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Exposed to scrutiny

26 October 2015

Exposed to scrutiny - Read more

Digitisation of the automotive industry has meant closer scrutiny for VW but it will lead to more effective supply chain management in the sector

Digitisation offers huge opportunities for car manufacturers. It does, however, present dangers for the industry not only in the form of new competitors, but in terms of what the World Economic Forum has described as ‘hyper-transparency.’ The main danger of hyper-transparency lies in the supply chain and the Volkswagen saga has underlined the size of the challenge facing the automotive industry – and facing every industry with a complex production process. It could be argued that the automotive industry has been slow to react to the consequences of digitising its business model.

Under a magnifying glass

Digitisation has broken down barriers that previously existed. We are now constantly connected and this is one of the factors which leads to hyper-transparency – and this exposes organisations to the 24/7 scrutiny that Volkswagen now endures. In complex risk situations, such exposure leads to distrust and scrutiny of the rest of a company’s business practices. In an industry as complex as the automotive sector, that can create severe headaches. In addition to managing the specific crisis in hand, Volkswagen should be looking to examine the breadth of its supply chain. Sloppy business practice in one unit can become institutionalised if it is not detected and cauterised.

Breaking down silos

Although the automotive industry is responsible for building some of the most cutting edge products in the world, it is not always known for its innovative approaches to organisational structures. In the case of Volkswagen, if the US CEO was aware of an issue for 18 months, but was unaware of the specific software falsifying emissions readings, it clearly shows how large organisations with complex supply chains can silo information – either intentionally or unintentionally.

This is not an attempt to scapegoat the US leadership team of Volkswagen, because it is extremely difficult for global organisations to create a clear and consistent picture of everything that is going on. However, what Volkswagen’s failings should tell us at the very least is that organisations cannot afford to allow information to be siloed if they are to create a coherent picture of the risks to their business.

This means that leaders of individual business units or functions will have to accept that sharing information with other teams is critical to success. When resources and budgets are finite, encouraging such collaborative behaviour is not simple and it goes against well-established practices in large organisations. Adding to the complexity is the need to encourage suppliers to share their information as well, but unless senior executives demand such access to information, there is always the danger that companies will be unpleasantly surprised when hyper-transparency exposes them to intense scrutiny.

Big data quality control

Digitising the automotive supply-chain is beneficial for senior executives as it offers them access to huge volumes of data. Yet herein lies another challenge: this is ‘big’ data and attempting draw actionable intelligence from complex supply-chains, including suppliers, customers and a geographically dispersed international operations is not simple.

The automotive industry is well placed to cope with this digital onslaught as it has already experienced a significant technological transformation, such as when robots automated many aspects of the manufacturing process. Nonetheless, the volume of information generated from the supply chain and its complexity will now require an entirely new level of awareness and quality control to ensure that data produced by these components integrates smoothly and effectively to identify risk exposure.

Analysing the trends and spotting issues is no easy task. There has been significant discussion about the need for a chief digital officer to help organisations maximise the opportunities of the digital era, but it could also now be important for companies with complex supply chains to identify a data quality control function beyond those that already exist.

Digitising is not only creating hyper-transparency with external stakeholders, it is forcing greater transparency between disparate internal business functions spread around the world. This is causing cultural heartburn for many organisations that are operating with traditional command-control structures. Organisations must accept that digitisation will only work with the free flow and integration of data from multiple sources to create a clear operational picture. This requires a data quality control function to ensure best practices are maintained across every business unit. This will ensure senior leadership teams have confidence they are examining all the available evidence before making critical business decisions.

Spotting strategic risks early

Research by the Corporate Executive Board shows that even reputable businesses with long-established processes and functions for assessing risk often fail to identify strategic risks emanating from the supply chain. These have the most damaging impact on organisations – namely denting share prices. The irony is that risk assurance teams only spend about 6% of their time on these most damaging issues, because they believe these matters are too serious and should be the responsibility of the CEO. Yet senior executives are failing to identify such strategic risks.

The CEO must drive this agenda, because ultimately this approach demands operational and organisational change. Particularly in the automotive industry there is a great opportunity for supply chain executives to play a supporting role. This team is fundamental to the smooth operation of a business – it should encourage business units and suppliers to adopt more collaborative business practices which go a long way to achieving positive change. These individuals could also perform the dual function of data quality control and silo-busters, but most importantly whoever takes on this role must ensure that the CEO and the senior leadership team has the most accurate picture of the company available.

As we have seen with the Volkswagen case, hyper-transparency makes it extremely difficult for a CEO to say that he or she did not know what was happening, because so many people can have access to the same data.

James Lawn is CEO of Polecat

Comment

‘In reputational terms, this could be a disaster for VW, Germany’s most trusted automotive brand ... According to the Edelman Trust Barometer 2015, trust is now an essential component of business and the automotive industry is among the most trusted sectors.

‘However, a major safety issue was badly handled by another highly trusted car brand, Toyota, in 2009, which had dire consequences for the company. Although they apologised profusely and management were forced to take a 10% pay cut, car buyers and commentators thought their response was too slow and the issue dragged on for several years.

‘Although VW has issued an immediate apology for “breaking the trust of our customers and the public”, a class action has already been started in the US.

‘For a global company which prides itself on trust and integrity, the accusation of “cheating emissions tests” will require swift and effective handling to avoid long-term reputational damage.’

Philip Dewhurst FCIPR is Past President of Chartered Institute of Public Relations and adviser to ICSA

 

‘None of us know what happened at VW and what will come out of the woodwork but, on the face of it, the issue – a serious breach with profound consequences where senior management or the board appeared unaware of the breach – comes in the same category as many of the case studies in Airmic’s Roads to Ruin report and many events since.

‘It highlights the need for all companies to ask the question: could something like that happen here? Looking at most of these types of incident, and not necessarily relating to VW specifically, the questions we would ask would be:

  • What were the drivers behind a decision which had the potential to result in catastrophic consequences?
  • Was the risk of this type of occurrence contemplated by the board and what was done to ensure that this risk was eliminated or minimised?
  • Has the company undertaken a reputational risk mapping exercise?
  • Were there any cultural failures, possibly exacerbated by incentive pay structures which led to the breach, as per the banking failures? Are there urgent lessons to be learned?
  • Once a single breach is identified, what steps are being taken to explore other possible similar breaches?

‘Frankly, this goes beyond pure compliance and has implications around ethics, culture, incentivisation, governance, transparency, speaking up/whistleblowing and so much more.’

John Hurrell is CEO of Airmic

 

‘Acting with openness, transparency and above all authenticity has to be the start point for companies faced with as severe a reputational crisis as VW is experiencing. Regardless of the extent of knowledge about the defeat device software held by VW’s senior leaders, they have to be accountable for the fall-out. Rapid communication to all stakeholders, including customers and dealers who are likely to be financially impacted, would also be essential. 

So, stop digging when in a hole, and maintaining open and genuine communications will be good tactics to limit further damage to an already severe situation. Over the longer term, the company secretary can play an instrumental role in protecting VW from ever being in a similar position again. 
‘It is clearly going to be a challenging few months and years for VW in the aftermath of this crisis, but the company has invested wisely in building its reputational capital in the previous decades.

Evidence among other companies with a similar degree of reputational goodwill, when faced with similarly daunting crises, suggests there is hope for VW to recover from the scandal. It will take strong leadership, communication and a demonstrable change in corporate culture to come through on the other side.’

Kasper Nielsen is Executive Partner and Co-Founder at Reputation Institute

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