKenna. “Should it have moved earlier? Well, yes, and it failed to do so, but of course the threat of cannibalisation for existing management and existing shareholders is terribly confronting.”

    Happily, today Foxtel has more than a million paying Kayo subscribers and, according to McKenna, there’s been very little “cannibalisation” of the Foxtel base. She attributes this to a thoughtful approach to managing the risks. Clarifying the company’s appetite for risk was a critical first step for the board to make.

    Strategic risk

    Strategic risk is often perceived as a binary issue. However, McKenna, who is also non-executive director of Woolworths and Nova Entertainment, prefers to think of it as a “portfolio” across a company. This prevents an organisation from veering between high-risk and low-risk strategies.

    “Within a company, one might have one particular area where one is prepared to take, as a board, much more risk, while at the same time managing another part of the company in quite a risk-free way,” she tells Directors on Digital.

    Some parts of a business may need to be managed with a high degree of caution in light of community or supplier expectations. Other parts may be engaged in attracting a new segment or a new type of customer, and will necessitate a different approach.

    “Within the portfolio of the lines of business... there will be different levels of risk,” says McKenna. “The board being conscious of that is an important factor in setting the risk appetite of the company as a whole.”

    Embrace opportunity

    This position is echoed by Peeyush Gupta AM FAICD, non-executive director of National Australia Bank, SBS, Woolworths and Nova Entertainment, who believes that risk should not be perceived as simply producing wins or losses. “The opposite side of the coin to risk is opportunity,” he says. “Risk isn’t only about assessing downside risk from a compliance point of view and avoiding making mistakes. It’s as much about intelligent risk management.”

    In weighing up whether to embark on a digital transformation, he recommends identifying the outcomes being sought and the metrics used to measure them. Then consider the organisation’s immediate priorities from the investment, which are reflected by its starting position, competitors and level of differentiation.

    “The challenge for many companies... is that your starting position often is not a great one” says Gupta. “You’re operating off legacy systems, which are probably not in the cloud. Transitioning to the cloud, while not being bound by your legacy systems, is a multi-year journey.”

    While a risk appetite statement is undoubtedly important, Gupta contends that risk is ultimately also a cultural issue, and requires effective communication. “You really want your people up and down the chain to understand what risks are acceptable and what risks are not. Managing your risk appetite as a company is also about having a risk-aware, risk-responsive, customer-centric and empowered culture that works hand in glove with the formal instruments.”

    Effective risk management framework

    1. Identify current and emerging risks
    2. Update the organisation’s risk register following regular reviews
    3. Formulate and revise risk management processes and procedures
    4. Monitor the organisation’s risk culture to ensure it is consistent with the board’s risk appetite.

    Source: AICD Director tool What’s your organisation’s risk appetite?

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