30% Multinational Companies To Be Hit By Unmanaged Digital Sovereign Risk By 2025: Gartner

Thirty percent of multinational organisations will be severely impacted by unmanaged digital sovereign risk by 2025, and will experience revenue loss, brand damage or legal action, according to research and consulting firm Gartner.

According to Gartner, digital sovereignty is the ability of a government to realise 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.

“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,” said Brian Prentice, VP analyst at Gartner.

Gartner highlighted three important areas impacted by digital sovereign risk that multinational organisations must manage to avoid potential revenue loss, brand damage, or legal action.

Digital Sovereign Risk Flows To Technology Provider's Multinational Clients

The operations of technology providers are impacted by much of the disruption brought on by the rise in sovereign digital strategies. Specific technology providers and sectors are seeing more great power competition, as evidenced by restrictions on 5G vendors like Huawei or Nokia. Increasing regulatory pressure, changes in national policy, or reactions to unexpected geopolitical events may be the cause of this.

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 organisations' broader supply chain, and proactively assess, and mitigate their digital sovereign risk.

Digital Productisation Initiatives Will Be Hampered Without Effective Localisation

As digital ambition of enterprises rises, digital productisation efforts push them toward the creation of discrete, market-facing digital products. If potential markets are identified in locations other than the enterprise's home country, steps must be taken to manage the digital sovereign risk associated with each digital product, recommends Gartner. 

This requires ongoing product localisation to adapt to regulatory requirements, along with the culture and language of customers in a specific market. Different national technological standards, state-sponsored protocols and frameworks supported by the government, all influence the decisions to be made when creating digital products that will serve multiple markets.

Digital Businesses Will Get Caught In The Middle Of Digital Geopolitical Competition

Enterprises will face the same wide range of digital free-market frictions as technology providers, as they boost their digital ambition and transform into digital businesses. This places them in the middle of digital geopolitical competition, which affects business strategy. 

To be successful, Gartner recommends that chief risk officers become comfortable with digital technology; otherwise, they will struggle to comprehend the expanding scope, purpose and implications of digital sovereign risk factors on their organisation.

“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.”