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Seeing red

A company's own red tape can actually be more costly than the government variety.

Rules can cost businesses more to manage than the risk they’re trying to eliminate.

While businesses like to point the finger at government red tape, their own red tape is actually much more costly – running to a staggering $155 billion a year, trumping compliance with public sector rules by around $60 billion, says a report from Deloitte Access Economics.

Get out of your own way

Unleashing productivity reveals middle managers and senior executives are chalking up 8.9 hours a week complying with the rules organisations set for themselves, with other staff spending 6.4 hours.

Examples of excessive regulation uncovered by Deloitte include small taxi fares that have to await approval from the weekly executive team meeting; a firm that rejects application forms from potential customers if they are completed in blue ink; and the firm that insisted staff complete an ergonomic checklist and declaration when they moved desks, then introduced ‘hot desking’ where everyone spent 20 minutes a day filling out forms.

So pervasive has been the rise of corporate red tape that it has effectively wiped out efficiencies gained from technological advancements such as IT, and Deloitte says this is a key reason why productivity growth in Australia has been so slow.

Back-office workers have occupied a smaller and smaller proportion of the workforce over the past two decades as their jobs have become automated yet these workers have all been replaced by compliance staff.

As a result, there are more compliance workers across Australia than people working in the construction, manufacturing or education sectors.

In fact, one in every 11 employed Australians now works in the compliance sector.

“Where new technologies are implemented, they’re often implemented into a framework of existing processes and rules. So, the efficiencies that you would hope to benefit from implementing new technology or an enterprise-wide platform often get cannibalised because the processes don’t change. So, you’re getting in your own way,” notes Deloitte Private partner Mark Allsop.

Not all red tape is unnecessary or wasteful

Rules and regulations can protect consumers from shonky businesses, keep workers safe and help businesses manage costs.

Much of the regulation arises from businesses’ desire to reduce risk. Making rules is a way of managing uncertainty and volatility.

But organisations tend to overestimate the extent to which they can insulate themselves against risks – hence the proliferation of rules that can cost more to manage than the risk they’re trying to eliminate.

Peter Meehan is the head of the G100 representing CFOs of Australia’s largest companies and has seen this risk-averse culture develop at board level, with directors asking staff for more and more information and to tick more and more boxes before they make a decision.

Much of this effort is simply so a company can show it’s been through the required process and is a brake on productivity and entrepreneurship. “Businesses run because they take risks – it’s risk versus reward. The more you work on risk and try to eliminate risk the less chance you have of reward,” Meehan says.

Nicholas West, national corporate account director at management consultancy PEP, agrees with Meehan that much of the risk-averse behaviour comes from fear of litigation, leading to organisations “overcompensating” by rolling out the red tape.

He has seen the effect that an overabundance of rules can have on morale and innovation.

“It absolutely puts a fence around innovations and stops that free thinking because if you’ve got to go through five processes to get something done, you tend to lose your enthusiasm. Therefore, you lose a lot of your innovations.”

Focus on what must go right

Rather than focusing on what can go wrong, companies should focus on what must go right.

This can pave the way for a dramatic reduction and simplification of an organisation’s rules.

Deloitte has an example of a company that made rules to govern its IT risk systems based on a list of 64 things that could go wrong. It changed focus to the 12 things that must go right.

The company identified 29 rules that mapped critical risks to the organisation’s core objectives, then eliminated or streamlined the rest.

This cut back the time required for internal and external audit to scope the company’s audit activities, which fell by 80 per cent in the first year. The time taken to complete those audits dropped by one-third.

Josh Keegan of Keegan Consulting Group says companies sometimes introduce rules for a good reason, but don’t return to them later to ensure that they’re still necessary.

But some rules just aren’t good to start with. Many middle-level managers also introduce and enforce rules as a way of protecting their own position.

“Because people have been caught out previously or senior management has dragged them
over the coals because something has gone a little bit awry, that’s where a lot of self-preservation comes into it and then they have a tendency to create more rules inside an organisation regardless of whether those rules are good for the organisation,” says Keegan, who believes companies need to have a challenge culture, where staff can question rules.

The 5 Cs tips for cutting red tape:

Cleanse:
Slash the stupidity – ask staff to list the dumbest things they are required to do as a result of the business’s own rules, then stop doing them.

Challenge:
Businesses should stop asking, “What could go wrong?” and focus on, “What must go right?”, then challenge their rules in that light. What are their rules really trying to achieve, could they be improved and are they cost-effective? If not, there may be more to dump.

Create:
Foster a culture focused on performance rather than compliance, and ensure the organisation’s rule-makers are aligned to its business goals.

Change:
Businesses and others should change the way they set new rules and audit old ones to better link rules with strategy and risk appetite.

Capitalise:
Make the most of these changes to realise the business’s full potential.

Written by Christopher Niesche for AIM Magazine.