Data and risk: challenges in an uncertain world

The value of data is growing exponentially. Financial markets have developed increasingly sophisticated methods of analysing and exploiting data, and almost every industry is becoming increasingly data-driven. The global response to the COVID-19 pandemic is another example. Statisticians and analysts have pored over available data sources to understand how the virus might affect populations, when the peak of the outbreak might occur and what effect it might have on health services.

Absorbing more risk

An organisation that expertly captures and leverages data has a chance to get ahead of competitors. At the same time, it potentially takes on more risk. The UK’s Information Commissioner’s Office proposed a fine of GBP 183m on British Airways in 2019 for infringing data security regulations following customer data breaches.

Regulators and legislators have upped the ante on data protection rules and have shown a willingness to issue penalties. They are also waking up to the idea of generating tax revenues by imposing levies on data, and they are recognising that the use of data could result in competition or anti-trust breaches.

Avoiding risk is absolutely essential, though businesses can also buy themselves additional freedoms by structuring and locating data more effectively. Global data regulation is fragmented (especially outside the EU) and so there are opportunities to make the most of more ‘data friendly’ locations. Businesses though should not leave aside ethical and reputational concerns in the hope of achieving greater data freedoms.

Value and trust

Data security, for example, is pivotal to earning trust from consumers. Chris Watson, Head of the CMS Technology, Media & Communications Group, says, “Data is the new gold. It is clearly a fundamental asset of the new economy, but we have to assess the value of data, where it is located, how it is regulated and how it might be taxed. These are the crucial elements to ensure a level playing field. You need to think about where you locate your data rather than simply choosing a cheap data centre. I feel that data ownership, localisation and how that data is taxed is one of the most interesting issues right now."

Fragmented rules

Yet disjointed regulation creates additional risk and uncertainty for businesses that are already trying to identify the most effective corporate and tax structures. The decision where to locate data-rich businesses is becoming increasingly important and the term ‘data haven’ is becoming almost as frequently used as its close relative ‘tax haven’.

Switzerland’s different touch on data regulation, as well as its neutrality and geographical location between East and West, is thought to be the primary attraction.

Zurich-based Stefan Brunnschweiler, Head of the CMS Corporate /M& A Group, says, “We are seeing more and more data heavy companies coming to Switzerland. Traditionally it was banking, but now we are seeing a growing tech industry. Switzerland is not part of the EU, it is a neutral spot and it’s an attractive place to work."

There are of course broader technology concerns, notably in the field of artificial intelligence (AI) and how this must be addressed in contracts and business relationships. Aukje Haan, Co-Head of the CMS Commercial Group, feels that there are already signs of uneven global AI regulations. Businesses are going to have to understand and give maximum consideration to laws and directives, ensuring that they are not breached. She says that businesses must consider issues such as the supply chain and more recent events such as the COVID-19 pandemic: “Companies should rethink their business models, think about what is needed to reshape and reform them to the new reality. Further digitisation and adoption of digital, tech and AI analytics and solutions will be key. Business teams should really reflect on the impact of an AI and data-driven society and how this translates to the way business is done and how contracts ought to be designed.”

Aukje Haan believes that contracts will need greater flexibility and to include principles of fairness to allow for unforeseen circumstances and not just in relation to force majeure and material adverse change (MAC) clauses. The COVID-19 crisis has shown us that an agile operating model is key and contracts have to be adjusted to this new reality.

Data-driven deals

For many businesses, the data that they hold and are able to exploit will inevitably be key to their accomplishments in the new economy. Stefan Brunnschweiler believes that the M& A segment is already driven to a large extent by data considerations. “Data is often the reason for a transaction,” he says, suggesting that due diligence processes are now heavily focused on the data that a business holds.

“However, when it comes to personal data transfer, that does not only mean a lot of value, but also a big liability and a lot of responsibility. There are risks that can arise during the transfer of personal data to the buyer and others in the post-acquisition phase, and cases such as the Marriott/Starwood breach only go to show the cost of insufficient due diligence.”

Environmental consequences

The race to acquire and leverage data is not without consequences. Technology is, for example, helping to solve many environmental problems, but it is also set to create more of them. Chris Watson believes that businesses will have to consider the climate impact of storing huge volumes of data. He points out that 5G is expected to use much more power than 4G, and if this energy does not come from renewable sources, then it threatens green ambitions. He says that, “A video conference instead of travelling to face-to-face meetings does not wipe out the environmental impact.”

Climate concerns are vital and businesses will need to monitor the impact of holding large data volumes and operating data intensive technologies. Alongside this, organisations must follow the evolution of the technology and the data regulation landscape. Where they locate and manage their technology and data will become an equally vital consideration. Driving financial growth and earning trust will depend on it.