PwC Pulse Survey: Managing business risks

In our second Pulse Survey of 2022, business leaders point to a wide range of challenges in the current environment, even as they take proactive steps to respond.

Key findings include:

• Business leaders are cautiously optimistic about their future prospects. More than four-fifths (83%) are focusing the business strategy on growth — more than any other objective. And only 30% see recession as a serious risk.
• Executives cite acquiring and retaining talent as a serious risk. Yet even as companies fret about human capital, in particular the need for people with the skills to help them grow, they’re taking steps to streamline the workforce.
• Cyber is the No. 1 business risk, with 40% of all respondents listing more frequent and/or broader cyber attacks as a serious risk (and another 38% calling it a moderate risk). Cyber threats are no longer solely the domain of the CISO.
• While companies continue to invest in many areas of the business, they’re scaling back the most in real estate and capex. After two years of remote work, many companies simply need less space, and they’re allocating capital accordingly.
• As the yardstick for company performance expands beyond financial metrics, companies have an imperative to build trust and transparency among their stakeholders. Almost two thirds (65%) of executives tell us they’re focused on developing or refining their trust strategy.
• Tested by the pandemic, business executives are now more prepared for the future, and 69% of respondents say that they’re referring to a lessons-learned playbook developed out of COVID-19.

Business executives are cautiously optimistic despite a challenging business environment

Executives cite a long list of business issues as serious risks to their companies. Cyber tops the list, with 40% citing more frequent and/or broader cyber risks as a serious risk. Talent acquisition and retention (38%) and rising production costs (34%) are close behind.

Among the less-frequently-cited risks were geopolitical factors like US-China relations (27% of respondents consider this a serious risk), a prolonged conflict in Ukraine (22%) and US societal unrest (17%). Recession was also well down on the list of business risks (only 30% consider it a serious risk, despite 60% of executives saying a recession is likely in the next year).

This comes as some economic data indicates signs of improvement. The unemployment rate, for instance, edged down to 3.5%. Inflation, while still high, showed some signs of stabilizing in July. This slight shift is also reflected in our survey, with 62% of executives now saying it's likely that inflation will remain elevated for the next 12 months, down from 69% in January. As a result, executives may be shifting from an active concern about the business environment to focusing on growth. Climate change was also low (23% consider it a serious risk), even with the growing emphasis on environmental sustainability at most companies.

Despite these risks, business leaders see bright spots. When asked how they are responding to the current business environment, 83% say they’re focusing their business strategy on growth. This is somewhat surprising given the mixed signals in the economy right now, including rising interest rates and slowing economic growth. After more than two years dealing with uncertainty related to the pandemic, business leaders recognize the urgent need to focus on growth in order to compete, and they’re zeroing in on what they can control.

With growth in mind, executives are exploring both acquisitions and increases in internal investment. Seventy percent tell us they’re considering an acquisition as a result of the current business environment. Internally, they’re increasing investments in digital transformation (53%), IT (52%), cybersecurity and privacy (49%) and customer experience (48%). Many of these investment areas can help improve efficiency and scalability and introduce new technology to boost productivity as companies continue to deal with talent shortages.

What your company can do

• Lean into growth even amid uncertainty. Focusing on your growth agenda will be key to competing. Pay close attention to the changes and trends that may impact your business and assess which ones you can plan for. Success is more than solely managing costs and risks. For example, you may need to change products, services or pricing — all of which drive growth.
• Take a hard look at all parts of your portfolio and where you can optimize. Position it to drive both operational excellence and growth. 
• Consider whether an acquisition would help you get the talent you need. The recent rise in interest rates has slowed deal activity, but dealmaking should always be an option — and some prices have come down.
• Don’t try to do too many things. Focus on the areas that free up the most dollars with the least amount of pain. Then look for value creation opportunities for your investments. Rather than expanding your investments in digital technologies broadly, for example, focus on those that drive productivity.

Walking a tightrope on talent

Nearly two-thirds of businesses (63%) have changed or are planning to change processes to address labor shortages, up from 56% in January 2022. Ironically, as businesses pivot even more toward automation, it’s critical to find employees with the right combination of deep functional knowledge and technology know-how. Without the right talent, automations can fail to deliver on promised efficiencies and increase operational risk.

Finding the right talent continues to be a challenge for business leaders. Talent acquisition came in second as a risk behind cyber, with 38% of respondents citing it as a serious risk. Companies continue to look for and attract new talent in creative ways, including:

• Expanding remote work options for roles that allow: A large majority (70%) of respondents say they have either implemented this or have a plan in place. 

• Pursuing acquisitions to gain access to talent: About half (52%) of executives say they’re considering an acquisition to gain access to needed talent.

• Customizing their HR strategy by employee type: 59% either have a plan to do this or have implemented one.

At the same time, respondents are also taking proactive steps to streamline the workforce and establish the appropriate mix of worker skills for the future. This comes as no surprise. After a frenzy of hiring and a tight labor market over the past few years, executives see the distinction between having people and having people with the right skills. For example, 50% of all respondents are reducing their overall headcount, 46% are dropping or reducing signing bonuses and 44% are rescinding offers.

We see these precautionary actions more in certain industries. Consumer markets and technology, media and telecommunications companies, for example, are more likely to invest in automation to address labor shortages. At the same time, healthcare is seeing bigger talent challenges than other industries and is more focused on rehiring employees who have recently left.

What your company can do

• Analyze your strategic workforce needs to understand both the skills and capabilities required today as well as those that will be needed to execute your company’s future strategic initiatives. Customize your HR strategy based on the employee type you need to grow.

• For each component of your people experience (e.g., recruiting and performance management), consider what changes you might need to make to drive the right culture, experience and outcomes.

• Use performance management tools that use data to assess how employees and managers are doing — especially given the shift to hybrid work where in-person oversight is less common.

• Conduct periodic culture assessments to help assess and create an inclusive environment even as the talent profile of the organization changes. In particular, avoid a “two-tiered” organization in which in-person and remote workers are treated differently. Balance your automation efforts with both your talent needs and what you want your company culture to be.

Cybersecurity is now on the agenda of the entire C-suite

Cybersecurity is becoming an enterprisewide issue, beyond the CISO’s office. Cyber attacks top the list of business risks, with 40% of all respondents listing it as a serious risk (and another 38% citing it as a moderate risk). Virtually all roles ranked cyber attacks high on their list of risks, including tax leaders (with 47% citing it as a serious risk), CFOs (44%) and CMOs (41%).

An even bigger signal of the growing concern around cyber is that 51% of board members cited it as a serious risk (and another 35% as a moderate risk) — more than any other category of business leader. In March 2022, the SEC proposed to enhance and standardize cybersecurity disclosures, requiring that the registrant’s board of directors oversee cybersecurity risk. The proposal would also require annual reporting or certain proxy disclosure about the board of directors’ cybersecurity expertise. As a result, board members are becoming increasingly attuned to cyber threats and their role in overseeing cybersecurity risk management.

Cybersecurity — including the related realms of privacy and data protection — is also becoming a growing policy concern of business leaders. Not surprisingly, 84% say they’re either monitoring closely or taking action on potential regulatory changes. 

The importance of cyber reflects two things. First, virtually all companies are now digital companies, with a heavy reliance on data and analytics and a growing reliance on mobile and cloud. Second, cyber threats continue to grow and become more sophisticated.

What your company can do

• View cybersecurity as a broad business concern and not just an IT issue. Build cybersecurity and data privacy into agendas across the C-suite and board. Increase investment to improve security. 

• Educate your employees on effective cybersecurity practices. 

• For each new business initiative or transformation, make sure there’s a cyber plan in place.

• Use data and intelligence to regularly measure your cyber risks. Proactively look for blind spots in your third-party relationships and supply chains.

Companies rethink their investments

As the trend for hybrid and remote work continues, companies are reassessing their physical office footprint with some deciding that less is more. Most (70%) have either expanded or have plans to expand permanent remote work options for job roles that allow. In fact, 42% have already implemented such measures — up from 30% in our January Pulse survey.

Only 31% of respondents plan to increase their investment in real estate, and 22% plan to decrease their investment (a higher decrease than any other investment area). Financial services and health industries are leading the way, with 30% and 29%, respectively, decreasing investments in real estate. Similarly, 15% of overall respondents say they will decrease their investment in facilities and general capex over the next 12 months. When a large swath of workers is no longer in the office on a regular basis, companies can significantly downscale their physical footprint.

On the other hand, executives are making investments in areas that will help drive growth. About half are increasing investments in digital transformation (53%), IT (52%) and cybersecurity and privacy (49%). Forty-eight percent are increasing investment in customer experience and 40% are putting more dollars toward research and development.

What your company can do

• Align your investment plan with your company’s strategic direction. Make multi-year investments to drive both short- and long-term outcomes.

• Embed clear return on investment expectations in the budget for every investment you make. Disciplined leaders are taking a very honest look at every part of their business.

• Determine where your company wants to go with ways of working and how to most effectively optimize your talent, real estate and technology strategies to enable that plan.

The trust imperative

Trust is increasingly becoming a source of competitive advantage for companies that treat it as such — and a point of failure for companies that don’t. In our current survey, 42% of executives say businesses will be the most trusted entity in the next 12 months — up from 39% in January 2022. Executives are doubling down, with 65% saying they’re focused on developing and/or refining their trust strategy. 

As the yardstick for company performance expands beyond financial metrics, companies have an imperative to build trust and transparency among different stakeholder groups — employees, customers, suppliers, regulators and the communities in which they operate. This includes both doing the right things and communicating clearly on topics such as reporting and tax transparency.

One third (32%) of business executives tell us they’re very agile when changing business strategy to address stakeholder demands for transparency. That may not seem high in absolute terms, but it was second-highest among all responses regarding agility. 

As companies respond to an ever-shifting landscape of risks, challenges and even crises, trust creates a multiplier effect — both positive and negative. Organizations that have cultivated trust as an asset and built up a reservoir of goodwill have more latitude in their response. Conversely, companies with a deficiency of trust make challenges that much tougher on themselves.

What your company can do

• Identify the areas of your business that most significantly determine your ability to build (or lose) trust, including cybersecurity, supply chain and communications. Work with your teams to embed trust in those processes.

• Trust can’t be limited to certain functions or business units. It needs to be an integral part of your organization’s DNA. 

• Educate your leadership teams on their role in building trust and identifying areas where trust can be impaired. Senior executives should be consistent in aligning words to actions. Be visible and transparent with all stakeholders about your company’s plans for the future. If you’re considering actions such as rescinding offers, for instance, make sure you’re paying close attention to the potential impact on your reputation as an employer.

• Create or refine your stakeholder plan, including your communication cadence for bringing each stakeholder along on your strategic journey. It’s critical to help your stakeholders understand the why. Set up listening channels to understand how stakeholders feel about your organization.

Tested by the pandemic, business executives feel more prepared for the future

If there’s a bright spot to the upheavals we’ve been experiencing over the past several years, it’s that companies and their leaders have become far more agile in how they respond. By the time executives could implement the changes they had scrambled to develop, something else would shift, causing the need for more changes. This time compression is forcing faster response times and, as a result, three- to five-year strategies can no longer be the go-to.

For manufacturers and other types of companies with long supply chains, many pivoted away from global just-in-time manufacturing after experiencing critical shortages due to production issues. Problem is, the processes were developed and used over decades because they were incredibly cost efficient. Smart executives are now reflecting on which investments made in response to the pandemic should be kept and which should be wound down.

Risks are also now more interconnected as well. The following examples highlight how business changes can result in new risks:

• While heroic shifts to remote work happened overnight in early 2020, cybersecurity risks soared as employees were logging in from home. 

• We’re now seeing companies settle on hybrid work models, with some employees working remotely all the time, some splitting their time between home and office and others working exclusively on-site. While this leads to added flexibility and allows companies to hire from a larger pool of employees, it also creates the potential for inequitable treatment of remote workers compared to in-office workers. In fact, 29% of CHROs say that finding a balance between in-office, remote and hybrid work will present a top-3 workforce-related concern for the next 12 months.

• As companies continue to automate processes due to labor shortages, many are finding that they don’t have the talent they need. Without the right talent, automations can fail to deliver on promised efficiencies and increase operational risk.

What your company can do

• Conduct a lessons-learned exercise to explore how your company fared over the past few years. Do a gut check on any of the countermeasures you took as a result of the pandemic. Consider all aspects of your business, from supply chain to management to people to tax to systems. Make sure you involve the right people.
• Collaborate closely across the leadership team as you develop go-forward plans. Aligned leadership teams that connect dots are critical to driving effective execution. 
• Consider business partners and the idea of an ecosystem mentality. Business partners can help free up resources.
• Revisit the models that your company uses to drive decisions. Many models do not include consideration of new risks that can materially impact your business. For example, how will increasing political polarization impact your revenue goals? Bring all voices to the table to help develop new ideas and ways to drive growth and build trust.

This won’t be the last unusual business experience you face. Avoid the temptation to rush to consider how to emerge stronger.