Embracing the Human Context in Numbers to Manage Risk
As finance executives plan for a successful 2018, the importance of looking beyond traditional modes of decision-making to understand business impacts remains of critical priority. Major macroeconomic trends prompting headlines have created new landmines for businesses. How finance leaders react to this environment will determine the extent of their company’s success in the coming years.
With an ever-increasing spate of global economic uncertainties and new business risks, there is a growing need for business leaders to adopt an economist’s point of view; in other words, to reconcile the story told by the numbers within the context of evolving geopolitical trends and policies.
From a generic perspective, the economist’s point of view is rooted in the study of numbers along with the human context around them. To adopt an economist’s viewpoint is to understand the reality that economic conditions birth political movements, which in turn spur policy decisions, which may potentially pose adverse risks or positive benefits for your business down the line. To adopt an economist’s viewpoint is to understand the strategic tradeoffs inherent in decision-making. To adopt an economist’s viewpoint is to understand the current reality with the analytical skills of a mathematician and the observational skills of a sociologist.
In 2018, business leaders need to be aware of the rapidly changing global risk environment to thrive amidst many-sided political and economic pressures. They need to think like economists.
Business Risk and Geopolitical Risk are Intertwined
The past several years have provided fascinating fodder for economic analysis. In order to synthesize the biggest threats to business, Dun & Bradstreet’s executive economists produce a Global Risk Matrix (GRM) and assigns a score to each risk out of 100. The scores from the top ten risks are used to calculate an overall Global Business Impact (GBI) score. The Global Risk Matrix examines three sets of data to assess overall macroeconomic risk: economic data, commercial data, and political data. Economic and commercial data are classic indicators of the robustness of an economy and its friendliness to transnational operators. During the period from 2012-2017, Dun & Bradstreet’s economists found that integrated political and economic changes accounted for more than half of risk rating changes. In 2017, political risk dramatically increased and caught markets off-guard. In a year of unprecedented global political turmoil, political risk became more important than ever in evaluating the larger picture of a business climate. Analysis of commercial data and the business environment alone simply aren’t enough to truly understand business risk. Understanding the environment in which risks occur is also critical.
The global economy in 2018 is healthy in many key respects, with Dun & Bradstreet forecasting strong growth in most major economic regions. U.S. growth is estimated to tick up to 2.7% from 2.1% in 2017, with positive trajectories also forecast in Russia, Brazil, and India. Not all engines will continue to hum, with slowdowns predicted in the UK, Japan, and China. This trend reinforces the need for decision makers to be aware of the matrix of data and risks that inform the global business environment.
The global economy is increasingly integrated, with transactions conducted along the same networks as cyberattacks. Borders are shifting and fluid, with tariff imposition depending not on a country’s best interests (as dictated by data) but on its politics. Finance leaders can no longer consider macroeconomics a domain divorced from their own. Success for today’s finance leaders means not only understanding the impact of decisions, but the environment in which those decisions are made.
Finance leaders may be quants at heart, but politics matters. Keeping an eye on macroeconomic trends, honoring both the hard economic and commercial numbers as well as the political context, might be the difference between striking out and striking gold.