Generative AI - Unrealistic Expectations?
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Hi, enjoy this weeks curated risk and business updates.
Generative AI exploded in 2023 and became an everyday technology, similar to email and search engines. Expectations rapidly grew to the point that generative AI may be near the “Peak of Inflated Expectations” on the Gartner, Inc. Hype Cycle.
For example, generative AI private investment increased from $2.9B in 2022 to $25.2B in 2023, Fortune 500 earnings calls mentioning AI went from 266 in 2022 to 394 in 2023 and the number of foundation models (big multipurpose models that generative AI tools run on) doubled in the US, going from 51 in 2022 to 109 in 2023.
Challenges to successfully gaining the benefits from generative AI are significant despite all the investment and focus. Identifying and understanding new emerging risks can always be a challenge.
A recent HBR article suggests that AI related risks could be categorized into 4 groups based on “intent” and “usage” to aid in identifying and mitigating AI risks:
Misuse
Misapply
Misrepresentation
Misadventure
These categories are useful for some AI related risks such as:
Consumer mistrust
Training data privacy and security
Deep fakes and misinformation
Hallucinations or false information
Inherent biases
Data usage and rights
Ethical challenges
Cybersecurity vulnerabilities and uses
Other AI related risks may fall outside of this model and therefore require more a more holistic approach such as the recent ISO standard 23894 Information technology — Artificial intelligence — Guidance on risk management:
Unrealistic expectations
Intellectual property infringement
Cost/ benefit of deploy and run AI models
Shadow AI initiatives
GPU shortages
Regulatory uncertainty
Request more information on DelCreo’s Risk Universe and risk assessment services.
As a reminder, here are our Risk Universe categories that we leverage to tackle and understand risk which include:
External Risk
Governance Risk
Strategic Risk
Product Risk
Business Operations Risk
Legal & Compliance Risk
Financial Risk
Technology Risk
We leverage our understanding of risk maps and risk universes to better advise our clients in strategic business decisions and to optimize the management of risk throughout the enterprise.
Weighing the Risks
Weekly Highlights
Three Key Ideas:
The U.S. economy is showing signs of a slowdown, reflected in declining personal income and consumption figures, raising concerns among investors and policymakers about potential economic risks ahead.
Regional economic indicators, like the Chicago purchasing managers index, are also indicating a downturn, suggesting broader industry risk factors amid the economic slowdown.
The emergence of potential AI monopolies poses significant strategic risks due to concentration of essential data and computing power, while the proposed M&A activity signals potential concentration risk and disruptive innovation risk in various industries.
Recommendations:
To address these external risks comprehensively, businesses should adopt a proactive enterprise risk management approach, including robust cybersecurity measures, compliance protocols, and strategic diversification strategies to mitigate financial, legal, strategic, and operational risks across various sectors and markets.
Risk Universe Weekly Updates
External Risk
The Fed Might Soon Have to Worry About More Than Just Inflation
The U.S. economy is experiencing a slowdown, with concerns rising among investors and policymakers as economic growth loses momentum, highlighted by declining personal income and consumption figures, indicating potential economic risks ahead.
Regional economic indicators, such as the Chicago purchasing managers index, are also signaling a downturn, with May's reading at its lowest since May 2020, suggesting broader industry risk factors amidst the economic slowdown.
Strategic Risk
Factors That Could Tip The AI Market To A Few Dominant Players
The emergence of potential AI monopolies or oligopolies poses significant strategic risks, including the concentration of essential data and computing power, potentially freezing out competitors and hindering market access.
Factors such as economies of scale, access to compute power, network effects, and mergers/partnerships could tilt the market towards a few dominant players, raising concerns about competition, innovation, and access to resources, while the diversity of the AI market and regulatory interventions could mitigate these risks.
Global M&A lurches back to life
Keywords Studios faces strategic risks including brand and reputation risk due to concerns about the impact of artificial intelligence on its business, heightened by being targeted by short sellers, potentially affecting its market perception and investor confidence.
The proposed acquisition by EQT signals potential concentration risk and disruptive innovation risk in the gaming industry, with the deal reflecting a revival in M&A activity driven by increased confidence among companies and investors, despite lingering uncertainties such as political and economic instability.
Product Risk
London hospitals declare critical incident after cyber attack
NHS hospitals in London faced a critical incident due to a cyber attack on a laboratory services provider, causing cancellations of operations and procedures, redirection of patients, and delays in blood transfusion delivery, highlighting significant cybersecurity risks and product compliance issues.
The incident underscores the vulnerability of healthcare systems to ransomware attacks, leading to disruptions in critical services, patient safety concerns, and significant financial costs, emphasizing the urgent need for robust cybersecurity measures and compliance protocols to mitigate product risks and safeguard patient care.
Business Operations Risk
How Do We Measure Supply Chain Due Diligence? GLI Labor Outcomes Metrics
The EU's Corporate Sustainability Due Diligence Directive (CSDDD) marks a significant shift towards mandatory regulation of labor practices in global supply chains, requiring companies to identify, assess, and mitigate negative impacts on people and the planet, posing risks of non-compliance, fines, and legal challenges, particularly concerning third-party relationships and business interruptions.
Labor Outcomes Metrics introduced in response to CSDDD aim to quantify actual impacts on workers, enabling regulators to monitor compliance and compare performance across companies, while reducing reporting burden and promoting accountability, although firms may face challenges in controlling their narrative and adapting to a more transparent reporting framework.
Legal & Compliance Risk
Marketers using generative AI for content creation face significant legal risks related to intellectual property, with concerns about copyright infringement claims and the potential loss of copyright protection for works autonomously generated by AI, necessitating careful documentation of human creative input to demonstrate eligibility for copyright registration.
The legal landscape surrounding AI-generated content remains uncertain, with ongoing lawsuits highlighting potential liability for AI developers and users, particularly those utilizing AI for commercial purposes, emphasizing the importance of understanding and mitigating copyright risks through early integration of AI into the creative process and thorough documentation of creative input sources.
Financial Risk
KKR Weighs Entering Private Credit in Japan to Challenge Banks
KKR's expansion into Japan's private credit market poses financial risks such as capital and liquidity risk, as well as fluctuations in financial performance due to the inherent uncertainties and potential losses associated with entering a new market and financing high credit risk companies.
Despite past losses, KKR aims to leverage opportunities in Japan's market, particularly in insurance and asset management, potentially diversifying its revenue streams and enhancing profitability, albeit with ongoing finance and accounting risk management challenges.
Technology Risk
B2B SaaS companies face significant challenges with reduced guidance and disappointing earnings, possibly indicating underlying risks within their product technology platforms and technology platform operations, potentially leading to diminished investor confidence and stock performance.
Saas spending is coming under greater scrutiny, 30% may be underutilized or wasted.
The emergence of AI and its integration into software development processes presents a transformative potential, but the industry may underestimate the complexities and limitations of AI, suggesting a slower adoption trajectory than anticipated, while mature SaaS companies might experience growth resurgence through effective AI integration and monetization efforts.