What worries Finnish companies? Business decision-makers’ risk map includes six major threats

The third part, in the blog, explains how Finnish business decision-makers perceive risks related to business. What worries companies and why?

Last autumn PwC Finland conducted an interview survey in Finland with a large number of business decision-makers from companies of different sizes. We wanted to know what their risk map is like and what they think about the changing world. We found that the concerns were roughly divided into six different groups.

The biggest threat scenario was Russia’s war of aggression in Ukraine, and the effects of the war on corporate finances were particularly highlighted. Prices had risen rapidly, rising interest rates had increased financing costs, and, ultimately, access to finance was expected to become more difficult. The outlook for companies weakened both due to the market situation in Finland and as demand slowed down in rapidly changing export markets.

Did outsourcing digital skills go too far?

Growing cyber threats and risks to corporate IT systems emerged as the second most important concern. This can be interpreted more broadly as a concern for the entire digital infrastructure. Digitalization has become a comprehensive competitive factor in everything as systems have comprehensively transitioned to cloud services and pricing structures to SaaS models. New dependencies and uncontrolled practices with different subcontractors and suppliers increase daily risks.

Companies are constantly facing technical challenges to their systems, and while at the same time being overshadowed by various cyberattacks and threats, there are plenty of challenges to solve. One cause for concern is related to competence bottlenecks: how can the risks to system users, and company employees, be better managed? Technology is advancing rapidly and people can’t always keep up with it.

Outsourcing has been drastic in Finland for the past twenty years. The question arises as to whether things have been outsourced that should never have been outsourced. Are companies too dependent on external expertise? Has the development of one’s own competence remained limited when development has been strongly promoted on a results-based basis? Have we understood the strategic importance of digitalization or have we relied blindly on practices formed elsewhere?

Outsourcing can be a huge enabler. However, if we end up in a situation where services are procured through large, interdependent supplier chains and the services and their procurement are no longer sufficiently understood, we will encounter unpredictable problems. Eventually, you may end up in situations where your core business expertise is very vulnerable.

The rapid change in the geopolitical situation is a cause for concern

The third concern of business decision-makers is related to the rapidly changing geopolitical situation in the world. The tripartite division of the world into US, Chinese, and EU camps affects trade policy and thus Finnish companies. In the past, raw materials, components, and services were selected globally, optimizing cost benefits. In the future, a number of different scenarios will be needed, depending on which markets the products are being exported to or where the partial deliveries to them are being ordered.

Trade policy progressed for a long time by dismantling trade barriers. The impact of tariffs decreased and trade restrictions between countries eased. This trend has changed drastically. Availability problems caused by coronavirus restrictions limited the production capacity of the whole world, and the war in Ukraine disrupted the structures for good.  Russia, one of the world’s largest producers of raw materials, fell outside Western trade. Relations between China and the United States have escalated and they are struggling for leadership in the technological world, which is constantly creating new problems for European and Finnish companies.

Finland has traditionally had close trade relations with Russia. Over the years, many companies have invested in production in Russia or entered into close cooperation to obtain raw materials. Russia has been an important trading partner. The Finnish economic structure also includes a lot of ownership of Russian origin, which was viewed permissively after the collapse of the Soviet Union.

Now the extensive restrictions on Russia are causing new problems for companies. Although they have already initiated measures to break off relations with Russia and written down their investments in Russia, the situation is very complex and will continue to cause problems for a long time to come.

As a country, Finland also lost its general attractiveness as an investment and tourist destination after the outbreak of the war. Finland’s accession to NATO will partly improve the security situation, but how it will ultimately change in the future remains open.

Preparing for the loss of tacit knowledge is difficult

The fourth risk that emerged was the availability of skilled labor. Finland is hardly the most desirable country to move for work. There are quite a lot of international students, but a large number of them end up working outside Finland.

In addition to the availability of labor, its permanence is seen as a major problem. Employee engagement with employers has loosened year by year. Just a couple of years of experience in one employer and one job is enough for many.

There is a bigger, latent challenge to this problem. In the past, long careers in the same positions accumulated tacit know-how and invisible capital for the company. Long-term, committed employees knew a lot about the background to the events and remembered where to find the necessary things or information. However, the organization has no memory, and when people change rapidly, this tacit knowledge disappears. This creates risks that will be very difficult to prepare for.

There are too few skilled workers and competition for them is fierce. This will make it more difficult for Finnish companies to succeed and compete in the future.

Supply and service chains are disrupted more easily than before

The fifth significant risk was identified as supply chains and service chains. Globalization has created long supplier structures linked to the ends of the world. Development has been rapid and uncontrollable. This was seen as a problem as the coronavirus spread and shut down the world.

Companies are not prepared for regional logistics chains as before. Efforts have been made to minimize or eliminate inventories altogether. Capital tied up in inventories has been kept to a minimum, but at the same time, even minor disruptions in availability cause interruptions in production and disruptions in customer deliveries. These are now materializing into business risks. The need for risk analysis and contingency models is growing at an accelerating pace.

Digital structures have also become problematic. Outsourcing services without the company having much influence over their management is a growing risk. Software and system structures include a wide range of third-party software components, open source pieces, and various types of integration solutions, the dependencies or exact content of which have often remained unconscious or unresolved.

It has been enough that everything works and the cost structures have remained under control. Now that physical supply chains and digital service dependencies have become critical, this has become one of the major risks for companies. It can be difficult to regain control of supply chains. Now we need alternative supplier structures, deeper knowledge of digital services and, possibly, moving solutions partly closer to production plants and offices, perhaps also repatriation.

Rapidly changing regulation curbs production and trade

The sixth risk area is regulation. Constantly changing regulations, both in Europe and globally, pose many new challenges. The transition periods to the new regulation have been shortened. In addition, with war, the risks of sanctions, for example, can change very quickly. Companies have limited resources to monitor regulatory changes and take the necessary measures to adapt to them.

Instead of liberalization, attempts are now being made to restrict world trade. The division of the world into four entities – the USA, China, the EU, and Russia – causes sufficient restrictions on trade. It is possible that there will be even more divisions from here. Trade is regulated and restricted by strict requirements, new certifications, more extensive import or export restrictions, and new tariff barriers.

The time for standardization and optimization is over – products and services must now be designed to be adaptable and adapted to different markets. As a country on the edge of the world and dependent on exports, Finland suffers significantly more from the fragmentation or absence of standardization than large countries with more concentrated export markets.