"The smallest Fortune 500 company is now five times larger than in 1990, and as organizations have grown, increasing size and geographic spread lead to complexity, which in turn increases the cost of coordinating activities across the organization." In addition to the hidden costs of growth and complexity, other risk themes this year include digitization, volatility in the macro environment and heightened public scrutiny.
CEB has identified the major risks that boards, Audit Committees and executives need to prepare for this year. The increase in business complexity and the associated, often hidden, implications of it contribute to several risks that Chief Audit Executives (CAEs) plan to watch closely.
"The smallest Fortune 500 company is now five times larger than in 1990, and as organizations have grown, they have seen significant cost savings," said Malcolm Murray, Audit research leader, CEB. "However, increasing size and geographic spread also lead to complexity, which in turn increases the cost of coordinating activities across the organization. But the implications of complexity are often hidden, making them difficult for executives to assess and manage."
The increase in complexity contributes to several risks that are top of mind for CAEs in 2017:
"Most executives aren't surprised by these risks, but they struggle to understand what to do about them," Murray said. "Strengthen corporate assurance by identifying and tracking these risks in the business and help management prepare to mitigate them."
- Third-party relationships: Vendors' access to company data continues to grow and organizations struggle to gain visibility into their vast vendor networks, which now often include a dense thicket of third, fourth and fifth parties. This makes oversight of third-party relationships increasingly difficult. Although the use of third parties is critical to organizations' success, especially in an era of digitization, only 20 percent of organizations have an established or world-class third-party governance framework.
- Strategic decision-making and execution: As organizations have grown in size and complexity, their structures have also become flatter and more matrixed. Although speed of execution is a stated goal for many executives, the costs of coordinating activities and collecting high-quality, usable data across large organizations impede agility. This makes strategic decision making and execution more difficult, with core business activities taking, on average, 20-40 percent longer than five years ago.
- Pace of innovation: Rapid digitization has opened the marketplace to new competitors, making innovation critical for incumbent companies. But years of cost-cutting initiatives have led to risk aversion – in fact, 77 percent of finance executives cited more risk aversion in project funding in 2016. This risk aversion combined with increasing complexity means companies have a difficult time fostering innovation.
- Change fatigue: The size and scale of global companies also lead to more change initiatives that are increasingly difficult to manage. Seventy-three percent of executives expect the current rapid pace of change to increase further over the next three years, and employees already experience 70 percent more change events today than they did five years ago. The workforces of many organizations, exhausted and overextended after all of this change, are at risk of change fatigue, which can lead to a five percent drop in productivity.
In addition to the hidden costs of growth and complexity, the other risk themes this year include digitization, volatility in the macro environment and heightened public scrutiny.