The strategic opportunity of risk in the transportation industries

The transportation sector’s intimate relationship with the global economy means that its modern practitioners face risks that are influenced by factors such as

  • increasingly complex markets
  • commercial alliances
  • transient workforces
  • disparate regulatory frameworks
  • the inexorable march of technology
  • geopolitical shifts

Far from isolated in silos, these fluid factors then interact with each other in complex ways that are difficult to understand, much less predict.

By its nature, supply chains are complex environments, a tangled web of alliances, uneasy partnerships, regulation and third-party dependence. The recent collapse of Hanjin Shipping starkly illustrates the scale of what can happen when things go wrong.

To better understand the hazards and opportunities inherent in the dynamic transport landscape, we asked 350 of the industry’s most senior executives to rank the threats over a 10-year horizon, across the air, land and sea transport sectors.

The results, detailed in our Transportation Risk Index, unveiled a risk landscape that was increasingly complex, interconnected and regionally distinct. The responses reveal an environment in which global solutions are unlikely.

However, one consistent theme was the opportunity that arises when you fully understand your risk profile and are among the first to demonstrate that it is in hand. Under those conditions, 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 every risk holds an opportunity for those who see its potential. And because risks are also opportunities, successful companies do not always play safe.

Managing modern business risks is a far more complex proposition than it was when the responsibility fell exclusively to risk managers and the champions of the information technology room. Today, an accurate assessment of the risk landscape can be more important than the mitigation strategy, although ideally the two should mutually support and deliver corporate strategy.

An accurate assessment of the risk landscape can be more important than the mitigation strategy

In fact, in an era where the risks are becoming more elusive and intangible, the emphasis has shifted toward preparedness for and response to events, rather than static strategies that hope to respond to a shifting risk environment.

The new complex, interconnected risk landscape requires a comprehensive, knowledge-based response that is co-ordinated from the boardroom, where corporate strategies are formulated.

Geopolitical risks

Examples of opportunity in risk abound. As a category of risk – or megatrend – geopolitical risks were the biggest concern for the executives whose opinions informed this year’s Index.

Brexit gave us all a recent taste of the commercial uncertainties that political actions can bring.

Urbanisation

Trends such as the globalisation of the economy and urbanisation are escalating and shifting centres of buying power, trading patterns and consumer demand every month. Respon­sive, flexible and informed corporate strategies will be key to mitigating those risks, and central to seizing the opportunities that arise.

Migration will put stress on existing road infrastructure, making the logistics of trade distribution more difficult

Take urbanisation, for example. The UN believes there will be 41 cities with 10 million inhabitants or more by 2030 (up from 34 today) as the rural populations of Africa and Asia flock to key urban areas in search of their own private opportunities.

The migration will put stress on existing road infrastructure, making the logistics of trade distribution more difficult. But it is also a huge opportunity for rail operators, who rely on population density to function efficiently and profit.

Big data

Advances in ‘big data’ mining will give the rail industry the market intelligence to compete with the emergence of ride-sharing networks by simplifying the user experience and adapting new low-cost pricing models. For example, tracking customer movements through digital-payment systems will allow operators to offer personalised travel options, which could optimise capacity and drive revenue growth.

In general, finding ways to use big data to customise the travel or trade-transport experience and drive monetary return is a substantial opportunity for companies in those sectors. As the strategic emphasis for risk management shifts from static solutions to responsiveness, predictive analytics will take centre stage.

Executives who can identify the specific data streams that more accurately predict the probability and occurrence of risks, market trends and increasingly educated consumer behaviour will gain an advantage for their companies and, ultimately, remuneration for themselves.

Cyber risk

Our respondents rate the risks associated with digital vulnerability almost as highly as they do those in the geopolitical sphere. Globally, cyber crime is the highest profile threat that businesses presently face. There, too, lies opportunity.

Beyond the first-mover reputational advantages of being seen to be among the few who have their cyber risks under control, there will be opportunities with a more direct influence on the bottom line.

Cyber crime is the highest profile threat that businesses presently face

Companies who fully understand and quantify their exposure to cyber risks within an enterprise framework will be first in line for the cheaper capital they need to fund other growth opportunities.

Inevitably, this will mean that good cyber is good business, as it will be a differentiator in the cost of capital from financial markets who will seek to transfer their cyber-related lending risks.

Technological change

According to the Transportation Risk Index’s findings, companies in the air-transport sector are the most sensitive to the risks associated with the accelerating pace of technological change, perceiving the inability to keep up as their fourth-highest risk. No other mode of transport ranked it in the top 10.

The challenges of staying abreast of technological change are considerable in transport’s most advanced sector. As will be the opportunities for the technological pioneers, or those based in jurisdictions governed by forward-thinking regulators.

Airlines benefit greatly from every incremental advance in the efficiency of air-traffic control. The route data and analysis tools are already there to improve routes, lower fuel costs and lessen the industry’s environmental impact. But, as governments bear the lion’s share of the cost for up­grades and receive fewer direct benefits, change is slow, at least too slow for the airlines.

Advances in technology are transforming even the humble shipping container. While automated lock sensors have proven vulnerable to cyber hacking, the latest containers can literally ‘smell’ danger (in the case of fires, for example), sense light, detect movement and changes in temperature, and tell the carrier whenever cargo is vulnerable.

Fuel

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.

Those who align the skills of their workforce with the emerging technologies will grasp a significant opportunity

However, 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.

Talent

But amidst the transition to automation, the digitalisation of business processes, the cascade of emerging technologies and the endlessly shifting markets and consumer trends, the transportation industry’s biggest opportunity may lie 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.

The hiring emphasis is already shifting from finding enough people, to finding the right people with skill­sets that reflect the industry transition toward greater use of automation, 3D printing and artificial intelligence. Those who align the skills of their workforce with the emerging technologies will grasp a significant opportunity.

About Mark Hue-Williams

Mark Hue-Williams joined Willis in 1991 and since that time he has held a variety of roles in the Aerospace divisio…
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