Tangled up in your own regulations

Internal company rules are more costly than government red tape

When Australian businesses complain about red tape, they usually blame government rules and regulations. Yet a recent study suggests that individual companies are tying themselves in far more red tape than the government does.?

Deloitte Access Economics estimates the national cost of administering and complying with rules and regulations that companies impose on themselves is $155 billion a year, compared with a cost of $94 billion a year to administer and comply with government regulations.

The report – 'Get Out of Your Own Way: Unleashing Productivity' – notes that private sector and government compliance costs together amount to one-quarter of a trillion dollars a year, and a saving of just 10% would equal about 1.6% of national income, ranking its impact with some of Australia's historic economic reforms.

Time is money, and our survey of public and private businesses, not-for-profits and government agencies shows that the time required for employees to comply with self-imposed rules has become a crippling burden. Middle managers and senior executives are chalking up 8.9 hours a week complying with the rules corporates set for themselves, with other staff spending 6.4 hours, the report states.

There is also the unquantifiable cost to innovation and morale of tying up staff in rules.

 Regulation creep

The results are unsurprising to George Shinkle, an associate professor in the school of management at UNSW Business School, who in the past has worked with Toyota on lean production and lean management systems and processes.

"My experience would suggest that if you really look closely and you really worked hard, you can probably take 30% to 50% out of some processes because they've been engineered over time and we tend to just keep adding to them and never taking away," Shinkle says.

Of course, Deloitte notes that not all regulation is bad – it can protect workers and consumers, for instance. The point is echoed by Nick Greiner, former premier of NSW, company director and a distinguished visitor at the Australian Graduate School of Management at UNSW Business School.

"We tend to say there's thousands of pages of legislation and that it's a waste of time and compliance costs – all of that's got some validity but I also think people ought to look at the quality of the regulation, be it in government or be it in the private sector. What is its purpose and how does it enhance shareholder value?" asks Greiner.

The larger a company becomes, the more likely red tape is to proliferate as executives try to extract synergies.

"I don't think there's any doubt that bigger companies tend to have lots of rules and the rules tend to be based on the centre wanting to exert either more power or more harmonisation in different parts of the enterprise," Greiner says.

'Faster clock speed for decision-making on these kinds of things is really critical'

GEORGE SHINKLE

Trying to minimise risk

Deloitte suggests another reason for the proliferation of corporate red tape is because companies want to minimise or even eliminate risk as much as possible.

But organisations often overestimate the extent to which they can insulate themselves from costs because many are bad at estimating true risks. In seeking to avoid a risk, companies often fail to estimate the "cost" of that risk insurance by way of added regulations.

"In terms of red tape, it's very easy for a business to blame government for that red tape and say government-imposed red tape costs them money," says Mark Allsop, a partner at Deloitte Private.

"And then, they flip the coin and look at self-imposed red tape as something which saves them money. It protects their business. It manages risk. It applies systems and embeds appropriate management. But they don't cast a critical eye over their own self-imposed red tape as to whether or not it is something that is saving them money or costing them money. What our report identifies is that, in many cases, it's costing them money either directly or through time," Allsop says.

Deloitte measured the extent to which an industry is subject to red tape by the proportion of compliance workers in each sector. At the top of the list are the finance and professional services sectors, where about 20% of staff work in compliance.

Only a small proportion of workers in the mining and construction sectors work in compliance, yet this is rising fast. Deloitte notes that the increased red tape for these sectors hasn't been without benefits, such as increased safety for workers, yet these sectors are also becoming subject to more government rules.

 Managing stability

The cost of self-imposed red tape is a problem that hasn't in the past attracted much attention – the Deloitte report is the first of its kind. Nonetheless, the issue is one that the Reserve Bank of Australia (RBA) is becoming concerned about.

In a speech last year, RBA deputy governor Philip Lowe said Australia had become increasingly focused on risk mitigation and risk control, and this was affecting the nation's productivity growth.

"Reducing risks is not always cost free – resources need to be devoted to the task and this means that these resources cannot be used for other tasks. And perhaps even more importantly, it might also be the case that a more risk-averse society is naturally less inclined to support and finance innovation, to implement new processes and to apply new technologies. If this is indeed the case, it has implications for future productivity growth," Lowe says.

According to Shinkle, a lot of risk aversion is driven by shareholders' desire for predictable cash flow and short-term profits from their investments. And as managers progress up the corporate ladder in an organisation they often want to protect their position, which also makes them more risk-averse.

"That's a normal kind of tendency, particularly in larger organisations in more sustainable environments. So, the issue is to try to manage the stability in a stable environment and so, in that case, adding more rules and procedures and trying to control it makes reasonably logical sense," Shinkle says.

"But, in an environment that's really changing and dynamic, you're trying to control something that's uncertain and unknowable, that can't be controlled. The traditional stuff that's in place was likely developed in a more stable environment that is now turning into a more and more dynamic environment and these things are colliding."

 Autonomy and motivation

One solution to this problem is to have rules that can adapt quickly, possibly through a fast way to make an exemption in an instance where circumstances deviate from the norm, or to have a quick way to revise the rules when circumstances change.

"Faster clock speed for decision-making on these kinds of things is really critical," Shinkle says.

Another solution is to provide a clear direction for employees through explicit values and intent for the organisation. This can replace or reduce the raft of rules and procedures that are introduced to help a corporation and its staff navigate a dynamic and changing world.

As Shinkle says: "Less governance but more direction."

This also provides workers with autonomy – which has been identified as a key motivator by US writer Daniel Pink, because rules constrain autonomy and so degrade motivation.

"The reduction of things that are perceived as being red tape, that are constraining autonomy, would not only increase performance but also increase the motivation of people to perform even higher," Shinkle says.