Does Regulation Really Stifle Innovation?

Last week I did a presentation to a group of managers when the issue of governance and regulation ‘getting in the way’ of innovation came up.

People often think regulations stifle innovation, new business and services. They assume that regulators are there to control and curtail what they want to do.

“We are so heavily regulated, we can’t change what we do” is a familiar cry from those in the public sector.

Is it true that regulators are blockers of innovation, or is it false perception?

Even worse – is this simply a convenient excuse used to resist change?

It’s true that if you looked at the websites and reports of most regulators you’d likely get a view that they are a pretty conservative bunch. There’s plenty of talk of consistency, best practice and benchmarking. And we all know that best practice and benchmarking are often just a race to be first at being average.

In reality though, when you meet face to face, I’ve never met a regulator who doesn’t want to see more innovation in their industry.

Last year I did two pieces of work, one for Ofwat, the economic regulator of the water sector in England and Wales, and the other for the Regulator of Social Housing. Both organisations were looking for ways to innovate within their own organisations and to spur on a greater drive for experimentation within their wider sectors.

It’s not in the interests of a regulator to be anti-innovation. A report last year  found that respondents were looking to regulators to support innovation, and to an extent most organisations are seeing this take place. 1 in 4 though see regulators as innovation blockers.

2018-10-04-080736299-How-do-you-see-regulators-impacting-innovation-in-your-sector

Part of the problem here is the definition of innovation, a disruptive pioneer (Uber for example) to one person is the unregulated aggressive exploiter of people to another.

Unregulated disruption is sometimes necessary. Had ride-sharing firms been prevented from entering the traditional taxi cab market, we would not be enjoying a better customer experience today. Arguably, the incumbents would never have improved their services left to their own devices.

In today’s world of speed and digital innovation though, regulators need adaptive regulations -and a more responsive, iterative approach.

That said – innovation gone bad requires regulation. Arguably “financial innovations” such as easy credit, subprime lending, mortgage-backed securities caused the financial crisis. It was a perfect storm to have uncontrolled innovation at the same time as encouraging light touch regulation.

Innovation as risk management

The fear of innovation within any organisation is far more likely to come from heavy handed approaches to governance and risk than it comes from external regulation.

At the event earlier this week, Ian Wright, Managing Director of the Disruptive Innovators Network asked a very good question: what is your risk patience? 

Most of our organisations and institutions lean toward control and order and away from chaos and risk.

How does your organisation actively seek out risk? Only 20% of strategy officers describe their organisation as risk seeking. We need to transform risk management from being about “stopping doing things” to being about “starting doing different things” within a well managed framework.

Traditionally we have not being good at focussing risk management on the right areas. Significant amounts of time are spent auditing areas that are highly unlikely to ever cause major reputational damage. This can be a huge inhibitor of potential innovation.

Whenever you innovate you’re taking a risk. What I’m anxious to get across to the public sector is that you DO need to take those risks – the Auditor General for Wales.

The work of the Wales Audit Office and in particular their Good Practice Exchange is a great example of an audit and assurance approach that encourages well managed risks

Innovation done badly IS a risk, but innovation done well is good risk management.

Having a framework that protects the host organisation from early stage experiments until they have proven value is actually good governance.

Orbit Innovation Event

The best approaches to innovation always have a way of framing and strategising, allocating and diversifying risk – whilst buffering the rest of the organisation from it. Organisations equipped with this will be less risk averse and conduct more risk-taking behaviour.

Ultimately, your organisation has plenty of excuses not to take risks, to stick to the tried and tested, to follow the same path as everyone else.

But fear of the regulator isn’t one of them.

  1. Often it is only through regulation that change has happened in social housing. The best example I know is in diversity especially race and diversity. The only time the sector made any real progress in this area was when the regulator and the audit commission took an active interest. HAs gad to find ways to deliver results. New policies procedure and practice saw performance improve and more BME people were appointed to senior positions and provided with decent homes. I would also argue that the sector has only begun to think about genuinely involving and working with tenants since it was suggested it would become a regulatory issue again. Sadly when race and diversity ceased to be a regulatory issue performance and achievement in this area went backwards. Today it is the worst I can remember since the early 1990s.

    Reply

    1. It’s a great point Tom – it’s very easy to see regulation as a barrier but the lessons are everywhere at what can happen when regulators step back.

      Reply

  2. I really appreciate this. Thanks for sharing. I’m currently working on a piece where I layout an idea of mine that the private sector can (and should) take the regulatory torch from governmental agencies. It’s idealistic but I think it would, in the long run, be more beneficial than the current model. I’m not the best writer but I work in the assurance/risk advisory business and think I can add some valuable insight into this area. Thanks again for the piece.

    Reply

    1. I’d be interested in that – please do share it!

      Reply

      1. I’m new to WordPress so if there is an easier way to share articles I’m sorry. Haha!

        https://christandcapital.com/private-assurance-providers-will-replace-regulatory-agencies/

        Would love to know your thoughts.

        Reply

        1. Really good piece – meaningful and effective self-regulation is preferable to the exclusive exercise of government authority and I think you’re right. There’s lot to explore in this area!

          Reply

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