Rules eat up 250 billion a year in profit and productivity

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Rules eat up $250 billion a year in profit and productivity

Deloitte report

29 October 2014: Australia’s productivity is being choked by red tape, with the combined cost of administering and complying with public and private sector bureaucracy costing the nation $250 billion every year.

Strikingly, the cost of self-imposed rules created by the private sector is double that associated with government regulations, according to Deloitte Access Economics. The self-imposed rules of the private sector cost $155 billion a year: $21 billion to develop and administer, and a stunning $134 billion a year in compliance costs.

In a world first, Deloitte’s new report Get out of your own way: Unleashing productivity – the fourth in the firm’s Building the Lucky Country series – identifies the costs to corporates and the nation of self-imposed red tape. It shows that the time required for employees to comply with self-imposed rules has become a crippling burden. Middle managers and senior executives chalk up 8.9 hours a week complying with the rules that firms set for themselves, with other staff spending 6.4 hours.

According to report co-author and Deloitte Access Economics partner, Chris Richardson: “Unless and until we address this choking cost, it will be hard for Australia to be truly ‘open for business.’

“To be clear, rules and regulations are vitally necessary. They cement the key foundations of our society, protecting the rule of law and a wealth of standards in everything from health to safety and the environment. And they can help businesses to reduce risk and plan for the future.

“However, a decade of prosperity has seen Australia’s policymakers ‘reach for a rule’, often without weighing the costs and benefits of doing so, and the cost of government rules has risen since the last time the Productivity Commission added them up.”

Deloitte Managing Partner Risk Services Harvey Christophers said: “Given our business is all about helping clients to identify risk and design controls to manage risk – some could ask if we are in the business of creating red tape. And the way risk was managed 15 and even five years ago with a saturated risk market of massive risk registers and commoditised services, the market that was a legitimate question.

“But by moving risk services away from asking ‘what might go wrong?’ towards deeper and more relevant risk insights gained from specialised services or sectors, we have changed the lens and now encourage the market to focus instead on what must go right and making sure that efficient control responses are designed to enhance process efficiency and support business in achieving its goals.  

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“In this way we are helping our clients connect strategy to process reality and set appropriate control environments in line with the risk appetites for their businesses.”

Matt Saines, national leader of Controls Transformation and one of the Risk Services Partners instrumental in informing the Deloitte Access Economics report, added: “By focusing on what must go right and thinking about the future, clients are better able to get the right balance of controls and through an intelligent approach to risk better understand “how much control is enough.”

Businesses usually impose rules on themselves for good reason – to increase controls, avoid exposure, measure compliance or make the organisation more effective. Yet often there are unintended or unforeseen consequences, with the new rules creating unnecessary overlaps, or old rules becoming outdated due to changes in technology or business models.

Saines said: “By following a structured approach to rule selection, and using existing data to look at things like bottlenecks, inefficiencies, rework etc - a business can redefine its processes and potentially produce a vastly different set of rules that work for the business and get and measure the right outcomes. In this way a business will better manage risk, improve its definition of its risk appetite, align it more with capacity, and remove unnecessary self-imposed rules to influence its productivity.”

Christophers added: “By taking the view of what must go right as opposed to protecting everything that could go wrong, we can help organisations advance their productivity agendas and at the same time identify and remove the ‘dumb’ rules and controls.

“You’d be amazed at how many superfluous controls surface in this way, controls which add little value to the business and manage low risks! The question we need to ask on a tactical and functional level is how important is this control?”

The crushing impacts of dumb rules on Australia’s productivity include:

  • $250 billion – annual burden on the national economy of administering and complying with the rules set by both governments and businesses
  • $155 billion – annual cost to administer and comply with rules the private sector imposes on itself
  • 8 weeks – time spent each year by the average employee just to pay for the cost of administering and complying with rules.
  • 1 million people – employed in ‘the compliance sector’ – the fastest growing sector in Australia.

The chart below shows the share and growth of compliance workers in the Australian workforce by industry. Professional services and finance industries have almost one in five workers involved in compliance, and the compliance cohorts in mining and construction have grown exponentially over the past five years.
 

Rules eat up 250 billion a year in profit and productivity

Compliance workers – share of total workforce and the increase in that share

 

 

 

 

Source: Deloitte Access Economics analysis of Census and labour force data

 

The higher a sector is on the chart, the larger the share of compliance occupations in its total workforce.
The further to the right on the chart, the faster the growth in the share of compliance occupations.
Bubble size reflects the size of the sector in terms of output.

 

According to the Deloitte Access Economics research there are already more ‘compliance workers’ across Australia than there are people working in construction, manufacturing or education roles. In fact, one in every 11 employed Australians now works in the compliance sector.

Chris Richardson concluded: “The total cost of $250 billion a year means that Australians – both workers and businesses – have to work for eight weeks every year just to pay for the administration and compliance costs of the rules we set ourselves.

“A saving of just 10% of these costs (without a net loss of the matching benefits of rules) would equal 1.6% of national income, ranking its impact with some of the largest reforms Australia has ever seen.

“Our politicians can raise our living standards if they have the courage to deregulate, but the same is even more true of our corporates. They need to have a close look at the productivity potential locked up in their own poor rules and rule-making.

“There is a huge payoff to the profits of Australian businesses and the incomes of our workers if we simply get out of our own way. Doing so won’t just unleash business productivity – it will unleash Australia.”

Note: A Get out of your own way infographic and copies of the report are available on request.
 

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