New Corporate Realities: The Next Generation of Managing Risk and Operations

Everywhere we look, whether professionally or personally, we see pandemic-related supply chain disruptions, a tight labor force, and climate change. We see inflation and digitization. If you're a corporation, there’s a massive number of new disruptions coming from multiple different angles. How do you manage these risks, but also benefit from the opportunities that some changes provide?

In this webinar rewind, panelists Giorgio Baldassarri (Global Head of the Analytic Development Group, Credit Risk Solutions, S&P Global Market Intelligence), Paul Bingham (Director, Transportation Consulting, Economics and Country Risk, S&P Global Market Intelligence), Sophie Malin (Senior Economist, Pricing and Purchasing, S&P Global Market Intelligence), and Christian Renaud (Global Head, TMT Consulting, S&P Global Market Intelligence) discuss these topics. You can find a replay of the webinar here.

How do you see corporates adapting to digital transformation?

Christian Renaud: We are in the transition, well into the transition, between the Third Industrial Revolution and the Fourth Industrial Revolution. And I think most oftentimes, you hear that talked about, depending on the context of the industry, as digital transformation. And that's really the combination of the people, the org chart, the business processes, and the tools and technologies necessary to become a digital native or a digital-first organization. Digital transformation is far more of an inevitability now than it was in years past. We find very few industries, or sectors, or companies, that are untouched by this transformation.

Inflation obviously looms large. But energy prices, labor and skills shortages, and supply chain disruptions are things that organizations are telling us are factoring into their technology purchasing decisions. And as such, not surprisingly, that sheds a lot of light on ESG. And a lot of investment that we're seeing these days is around energy efficiency investment, reducing carbon footprint, and data protection. One of the benefits of digital transformation is increased visibility and transparency into your organization.

If you look at the technology deployment reasons moving forward on the near-term horizon, the key drivers that we're getting back from enterprises globally are compliance with environmental regulations as a key driver for that investment, recruitment and retention of talent, and then operational efficiencies improvement.

How has digitization impacted the transportation sector?

Paul Bingham: Over the last few years, we've seen unprecedented disruption to transportation, supply chain operations, and capacity performance, providing tremendous new challenges that management and corporates have not had to face previously. In addition to the disruptions from the pandemic, we've seen climate change and now geopolitical impacts on the demands on infrastructure and transportation services. In some ways amplified by the interconnectivity of global supply chains and the infrastructure that then collectively provides a threat to their continued operations.

Now, public sector policies are being adopted that will force the industry and investors to take ESG more into account. That's all in the context and perhaps consistent with the long-term trends we're seeing in energy transition, digitization, and the connectivity of infrastructure that, in some cases, is challenged not only by those environmental factors but also challenges in the workforce, availability of labor, which is driving some of the decisions and influencing some of the investment opportunities. That's one of the reasons behind the adoption of technology for having autonomous transportation, automation and production, manufacturing, and distribution.

What are you seeing in the current labor market and how is it evolving?

Sophie Malin: A key risk in global labor markets, and a key risk to rising labor costs, are the record-high vacancy rates that we're seeing at the moment. We've seen labor shortages building in the background of the pandemic, which then became exposed once activity levels started to recover in the economy and, of course, then labor demand increased.

The last six months have been a story of record-high vacancy rates globally as the skill, and labor unavailability has been exposed as economic activity levels have been recovering. So, those firms that let go of workers during the pandemic to lean down (especially those that also let go of skilled workers) are now struggling to find those skills again in a much tighter labor market.

It does seem that we've now hit a turning point. We're starting to see a decline in the number of job vacancies in some countries as a result of weaker economic growth. So, we're starting to see a decline in job vacancies as the weakness in economic growth flows through to softer demand for labor and sees job postings decline. But the issue is vacancies are still very elevated. Despite this weakness, there's still a huge gap between demand and supply for labor.

From a credit and risks standpoint, these new corporate realities need to be modeled. How do we take some of these factors, put them into practice, model them, and ultimately help management handle these complex challenges?

Giorgio Baldassarri: To execute the fundamentals of credit risk analysis, one looks at company financials. But as we know, for private companies, there are challenges because the company financials are not reported frequently, the standards are not as stringent, and sometimes they're not reported at all. So, in this instance, credit risk models based on statistical techniques and using company financials are insufficient.

So, we should look at something different, like alternative datasets. These are becoming more and more available. For example, things related to payment behavior on the supply chain side or digital footprint – thanks to the level of digitization that we have seen during the pandemic. So yes, the pandemic brought a lot of challenges but also opportunities.

By combining all these new signals into traditional credit risk models we can add value to the assessment and the management of risk because we can get more timely signals to, in essence, compare the current level of risk with the previous level of risk and maybe compare it also with predefined thresholds in order to then decide how to tackle these risks and potentially identify pockets of credit risk in certain industry sectors in the supply chain or in specific countries.

However, this is not enough because this is more of a passive type of risk management. And the more proactive type of risk management consists of looking at multiple macroeconomic scenarios, not just to compare the current credit risk level with the past one but also how this credit risk level may evolve in the future.

To hear the entirety of the conversation, check out the on-demand webinar HERE.