While COVID is no longer a threat to supply chains, the interdependence of our economy means supply chains remain fragile, particularly given the fractious geopolitical environment.
McGrathNicol has just released a survey, “Uncovering Risks in the Supply Chain“, of business leaders’ attitudes towards key threats to their businesses.
Sean Aylmer talks to Matt Fehon and Sam Boarder – both Partners at McGrathNicol Advisory – about the survey, and the bigggest concerns for business leaders as they approach the end of the year.
McGrathNicol is a supporter of this podcast.
Find out more: https://fearandgreed.com.au
See omnystudio.com/listener for privacy information.
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Sean Aylmer: Welcome to the Fear and Greed Business Interview. I’m Sean
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Sean Aylmer: Aylmer. One of the great lessons from the COVID period
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Sean Aylmer: is that supply chains matter. Those in business always knew
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Sean Aylmer: it, but now the rest of us appreciate just how
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Sean Aylmer: important raw materials and manufacturing, technology, shipping, transport, all those
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Sean Aylmer: sorts of things are to our everyday lives. While COVID
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Sean Aylmer: is no longer a threat to supply chains, the interdependence
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Sean Aylmer: of our economy means supply chains remain fragile, particularly given
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Sean Aylmer: the fractious geopolitical environment.
McGrathNicol, a great sponsor of the
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Sean Aylmer: Fear and Greed podcast, has just released a survey of
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Sean Aylmer: business leaders’ attitudes towards key threats to their businesses. It’s
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Sean Aylmer: called Uncovering Risks in the Supply Chain. And here to
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Sean Aylmer: talk to me this morning are Matt Fehon and Sam Boarder,
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Sean Aylmer: both partners at McGrathNicol Advisory.
Matt, Sam, welcome to Fear
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Sean Aylmer: and Greed.
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Matt Fehon: Hi Sean.
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Sam Boarder: Hi Sean. Thanks for having us.
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Sean Aylmer: Okay. So Matt, starting with you, 97% of Aussie business
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Sean Aylmer: leaders are very or somewhat confident in their ability to
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Sean Aylmer: navigate future potential risks to their supply chain. Is that
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Sean Aylmer: a good thing or is it complacency? I mean, that’s
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Sean Aylmer: an incredibly high number.
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Matt Fehon: I think from my perspective, the results weren’t that surprising
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Matt Fehon: really. In conducting the survey, we engaged with YouGov and
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Matt Fehon: surveyed 300 executive across a range of industries. This included
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Matt Fehon: board members and senior executives, and those senior executives held
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Matt Fehon: a variety of roles. So it was a good cross-
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Matt Fehon: section. But.
I think the reason I say it wasn’t
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Matt Fehon: surprising, for the last five or six years, we’ve been
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Matt Fehon: challenging executives to think differently about their supply chain risks.
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Matt Fehon: The majority do think about what’s the impact to their
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Matt Fehon: financial performance, but they don’t assess the real impact on the non-
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Matt Fehon: financial risks that are presented through supply chains. I think
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Matt Fehon: many executives rely on a supply chain manager or a commercial
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Matt Fehon: manager that is responsible for supply chain, and they might think
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Matt Fehon: it’s all hunky dory having someone or a resource in
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Matt Fehon: place. But I think that person also needs to move
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Matt Fehon: with the times and model what the potential scenarios might
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Matt Fehon: be that could result in unexpected events.
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Sean Aylmer: So Matt, it’s a really good point. I mean, your
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Sean Aylmer: survey covers off all sorts of things… cyber attacks, legal
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Sean Aylmer: and regulatory changes, operational risks, counterparty risks, et cetera, even
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Sean Aylmer: geopolitical threats. What you just said, you have a supply
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Sean Aylmer: chain manager in place, fantastic. But it actually has to
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Sean Aylmer: be much more than that. It has to go to
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Sean Aylmer: executive and board level. What would your advice be to
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Sean Aylmer: companies and their boards that I suppose don’t know where
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Sean Aylmer: to start? They know they’ve got a supply chain manager,
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Sean Aylmer: but they know they need to do more. What should they do?
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Sean Aylmer: What’s the step one?
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Matt Fehon: The first thing, I think organizations or executives need to
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Matt Fehon: just acknowledge they’ve probably taken away a bit of confidence
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Matt Fehon: from the COVID experience where everyone had to adapt, Sean,
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Matt Fehon: and as you know, learn quickly as to the disruptions
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Matt Fehon: in their supply chain. But what I don’t think they’ve
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Matt Fehon: done is moved with the broader geopolitical risks that you
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Matt Fehon: just touched on. No one thought we’d be experiencing the
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Matt Fehon: conflicts that we’re seeing in Ukraine, and more recently Gaza, of
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Matt Fehon: course.
And this then brings into what we say is
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Matt Fehon: really important, the security threats that are present within the
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Matt Fehon: supply chain. I think cyber’s a very good example, if
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Matt Fehon: we can just touch on that. For a long time
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Matt Fehon: where we saw complacency over the last decade, in the
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Matt Fehon: early stages of the last decade, in my experience in
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Matt Fehon: the work that I’ve done for many years, we saw
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Matt Fehon: complacency around cyber in many businesses until we saw ransomware
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Matt Fehon: and data breaches and big data breaches and how that
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Matt Fehon: impacts a company or a business and then ultimately how
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Matt Fehon: that plays out in the supply chain, whether it was
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Matt Fehon: the company that was attacked or one of their suppliers,
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Matt Fehon: and it then had that consequential effect.
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Sean Aylmer: So if I’m a manager or on a board and
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Sean Aylmer: I’m thinking about the big challenges, cyber is obviously one
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Sean Aylmer: of the big ones. What are the other big ones
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Sean Aylmer: I should be thinking about?
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Matt Fehon: Well, I think if we look at your supply chain,
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Matt Fehon: the first thing is always, and the survey showed this,
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Matt Fehon: 57% of respondents said financial risk is still the number
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Matt Fehon: one risk that they assess. But behind the financial risks,
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Matt Fehon: you’ve got these secondary risks such as cyber, counterparty risk,
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Matt Fehon: and I think proper due diligence.
I’ve been a forensic
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Matt Fehon: accountant for 30 years now, and I must say most
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Matt Fehon: investigations that we do and the range of issues that
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Matt Fehon: we confront generally go down to a lack of knowing
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Matt Fehon: the individual or the entity that you’re doing business with.
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Matt Fehon: And then I think the other risk, which everyone needs
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Matt Fehon: to be aware, is regulatory risks. And I think the
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Matt Fehon: best example of that is sanctions. And we’re starting to
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Matt Fehon: see sanctions that were imposed on Russia, Russian companies, et
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Matt Fehon: cetera. But with other now geopolitical events, and particularly in
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Matt Fehon: our region through Southeast Asia, should there be further sanctions
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Matt Fehon: imposed, organizations need to consider how that may impact supply
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Matt Fehon: chain and just supply through our usual trade routes.
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Sean Aylmer: Okay. Sam, I might bring you in on that particular
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Sean Aylmer: point. How do you think Australian businesses and their supply chains
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Sean Aylmer: could potentially be affected by the conflicts or the geopolitical
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Sean Aylmer: tension we’re talking about, be that Ukraine, Russia, or the
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Sean Aylmer: Middle East, which seem far away in some senses, or
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Sean Aylmer: what’s happening in our region in the Asia Pacific region
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Sean Aylmer: and then further north?
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Sam Boarder: Well, I think to start with, it’s very hard to
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Sam Boarder: predict as these complex situations often are, but all assessments
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Sam Boarder: are indicating that things will likely get worse before they
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Sam Boarder: get better, to be a pessimist. But one thing we
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Sam Boarder: are looking for at the moment is whether the Israel-
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Sam Boarder: Hamas conflict becomes the catalyst for broader volatility, obviously in
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Sam Boarder: the Middle East in the first instance, but even potentially
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Sam Boarder: even mark the beginning of a new era of proxy
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Sam Boarder: conflicts with all of the geopolitical risks that would bring
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Sam Boarder: with it. So that’s the worst case scenario.
But there
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Sam Boarder: are two certainties, which I’ll speak to now. One is
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Sam Boarder: that the baseline level of existing geopolitical risk to businesses is
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Sam Boarder: going to increase. That’s a given. And the second is
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Sam Boarder: just around uncertainty and the fact that in the past,
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Sam Boarder: sudden and rapid escalation in these types of events is
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Sam Boarder: likely to have an impact on supply chains in the
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Sam Boarder: region, and there is always a cost factor associated with
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Sam Boarder: that uncertainty.
So the trend that we’ve been observing over
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Sam Boarder: at least the last three years, particularly during COVID, is
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Sam Boarder: that Australia’s geopolitical environment is becoming more contested and it’s
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Sam Boarder: becoming more hostile. And this trend’s being driven by a
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Sam Boarder: few things, but largely it’s being driven by strategic competition
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Sam Boarder: between the US- led West and an increasingly assertive authoritarian
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Sam Boarder: block that’s being led by China, Russia, and Iran. So
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Sam Boarder: the Israel- Hamas conflict that we’re seeing play out at the
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Sam Boarder: moment has the potential to become the latest epicenter of
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Sam Boarder: that broader competition, if you like.
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Sean Aylmer: Stay with me, Matt and Sam. We will be back
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Sean Aylmer: in a minute.
My guests today are Matt Fehon and Sam
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Sean Aylmer: Boarder, partners at McGrathNicol Advisory. In Australia at the moment,
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Sean Aylmer: we have our prime minister having spoken to Joe Biden,
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Sean Aylmer: about to speak to Xi Jinping. We’ve played I wouldn’t
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Sean Aylmer: say quite pivotal, but certainly our geography and our resource
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Sean Aylmer: background, we matter nowadays. Is that a good or a
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Sean Aylmer: bad thing in terms of local businesses dealing with, again,
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Sean Aylmer: I don’t like to say sides, but different parts of the geosphere?
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Sam Boarder: Yeah, I think it’s interesting, Sean, because there’s been a
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Sam Boarder: Thor obviously in relations between Australia and China over the last bit. And
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Sam Boarder: if we go back into the COVID years, we had bans
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Sam Boarder: on lobster and we had bans on Bali, and I
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Sam Boarder: think maybe we’d been quite I’ll say shouty particularly towards
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Sam Boarder: China, and they’d responded to what they were perceiving as
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Sam Boarder: us perceiving them as a threat.
Now, there’s multiple layers
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Sam Boarder: to this. One of them is that with the change
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Sam Boarder: in government, a new tack has been taken, if you
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Sam Boarder: like, and the Chinese are, I think, at pains to
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Sam Boarder: reward that in some way. And so they’ve opened up
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Sam Boarder: in a way that they hadn’t for the last government.
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Sam Boarder: One thing I would say though is I think it
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Sam Boarder: would be a mistake to misread that, that we’re going to
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Sam Boarder: go back to what we had in terms of relationship,
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Sam Boarder: particularly a trade relationship, prior to the ban on Huawei,
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Sam Boarder: for example, in the 5G network back in say 2018.
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Sam Boarder: I think we’d seen a steady deterioration and maybe an
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Sam Boarder: increasing perception from the Australians in that the military buildup
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Sam Boarder: that we were seeing from China and some of this
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Sam Boarder: expansionist behaviors and aggression that we were seeing in the
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Sam Boarder: South China Sea, that was a potential threat to, well,
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Sam Boarder: firstly to supply chains, but directly to Australia.
So I
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Sam Boarder: think we probably now have accesses to the Chinese side
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Sam Boarder: that the US don’t have. The US haven’t had that
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Sam Boarder: Thor in the relations that we’ve had, but I think
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Sam Boarder: it would be a mistake to see it as a return
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Sam Boarder: to the previous type of relationship that we had with China.
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Sean Aylmer: Just before we leave this geopolitical discussion, Sam, do you
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Sean Aylmer: think that agents will use the Russia, Ukraine, Middle East
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Sean Aylmer: conflicts as cover to launch cyber attacks on Australian businesses?
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Sam Boarder: Yeah. Well, the first point to make here, Sean, is
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Sam Boarder: that many of the more advanced cyber threat actors are
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Sam Boarder: based inside Russia, China, and Iran. So what that means
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Sam Boarder: is that many of the most active and capable cyber
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Sam Boarder: criminal groups, they’re either sanctioned or they’re actively working with
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Sam Boarder: the regimes in those countries. So while the ultimate goal
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Sam Boarder: is financial, and obviously they’re in it to make money, attacks
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Sam Boarder: against Western companies and governments serve both purposes. It gets
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Sam Boarder: them to cash and it also creates disruption in the
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Sam Boarder: country or the company that they’re targeting.
So I’ve actually
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Sam Boarder: heard it said recently that there’s been a drop off,
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Sam Boarder: an apparent drop off, in larger ransomware events over the recent
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Sam Boarder: past. And I’ve heard it posited that one of the
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Sam Boarder: reasons for that is because the bulk of the best
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Sam Boarder: Russian hackers are busy providing cyber support to Russia against
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Sam Boarder: Ukraine in the Ukraine War.
So I think the second
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Sam Boarder: part of your question, Australia’s a really wealthy country, and that
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Sam Boarder: obviously presents opportunity into what is a billions if not
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Sam Boarder: trillions of dollars a year ransomware industry. And one thing
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Sam Boarder: on that is that I think Australia’s cyber defenses are
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Sam Boarder: getting better, and I think we’re doing pretty well. We’re
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Sam Boarder: coming up quickly. And so what that means is that
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Sam Boarder: what we’re seeing is that cyber threat actors then just
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Sam Boarder: adapt their behavior to evade those defenses. So as we
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Sam Boarder: better protect our systems, those malicious threat actors, and particularly
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Sam Boarder: those that are getting state- sponsored support, they’re just shifting
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Sam Boarder: their tactics to other collection vectors and looking for easier
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Sam Boarder: ways to get access. And one of the ways that we’re
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Sam Boarder: seeing them get that access is by exploiting individuals, so
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Sam Boarder: trusted insiders, employees who have privileged access. Basically they’re going
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Sam Boarder: around the defenses and they’re going directly to someone who’s
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Sam Boarder: sitting at a desk.
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Sean Aylmer: Matt, looking at the McGrathNicol YouGov survey, what to you is
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Sean Aylmer: the key takeaway? The people who are listening to this
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Sean Aylmer: podcast, what is it that you want them to leave
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Sean Aylmer: this discussion thinking about?
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Matt Fehon: There’s a couple of things. I think from the survey
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Matt Fehon: itself and what the senior executives had indicated, I think
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Matt Fehon: it was 75% of the executives said they faced challenges
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Matt Fehon: in dealing with supply chain risks and in actually addressing
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Matt Fehon: the risks in the business. And then alarmingly for me,
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Matt Fehon: it’s then, I think it was 27% of the organizations
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Matt Fehon: have said that they failed to update their risk management
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Matt Fehon: plans for supply chain. So whilst they’re struggling to address
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Matt Fehon: it, there’s also a lack of willingness or accountability to
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Matt Fehon: address that.
I think coming out of it, we’ve got
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Matt Fehon: business leaders and business leaders are very attuned to dealing
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Matt Fehon: with and addressing and following certain information such as economic
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Matt Fehon: conditions, inflation, interest rates, costs of and probably the shortage
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Matt Fehon: of labor, and that’s driving a lot of business focus
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Matt Fehon: and a lot of business decisions. But cyber, as I’ve
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Matt Fehon: touched on earlier, it has risen up the risk register.
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Matt Fehon: And businesses are now alert. Board members are now alert.
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Matt Fehon: The company directors are very alert to cyber risk.
So
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Matt Fehon: I think when we look at the next 12 months
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Matt Fehon: or so, I do think we will see change, but
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Matt Fehon: we won’t see dramatic change given the economic conditions. But
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Matt Fehon: what I do advise business leaders to do is devote
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Matt Fehon: more time to understanding geopolitical and security risks. So security
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Matt Fehon: risk traditionally was physical security, and that’s how I think
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Matt Fehon: many executives still think of it. But as Sam’s alluded
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Matt Fehon: to, in the supply chain and your second, third, or
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Matt Fehon: fourth counterparty or down the supply chain where your goods
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Matt Fehon: are being sourced from, what is their cyber posture? Sam’s
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Matt Fehon: touched on, importantly, insider risk. And again, I’ll say, and
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Matt Fehon: when I talk my fraud investigations, it’s the trusted insider
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Matt Fehon: that was at a major bank who caused significant damage
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Matt Fehon: and loss that Sam’s focused. Who was the insider that
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Matt Fehon: would enable a cyber attack or some other malicious action?
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Matt Fehon: And then the final one for me, Sean, as I’ve
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Matt Fehon: touched on, is counterparty risk. Need to do proper due
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Matt Fehon: diligence and know your customer or know your counterparty. I
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Matt Fehon: think the final point, one thing that businesses and when
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Matt Fehon: they’re struggling with supply chain and how they address it,
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Matt Fehon: what we’ve found in the work that we’ve done and
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Matt Fehon: when we’ve helped organizations actually manage their supply chain risk,
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Matt Fehon: they’ve just got a lack of credible information and they’ve
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Matt Fehon: got poor due diligence into those that are within the
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Matt Fehon: supply chain, the companies, but also the individuals that sit within
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Matt Fehon: those companies. So the processes and the information they gather
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Matt Fehon: is really poor, and that’s often the gap that we
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Matt Fehon: fill and advise organizations what type of information they should
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Matt Fehon: be seeking to stay informed.
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Sean Aylmer: Matt, Sam, thank you for talking to Fear and Greed.
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Matt Fehon: Thanks, Sean.
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Sam Boarder: Thanks, Sean.
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Sean Aylmer: You’ve been listening to Matt Fehon and Sam Boarder, partners at
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Sean Aylmer: McGrathNicol Advisory, and great supporters of Fear and Greed.
This
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Sean Aylmer: is the Fear and Greed Business Interview. Join us every
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Sean Aylmer: morning for the full episode of Fear and Greed, Australia’s
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Sean Aylmer: best business podcast. I’m Sean Aylmer. Enjoy your day.