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FOCUS: Top risks affecting the shipping industryby ASC Staff on Nov 6, 2016
By Ben Abraham, Head of Willis Towers Watson’s marine practice
Transportation keeps the global economy moving. Any operational disruptions have wider consequences for society, making the management of the associated risks a priority that should transcend industry boundaries.
The world economy has surged over the last half century, and that growth has been largely driven by globalization and the consequent increase in trade. International trade in goods and services has increased from around $4 trillion in 1990 to $24 trillion in 2014, according to 2015 data from the United Nations Conference on Trade and Development. This increase in trade would not have been possible without an equivalent rise in the capabilities of the global transportation sector. More than just a mover of goods and people, transport is a key driver of economic and social development. It brings opportunities for the poor and helps economies to be more competitive.
The transportation sector's intimate relationship with the global economy means that the risks faced by the industry are influenced by factors such as increasingly complex markets, transient workforces, disparate regulatory frameworks, the inexorable march of technology and geopolitical shifts. Far from being isolated in silos, these factors interact with each other in complex ways that are difficult to understand, let alone predict.
After interviewing several executives from each mode of transport, the threat from new and emerging competitors is the number one risk on the minds of executives in the transportation industry in the Middle East and Africa region, according to Willis Towers Watson’s 2016 Transportation Risk Index report.
The findings of the Index, which includes the opinions of 110 CEOs and 80 CFOs, reveal a fluid risk landscape that is increasingly complex and interconnected. While proactive risk mitigation strategies remain central to corporate resilience, preparedness and response are now just as critical to a company’s performance.
In general, the prolonged economic struggles of most shipping lines have made the maritime sector more sensitive to risk than other modes of transport. Maritime transport providers perceive cyber-threats and data privacy breaches to be their top risks. Dissenters from that view argue that cyber-risk fears are fueled by an alarmist media environment where discussion is dominated by hacking horror stories, ill-intentioned insiders and suggestions that the critical systems of most top corporations have already been compromised (the owners just don't know yet). But there is no denying that the skillsets of the digital threat actors are growing, just as the transport industry's increased reliance on third-parties is multiplying the potential points of entry. Clearly, an increasingly connected world requires a community response to many risks. No company, no matter how vigilant, is an island.
Digital Vulnerability and rapid technological change
Global commerce is increasingly conducted in a digitalized world where automation and the Internet of Things are transforming virtually every sector of the economy. While some modes of transportation have been slow to adopt new digital tools, the overall pace of engagement is quickly escalating.
Step by step, transport companies are embracing the digital revolution. In fact, digital technology is becoming so pervasive that many businesses underestimate the extent to which they are now dependent on it. Even risk-savvy firms are struggling to map the chain of consequence that informs an effective mitigation strategy. While the commercial opportunities inherent in these technological advances are too numerous to list, so are the vulnerabilities and risks. Those that find the balance will thrive. Those that do not will find themselves left behind by changing markets and consumer expectations, or left vulnerable to the growing army of threat actors.
According to Interpol, "more and more criminals are exploiting the speed, convenience and anonymity of the internet to commit… criminal activities that know no borders… cause serious harm and pose very real threats to victims worldwide." Consultancy firm PwC believes the global cost of data breaches alone could exceed $2 trillion by 2019. Criminals are clearly flourishing in the unprecedented access and connectivity the internet provides.
Understandably, the risks inherent in the rapid rise of the digital economy are a primary concern may enhance cost efficiency, collective intelligence and product delivery, but they also multiply digital entry points to strategic commandant- control centers, commercially sensitive information and private third-party data. As industries become more connected, levels of resilience are increasingly dictated by the weakest link in the digital supply chain. As such, organizations have less individual control to mitigate their digital risks. In that environment, security is a communal issue. It is a collective responsibility where every participant in every supply chain is responsible – not only to shareholders, but also to their other partners.
The strategic opportunity of risk
Risk is a path to growth. Industries tend to fixate on the downsides of risk – its potential to disrupt operations, destroy profits and damage reputations. But risk can also present opportunities for those able to see the potential. Smart companies seek out measured risks to gain competitive advantage. They don't always play safe. Managing modern business risks is a far more complex proposition than it was when the responsibility fell exclusively to structural engineers, finance managers and the champions of the IT room. Today, the assessment of the risk landscape is almost more important than the mitigation strategy, although ideally the two should mutually support and deliver corporate strategy.
In fact, in an era where risk is becoming more elusive and intangible, the emphasis has shifted toward preparedness for and response to events, rather than development of static strategies that mitigate individual risks. The new complex, interconnected risk landscape requires a comprehensive, knowledge-based response that is coordinated from the boardroom, where corporate strategies are formulated.
The transportation industry rates the risks associated with digital vulnerability almost as highly as they do those in the geopolitical sphere.
The biggest individual threat across all modes of transport in the MEA region is the threat from new and emerging competitors, with growing competition a concern across all modes of transportation: land, sea and air. This is followed by failure of critical IT systems and lack of skilled labour and mobility in the top three risks. As transportation embraces the technologies of the digital age, it must build community risk strategies to ensure that all systems in the global value chain are secure and reliable.
The Willis Towers Watson survey found that the prolonged economic struggles of most shipping lines have made the maritime sector more sensitive to risk than other modes of transport. Maritime transport providers perceive cyber-threats and data privacy breaches to be their top risk. But shipping companies are also heavily exposed to the complexities of globalization.
Every mode of transport would benefit from the development of more efficient fuels and propulsion technology. At present, ship owners in particular face significant regulatory and technical uncertainty, which is raising investment risks. Some are using advances in computational fluid dynamics and model laboratories to streamline hull and bow structures and design more efficient propellers to achieve roughly the same end.
But amidst all the automation, the digitalization of business processes, the cascade of emerging technologies and the endlessly shifting markets and consumer trends, perhaps the transportation industry's biggest opportunity lies in the competition for talent. People are the binding agent between corporate strategy and goal delivery. As technology changes, the importance of retaining and retraining the associated skillsets to manage the systems, tools and assets will not diminish. Even robots will need programmers. Those who have the market intelligence to align the skills of their workforce with emerging technology will have grasped a significant opportunity.
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- FOCUS: Top risks affecting the shipping industry