Thirty percent of multinational organizations will experience revenue loss, brand damage or legal action due to unmanaged digital sovereign risk by 2025, according to Gartner, Inc.
Brian Prentice, VP Analyst at Gartner said, “For the last 30 years, multinationals have been managing business operations against the backdrop of assessing risk from the economic and political environments of the countries they operate in. They now need to expand sovereign risk to include digital to avoid any potential fallout as it increasingly fragments along national and regional lines.”
According to Gartner, digital sovereignty is the ability of a government to realize policy without impediments imposed by the digital regulations of foreign governments directly on their citizens and domiciled business, including those exercised through digital giants under regulatory control.
“As more countries pursue sovereign digital strategies, what emerges is a complex array of trans-jurisdictional regulatory obligations, tariff restrictions, import/export bans, country specific technology protocols and local content requirements,” said Prentice. “Given digital’s critical role in business operations, executives must understand digital sovereign risk and its impact on business conditions.”
Gartner highlights three key areas impacted by digital sovereign risk that must be managed to avoid potential revenue loss, brand damage or legal action.
1. Digital Sovereign Risk Flows to Technology Provider’s Multinational Clients
Much of the disruption resulting from the growing number of sovereign digital strategies impacts the operations of technology providers. Increased great power competition is playing out with specific technology sectors and providers, such as restrictions on 5G suppliers like Huawei or Nokia. This may be the result of increasing regulatory pressure, shifts in national policy or responses to sudden geopolitical events.
According to Gartner, how technology providers respond to their own digital sovereign risk can have a significant impact on the operations of multinational customers. Multinationals must consider critical technology providers as part of their organizations’ broader supply chain, and proactively assess and mitigate their digital sovereign risk.
2. Digital Productization Initiatives Will Be Hampered Without Effective Localization
As digital ambition increases, digital productization efforts push enterprises toward the creation of discrete, market facing digital products, often with their own P&L. If markets are found in other locations beyond the enterprise’s home country, Gartner recommends steps are taken to manage the digital sovereign risk associated with each digital product.
This requires ongoing product localization to adapt to regulatory requirements, along with the culture and language of customers in a specific market. Diverging national technology standards, state-sponsored protocols and government-advocated frameworks, all weigh on the decisions required when producing digital products that will serve multiple markets.
3. Digital Businesses Will Get Caught in the Middle of Digital Geopolitical Competition
As enterprises increase their digital ambition and become digital businesses, they will have to deal with the same broad array of digital free market frictions as technology providers. This places them in the middle of digital geopolitical competition, which impacts business strategy.
To be successful, Gartner recommends chief risk officers (CROs) become comfortable with digital technology, otherwise they will struggle to comprehend the expanding scope, purpose and implications of digital sovereign risk factors on their organization.