Regulation across all industries is expanding at a significant rate with the cost, effort and specific expertise requirements ever increasing. What may once have been a negligible expense has become a material component of both costs of sales and operational expenses.
Companies are devoting tremendous resources to ensure compliance with regulatory mandates, yet compliance failures are commonplace. Health and Safety regulations in South Africa increased from 4 (four) distinctive regulations in the 1980s to 27 by 2020. Private information protection regulations have introduced the need for additional data security measures compliance which requires material investment and ongoing effort. The global financial industry for example spent $870b between 2008 and 2014 according to a Financial Times article at the time [1].
Costs associated with compliance are as high as $10,000 per employee in the USA and impose multi-billion-dollar expenditures locally and globally[2].
Apart from the risk reduction incentive to prevent negative consequences the options also exist to translate the compliance effort into a competitive advantage. Strategically there are four approaches that can either be pursued independently or in combination.
Compliance Efficiency: To achieve the desired level of compliance at a lower cost than competitors. To pursue compliance efficiency as a competitiveness approach, the company must determine the ideal resource balance between resource commitment (i.e. internal specialization, external expertise utilization, compliance process automation investment, management workload, and general employee compliance workload) and compliance risk. Compliance risk is defined as the adverse consequences that can arise from systemic, unforeseen, or isolated violations of applicable laws and regulations, internal standards and policies, and expectations of key stakeholders with a variety of negative implications ranging from fines to unsuccessful mergers or acquisitions [3]. A compliance efficiency strategy guards against over or under-compliance resource commitments without a good understanding of the ideal compliance profile, the resource requirements to achieve it, and viable strategies to reduce the cost without negative consequences. Integrated compliance process management automation, compliance culture programmes, and operational emerging technologies such as APIs, cognitive computing, robotic process automation (RPA), and blockchain may provide some transformative potential in the pursuit of compliance efficiency.
Compliance Effectiveness: To differentiate o compliance effectiveness and to exploit the quality of compliance results as a competitive advantage. In considering compliance effectiveness as a differentiator the organization needs to define the ideal level of compliance both from an external benchmark and internal risk propensity. Identify the relevant regulations compliance to which will improve competitiveness and eliminate reputation destroying findings. Most companies seem to employ some level of risk-based compliance strategies and prioritize key compliance related focus areas in line with the enterprise risk management process. Risk-based compliance management programs, contextual ESG or GRC management approaches and appropriate supplier management engagement could be considered as part of this strategy.
Robert C. Bird & Stephen Kim Park[4] combine both compliance efficiency and effectiveness in a compliance competitiveness model suggesting an optimal overlap between the relative optimal compliance and the resource commitment. TE curve in the graph below represents the risk combinations on the compliance frontier of compliance investment and relative non-compliance risk. A company reaching the TEi point on the compliance frontier has achieved technical effectiveness for its own defined risk cost profile. In addition, the AE line represents a company’s pursuit of compliance resource efficiency. The positioning of the AE line in the graph below suggests the company has already achieved effective compliance and should now consider relative resource allocations to this effort. The point AEi, TEi, therefore, represents the point at which a company achieves both compliance effectiveness and compliance efficiency. At this point, the company has achieved the greatest reduction in non-compliance risk relative to the cost of compliance
Compliance Credibility: To promote and communicate the organization’s compliance track record and extraordinary achievements in an effort as a differentiating factor. Amongst tremendous political turmoil and evolving economic trends, companies are increasingly being held responsible for providing a beacon of light amidst all the noise and publicly owning their values. Rising consumer activism and research results indicate that (a critical mass of) consumers prefer buying from and working for companies they can trust and that have been publicly recognized for ethics.[5] The underlying logic is therefore to use historical and recent achievements as an indicator of future success and resultant peace of mind to investors and customers of continued social license to operate, associated stakeholder ESG reputation enhancement. This approach can exploit business intelligence, continued global benchmarking, stakeholder value proposition promotion, and data visualization maturity to exploit historic and future trends as a competitive edge.
The capability validation approach utilizes industry and discipline-specific management standards such as ISO standards, AITF, SOC, and ICMM to validate the collective organizational capability to integrate regulatory compliance with industry standards and internal operational excellence. The certification decision may potentially be taken to establish capability credibility with clients and stakeholders to either keep up with general expectations or establish a high level of capability credibility which, if utilized or promoted appropriately may sway commercial decisions and engagements. Another approach to be considered is the concept of sustainable business practices and the potential value of being able to promote the internal capability of a company to ultimately achieve this goal. According to David, S Payne[6] there are about 50 core concepts in the pursuit of sustainable business practices. Promoting the company’s capability to deal with and effectively balance this level of complexity may provide a competitive edge in the future.
The fifth option to consider is a combination of the four strategic perspectives to establish a best fit between internal ability and external awareness and promotion.
Mere compliance to regulatory requirements is a daunting enough task for companies without the added pressure of translating the efforts and investment into a competitive advantage. It is clear such an achievement will not happen by “osmosis” and requires a deliberate strategy and program to translate compliance into a competitive advantage.
An appropriate integrated compliance management system is, amongst the various tactics to consider regardless of the specific strategic perspective, one of the options which can enable activities and initiatives in each of the four themes. It can support efficiency by effective monitoring of cost and effort, compliance effectiveness can be served by enabling focus on risk-based compliance, compliance capability promotion can be enabled through standards certification and compliance history and compliance credibility can be supported through effective intelligence, data visualisation and reporting.
1. Roy S, “How to Turn Compliance into a Competitive Advantage”, Roy S, Brinknews, July 5, 2018, www.brinknews.com/how-to-turn-compliance-into-a-competitive-advantage.
2. Geoffrey P. Miller, The Law of Governance, Risk Management, And Compliance 3, 137 (Vicki Been et al. eds.,
2014).
3. Michael D. Kelsey & Michael Matossian, Compliance Risk: Ensuring the Risk Taken is the Risk Intended, ABA BANK COMPLIANCE 6 (May-June 2004)
4. Robert C. Bird & Stephen Kim Park, Turning Corporate Compliance into Competitive Advantage, University of Pennsylvania Journal of Business Law Vol. 19:2, 2014
5. “Consumers prefer ethical companies survey shows,” ECI Connector, Ethics and Compliance Initiative, January 7, 2016, https://www.ethics.org/blogs/eci-connector/2016/01/07/consumers-prefer-ethical-companies-survey-shows.
6. David S. Payne: Sustainable Business, Resilient Business: Entrepreneurial Business Strategies on the Adaptive Path to a Sustainable Future, A thesis submitted to the Faculty of the Graduate School of the University of Colorado in partial fulfilment of the requirement for the degree of Master of Science Department of Management 2008.