Top 5 risks for technology manufacturers

Technology has become a fundamental part of our lives. Millions of Americans now work from home, ordering essential products online and keeping in touch with friends and family on laptops and smartphones. Technology is embedded in almost everything we do.

This is a boom time for technology manufacturers. But hardware and software providers face a variety of business risks that can impact their products, reputations and resilience. And midsize technology manufacturers often feel the impacts of risks differently than larger organizations due to capacity constraints, such as fewer financial and human resources. They can also have limited scale compared to large enterprises that benefit from operations spread across different regions or even countries, providing diversification that reduces the impact of localized risks.

Alex Wells, Head of U.S. Middle Market, Zurich North America, spoke with Fortune about the top risks for midsize companies. He listed economic uncertainty, cybersecurity threats, supply chain disruptions, talent acquisition and retention, digital transformation and natural hazards among those risks.

In my role as Head of Manufacturing and Technology at Zurich North America, I talk with business leaders in the technology sector all the time. Technology is a dynamic and rapidly evolving part of the economy, but business leaders — especially in the middle market — face increasing economic, legal, regulatory and digital risks. Here are what I see as the top five risks facing middle market technology manufacturers in 2024.

1. Cybersecurity and data privacy

In today’s digital age, businesses of all sizes face the threat of cyberattacks. While large corporations often dominate headlines when it comes to cyber breaches, midsize companies are equally vulnerable, if not more so. Cybersecurity and data privacy pose significant risks for midsize technology manufacturers, who often lack the necessary defense infrastructure and expertise to combat sophisticated cyber threats.

Midsize companies can often underestimate their risks when it comes to cyberattacks. These attacks are primarily aimed at stealing and misusing customer or business information for financial gain or causing mischief. Malicious code embedded in email attachments can introduce malware into a network, leading to data invasion and corruption. Ransomware attacks can lock access to critical network data until a hefty ransom is paid. For technology manufacturers, an attack on their enterprise resource program, which runs highly specialized equipment used in specific industries, can disrupt an entire business segment.

The growth of the Internet of Things (IoT) in manufacturing has expanded the attack surface for technology manufacturers. As manufacturers rely more on industrial process automation such as robotics, web-connected devices, and uses of artificial intelligence (AI) or machine learning, the potential for cyber threats and other emerging technology risks increases. The addition of new components to the production and control environment further amplifies this risk. Notably, malware infiltrating Industrial Control Systems (ICS) can cause widespread damage by shutting down manufacturing processes, corrupting data and physically impairing vital production equipment.

That’s why manufacturers need to be proactive in recognizing the cyber risks they face, particularly as cybercriminal threats become increasingly sophisticated. It is crucial to evaluate and assess networks to identify any undetected breaches that may have already occurred. By leveraging network monitoring resources and seeking expert advice, manufacturers can intercept and prevent future cyberattacks, safeguarding their sensitive information and critical operations.

The financial impact of these cyber risks can be substantial. The global average cost of a data breach in 2023 was $4.45 million, a 15% increase over 3 years, according to IBM’s Cost of a Data Breach Report 2023.

Technology manufacturers can help to protect themselves through targeted insurance solutions. Zurich, for instance, has bolstered its cyber risk services by acquiring SpearTip, a cyber counterintelligence firm. This acquisition enables Zurich to offer proactive and responsive services including 24x7 real time network monitoring to protect clients against cyber threats. Insurance coverage can provide financial protection, mitigating the potential losses resulting from cyberattacks, thereby allowing manufacturers to focus on recovery and growth.

By proactively addressing cyber risks, technology manufacturers can secure their operations, protect their customers, and maintain a competitive edge in an increasingly digital world.

2. Supply chain disruptions

The COVID-19 pandemic served as a stark reminder to business leaders about the significant risks associated with supply chain disruptions. Technology manufacturers rely heavily on a secure and uninterrupted flow of components and products from suppliers, especially in Asian countries. Breaks in the supply chain pose a considerable risk to technology manufacturers, impacting their profitability, market share and overall competitiveness.

As businesses become increasingly globalized, manufacturers often depend on suppliers from different countries for raw materials, components and parts. This introduces challenges such as longer lead times, transportation delays and higher costs due to import/export regulations and customs duties. These obstacles can disrupt production schedules and hinder the overall efficiency of the supply chain, ultimately affecting the manufacturer’s ability to meet customer demands and maintain profitability.

AI can offer help on managing supply chain disruptions. Yet, at the same time new technologies need to be carefully adopted and monitored.

Disruptions in the supply chain can have both immediate and long-lasting impacts. They can lead to customer dissatisfaction, reputational damage and loss of market share. The inability to deliver products on time and meet customer expectations can significantly impact a manufacturer’s bottom line.

Manufacturers often struggle with a lack of visibility and transparency across their supply chains. Working with multiple suppliers and subcontractors makes it difficult to track and monitor the movement of goods and materials at every stage. This lack of oversight can result in inefficiencies, delays and an increased risk of counterfeit or substandard products entering the supply chain.

To mitigate the risks associated with supply chain disruptions, technology manufacturers are adopting various strategies. Some manufacturers are purchasing supplies in bulk to ensure they have the necessary materials readily available when needed. However, this approach introduces a new risk of potential property loss, as storing large quantities of raw materials or critical parts in warehouses or storage facilities can compound losses from fires or floods.

To address these challenges, manufacturers need to be agile and responsive. Conducting a comprehensive assessment of existing sourcing and contingency plans is crucial to prepare for major disruptions. Zurich Resilience Solutions offers Supply Chain Risk Services specifically designed to help manufacturers enhance the resilience of their supply chains. These services provide valuable insights and tools to identify vulnerabilities, develop contingency plans and strengthen supply chain operations.

By leveraging specialized risk services and adopting proactive strategies, technology manufacturers can enhance their resilience and maintain a competitive edge in an increasingly complex global market.

3. Recruitment and retention of key staff

Recruiting and retaining key staff is important for technology manufacturers to remain competitive. Inability to do so can pose significant risks, particularly in the face of the ongoing workforce shortage in the United States. The impact of this shortage has been felt across various industries, but manufacturing has been hit the hardest. Even before the COVID-19 pandemic, the industry was already facing a potential labor crisis, with a projected 2.1 million unfulfilled jobs by 2030 due to a lack of skilled labor, according to a study by the Manufacturing Institute.

In the Manufacturers Outlook Survey conducted by National Association of Manufacturers, more than 71% of respondents cited the inability to attract and retain employees as their top primary challenge.

Technology manufacturing is a highly specialized field that requires specific knowledge and experience. Recruiting individuals who have a strong background in the industry ensures that manufacturers have the necessary expertise to tackle complex challenges. Retaining these key staff members allows companies to build institutional knowledge and expertise, which can be leveraged for future projects and initiatives.

Retaining key staff members is essential for maintaining a high level of productivity and efficiency. When employees have been with a company for a long time, they become familiar with its processes, systems and culture. This familiarity allows them to work more efficiently and effectively, as they can anticipate challenges and find solutions more quickly. Retaining these experienced employees also reduces the costs and disruptions associated with constantly recruiting and training new staff.

In addition, employees who feel valued and appreciated are more likely to be engaged and motivated. They are also more likely to align themselves with the company’s goals and values, which fosters a positive work environment. A strong company culture not only improves employee satisfaction but also attracts top talent.

Finally, retaining key staff can help manufacturers build a reputation for excellence. When a company consistently delivers high-quality products and services, it gains a reputation for being reliable and trustworthy.

Recruiting and retaining key staff is crucial for technology manufacturers due to the specialized nature of the industry and the need for continuous innovation. Having a talented and dedicated workforce not only ensures a competitive advantage but also contributes to productivity, company culture and reputation.

4. Managing data integration and upgrades

As technology continues to advance at an exponential rate, data integration and upgrades have become a significant concern for technology manufacturers. These companies face the challenge of managing and merging vast quantities of data from various sources, including in-house legacy systems, the cloud and data stored on countless laptops and other devices. However, this process comes with inherent risks that can have a detrimental impact on a business.

One of the primary risks is the strain it places on system resources. Integrating large data sets to find matching values can tie up substantial resources, making it a resource-intensive task. This can lead to performance issues and system slowdowns, ultimately affecting the overall efficiency of the business operations.

The process of data integration often requires temporary storage and other techniques to streamline the integration process. However, these techniques can be logistically challenging and cost-prohibitive for technology manufacturers. The need for additional storage space and infrastructure can increase expenses and reduce profitability.

Data integration is no longer limited to sorting text files and database extracts from familiar IT infrastructures. It now involves managing streaming data from device logs, online services, social media and publicly available and cloud-based data, as well as data from customers, partners and suppliers. This hybrid integration, combining both on-premises  and cloud-based infrastructure, introduces additional complexity into the process.

This new complexity can lead to more opportunities for errors and inconsistencies. Mishandling or misinterpreting data can result in inaccurate insights and decisions, which can have severe consequences for technology manufacturers, including faulty product designs and ineffective marketing strategies.

The strain on system resources, logistical challenges, increased costs, complexity and potential for errors all contribute to the potential negative impacts on a company’s operations and reputation. To mitigate these risks, technology manufacturers must invest in robust data integration strategies and ensure ongoing training and education for their employees to effectively manage and leverage their data assets.

5. Compliance

One of the most challenging aspects of technology manufacturing is complying with the strict standards set by industry and government entities. Failing to adhere to these regulations can pose significant risks to a business, including loss of customer confidence, delayed product launches, missed revenue forecasts and negative impacts on a company’s reputation and brand.

One of the main reasons compliance is important for technology manufacturers is that it ensures the safety and security of their products. Industry and government regulations are put in place to protect consumers and the environment. By complying with these regulations, manufacturers can ensure that their products meet the necessary standards and are safe for use. Non-compliance can lead to product recalls and lawsuits.

In highly regulated industries, such as healthcare and finance, compliance is crucial. For example, healthcare technology manufacturers must comply with strict privacy regulations, such as the Health Insurance Portability and Accountability Act (HIPAA). Failure to meet these requirements can result in severe penalties and legal consequences. That’s why manufacturers must integrate compliance into the design and development of their products to meet these industry-specific regulations.

Another reason why compliance presents a business risk is that non-compliant products may not be able to be sold or used in certain markets. Many countries have their own set of regulations and standards that products must meet. If a product does not meet these requirements, it may be barred from entering a particular market, limiting the manufacturer’s potential customer base and revenue streams.

To mitigate risks associated with non-compliance, a proactive approach known as “compliance by design” is recommended. This approach involves incorporating compliance protocols and risk controls into the entire product lifecycle, from the early stages of design to delivery and customer deployment.

By building compliance into products from the start, technology manufacturers can save time and money in the long run. They can avoid costly reengineering processes, delays in product launches and potential legal consequences.

Risk management, resilience and growth

Of all the things technology manufacturers must manage, the most important may be risk. Managing risk in the technology industry is critical for sustaining operations, protecting assets and ensuring long-term success. By addressing the risks of cybersecurity, supply chain disruptions, recruiting and retaining key staff, data integration and regulatory compliance, technology businesses can increase their resilience, maintain a competitive edge and meet the evolving demands of customers and the market.

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Our team of dedicated Technology Underwriters positioned throughout the country possess deep expertise within both Property & Casualty and E&O/Cyber for Middle Market Technology risks.  We are fortunate to have a strong technical base for both cutting edge and traditional Technology like Software Developers, Hardware Manufactures, Data Integrators, Robotics and Autonomous Technology Companies. My passion for Technology started over a decade ago when Robotics and Autonomous Technology was first taking off.  Learning the intricacies of these cutting-edge sub-segments was fascinating and really helped to fine-tune my underwriting skills and be better positioned to craft the most comprehensive insurance program for our Technology customers.   Zurich’s global reach has further broadened my exposure to Tech accounts around the world and I’m privileged to also lead our Global Casualty Center of Expertise for Technology and help drive our expertise and portfolio globally.   It’s critical that the customers within the Technology industry partner with brokers and carriers like Zurich who understand their business and can provide the services and coverages needed to thrive and continue to evolve.

 

Learn more about Zurich North America’s Insurance for Technology.