COVID-19 has upended our world. In our ongoing conversations with senior executives in our network, we learned recently about how the crisis is impacting corporate IT spending priorities. Interestingly, we noticed a broader theme of enterprise risk—and how to manage it–in these conversations, so we decided to explore this further.
During good times, evaluating risk for businesses is fuzzy. Now risk has come into sharper relief—but different sectors of the economy define risk in very different ways, with different implications. Some companies are responding to the current economic situation by implementing tech solutions in ways that feel obvious and urgent to them, but would look insane to their peers in other industries.
In talking to our network of executives, we’ve discovered that a company’s perception of risk appears dependent on where its industry stands on the S-curve of innovation. Every industry goes through waves of innovation, from early adoption through take-off, then into maturity. When one S-curve ends, another begins, as new competitors enter the market, disrupt old ways of doing things and force legacy companies to adopt more new technologies.
Paradoxically, times of sudden change can call for both risk mitigation and innovation at the same time. Companies must meet newly urgent needs while maintaining stability in an uncertain climate. Here’s what risk looks like now for three business sectors at different points on that S-curve, and how that risk definition informs companies’ short-term and long-term playbooks.
Mature stage: Financial services
How executives see risk:
The financial-services industry started its digital transformation in the 1980s. Simply processing millions of checks every day nudged companies into the transformation. Companies in this space now compete for customers with cutting-edge apps and tech stacks.
Right now, companies at this point on the S-curve are looking to eliminate risk by focusing on optimizing around tech solutions that already have traction. Stability is key during a crisis, and consumers and regulators will reward companies for staying the course.
In the longer term, the big risk for companies in a mature sector like this is that a new competitor enters the market with a new technology, but without the same legacy costs. Examples abound: Robo-advisors like Betterment built a new tech stack that enables them to offer personalized investment advice to an under-served market, mass affluents. Affirm* is similarly opening up a broader market for consumer loans, while Venmo has revolutionized mobile payments. Our portfolio company N26* enables consumers to open checking accounts with their smartphones in just eight minutes. Even in a crisis, companies in mature sectors need to be thinking about how to jump to their next S-curve.
Established companies should be trying to modernize their tech stacks to maintain the ability to respond nimbly to the market. Consider acquiring talent from digitally native companies or looking for unique partnerships that deliver surprising value outside of your traditional ecosystem.
Take-off stage: Insurance and healthcare
How executives see risk:
The insurance and healthcare sectors have been digitizing in fits and starts for some time now, but they’re risk-averse in their DNA, so most companies have been tinkering around the edges. Much of the industry’s transformation has involved digitizing existing processes versus really transforming businesses. This crisis is an opportunity to push technologies like information sharing and advancing digital capabilities further into the core of these businesses.
For example, insurance companies we spoke with recently were already seeing 80% of customer inquiries come in through digital channels and 20% through voice calls. Many of the digital interactions are common tasks that all policy owners perform. Making payments is one example. But right now, policy owners are asking questions and performing tasks that are not routine. As a result, insurance companies are expecting an influx of calls as their customers deal with the personal and financial impacts of the coronavirus. And they’re looking for ways to nudge even more customers toward that digital channel.
In the longer term, this crisis underscores the need for companies to think strategically about why digital transformation doesn’t stop at digitizing records and maintaining a website. In the next wave of innovation, creative partnerships will allow legacy companies to move at a faster pace.
Companies thinking long-term should be looking for ways not only to optimize their own data for usability’s sake, but to allow portability of the data for consumers and enable third-party companies to help solve big problems. Adoption of electronic health records (“EHR”), for example, has been widely adopted by the industry. However, data in these records usually stays locked in highly customizable and fragmented formats – even within one provider. A person can literally move from Northern California to Southern California within one major provider network and be unable to bring his or her EHR with them, since different systems can’t ‘talk’ to one another. To the healthcare provider, there would be many advantages, for example, in not just offering customers a list of participating providers, but also in generating recommendations based on data like hospital readmission rates and other measures that can make huge differences in patient outcomes—and costs. Lastly, the problem of access is more acute for innovative drug and technology companies that could leverage that data to create new products and services.
Early-adoption stage: Oil and gas
How executives see risk:
The oil and gas sector and other old-economy businesses are still in the early days of technology adoption. Here, the current crisis makes any inefficient use of capital inherently risky. For oil-and-gas in particular, since the price of oil has dropped sharply, projects that were profitable before the crisis may be money-losers today.
Short-term playbook & longer-term recommendations:
Companies in sectors that are still early on the adoption curve, like this one, should be looking for immediate ways to target core business challenges like modernizing the supply chain, providing greater uptime for expensive equipment, reducing injuries, and so on. Start with the slam-dunks: projects with low execution risk and short iteration cycles, which can help train your teams in the skills they’ll need to move up the S-curve. One benefit of being lower on the curve in this environment is that you can look to other industries to identify some of the pitfalls of adopting new tech.
Conclusion: It’s all about the S-curve
Ultimately, every industry is looking to minimize risk right now, but that means different things in different contexts. Near-term, many industries are looking to drive efficiency and reduce costs. But in the long term, the best and least obvious move in the face of the massive uncertainty we’re experiencing now is to jump to a new S-curve. More on that in our next post on enterprise risk.
Battery Ventures provides investment advisory services solely to privately offered funds. Battery Ventures neither solicits nor makes its services available to the public or other advisory clients. For more information about Battery Ventures’ potential financing capabilities for prospective portfolio companies, please refer to our website.
*Denotes a past or present Battery portfolio company. For a full list of all Battery investments, please click here. Investments identified above are for illustrative purposes only. No assumptions should be made that any investments identified above were or will be profitable. It should not be assumed that recommendations in the future will be profitable or equal the performance of the companies identified above.