Strategy and the regulator


Strategy and the regulator

Looking at the papers recently, there were several examples of regulators in different sectors flexing their muscles.

  • The EU Competition Commissioner blocked the planned merger of telecoms giants O2 and Three. In their view, this would have reduced the number of operators to a level where competition could be undermined, driving up costs for consumers and reducing service innovation.
  • Ofgem is the government regulator for gas and electricity markets in Great Britain, as well as providing resource for government policy. It fined Scottish Power for poor service on call handling, complaints resolution, and billing.
  • The UK Defence regulator, Single Source Regulations Office (SSRO) was set up to crack down on ‘padding’ of contracts where there is only a single buyer and single supplier. It has required Rolls-Royce to remove £1M from charges related to servicing jet engines.

Regulators have traditionally been standard bearers, defining the standards for a sector of the market, and in doing so, setting the direction and speed of travel for that sector of the market, and the decision on EU telecoms is an example above. The other examples above show the complementary area of regulatory activity, that of enforcement. Here the regulator is much more likely to be active with organisations which are in some way outliers. The regulator acts on those which are lagging the rest of the herd in the sector, failing to meet regulatory standards, or those which are leading the herd and stretching current regulation and its adoption in a direction not wanted by the regulator. This function of the regulator here is more of a sheep dog activity, nipping at the heels of those organisations which are out of line, and creating a densely packed herd which is broadly travelling along the preferred trajectory of the regulator, and at an acceptable speed.

The regulator-as-sheep-dog maintains sector standards for the benefit of consumers and for society, and builds its expertise and credibility because of its multiple connections with the herd and its deep understanding of how the herd interprets and adopts regulation.   The regulated organisations know the standards they are required to uphold, and their strategy needs to ensure that they don’t become the focus of sheep dog attention. Healthy and proactive interaction with the regulator ensures that the organisation has the right understanding and interpretation of the relevant regulations, and is well informed on the current areas of attention of the regulator.

Perhaps more interesting in terms of strategy setting for the organisations within the herd is the role of the regulator as standard bearer. Many organisations see themselves as recipients of regulation, and of course that’s true, but it is only part of the picture. The regulator-as-standard-bearer needs firstly to shape the direction of regulation for the sector, and then develop the specific regulations which apply. And it gets the learning and feedback it needs to generate the direction and regulations from, amongst others, the organisations which it regulates. The regulator hears about emerging challenges and opportunities from the leading members of the herd, gathering evidence which supports and informs the development of new regulation. So from the perspective of the regulated, it is far better to be a partner to the regulator, discussing changes in regulation, where there is potential to shape that regulatory direction and content, and to shape it in a way that is beneficial, than to be disengaged from the shaping of regulatory content. As an organisation which is leading the herd, it is possible to establish constructive dialogue with the regulator in areas where the organisation seeks and prefers regulatory change, and so have some influence on the regulation-setting. Obviously the regulator needs to maintain neutrality, for the good of the sector, but is open to discussions with – and in fact needs information from – the organisations which it regulates. In terms of strategy development for organisations in a regulated sector, then effective relationships with the regulator are key. At the very least, the organisation needs to be aware of the activities of the regulator-as-sheep-dog and, ideally, can bring some influence to bear on regulator-as standard-bearer.

The regulator changes organisations – and organisations influence the regulator. So organisations don’t need to be purely passive with regulators, as there is scope to improve strategic position by an active collaboration with them.