O Gartner, a global leader in business research and advice, predicts that by 2025 around 30% of multinational companies will suffer lost revenue, brand damage or legal action due to unmanaged sovereignty risks.
Brian Prentice, Vice President and Analyst at Gartner
For Brian Prentice, vice president and analyst at Gartner, for the past 30 years, multinationals have managed business operations against the backdrop of assessing the risk of the economic and political environments of the countries in which they operate. “Businesses now need to expand sovereign risk to include digital to avoid any potential consequences as it increasingly fragments along national and regional lines.”
According to Gartner, digital sovereignty is the ability of countries to carry out policies without impediments imposed by the digital regulations of foreign governments and companies, including digital giants that have regulatory control.
“As more countries adopt sovereign digital strategies, what emerges is a complex set of regulatory obligations across multiple jurisdictions, tariff restrictions, import and export bans, country-specific technology protocols and local content requirements,” says Prentice. “Given the critical role of digital in business operations, executives should 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 losses, brand damage or legal action.
1. Digital Sovereign Risk Flows to Multinational Clients of Technology Providers: Much of the disruption resulting from the growing number of sovereign digital strategies impacts the operations of technology providers. Increased competition between great powers occurs with specific technology sectors and companies, such as restrictions on 5G suppliers such as Huawei or Nokia. This may be the result of increasing regulatory pressure, changes in national policies, or responses to sudden geopolitical developments. According to Gartner, how technology providers respond to their own digital sovereign risk can have a significant impact on the operations of multinational clients, who should consider technology providers as part of their companies' broader supply chain to evaluate and proactively mitigate digital sovereign risk.
2. Digital production initiatives will suffer without effective localization: As digital ambition grows, digital production efforts push companies toward creating discrete, market-driven digital products, often at their own profit and loss. If markets are found in locations other than the company's home country, Gartner recommends that steps be taken to manage the digital sovereign risk associated with each location. This requires continuous monitoring of products to adapt to regulatory requirements along with the culture and language of customers in the various markets where they are present. Diverging national technological standards, protocols and frameworks advocated by governments weigh in on the decisions required when producing digital products that will serve multiple markets.
3. The 3 will be involved in geopolitical competitions: As companies increase their ambition and become digital businesses, they will have to deal with the same vast set of digital free market frictions as technology providers. This puts them in the middle of digital geopolitical competition, which impacts business strategy. To be successful, Gartner recommends that chief risk officers (CROs) work to become comfortable with technology. Otherwise, they will have difficulty understanding the scope, purpose and growing implications of digital sovereign risk factors on their companies.
