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“Entanglement” – The New Challenge For Regulators

March 23, 2008

In this week’s Economist, the lead article unsurprisingly focuses on the financial system and the threat of its collapse. It highlights what it terms ‘entanglement’ and the extent to which global interdependency has allowed the mushrooming of relationships between financial service providers – and has created a nightmare for regulation.

In many respects, it is this same phenomenon of rapidly growing, often services-based, relationships that challenges all those involved with ‘regulation’, whether at a governmental or a company level.  In the corporate context, ‘the regulators’ are generally the traditional support functions – Legal, Finance, Procurement and Contract Management.  The challenge they face is that competitiveness depends on leveraging the global economy, yet this move to global markets creates a far more complex and unpredictable web of relationships – hence the ‘entanglement’. Staff within these control functions face the same challenge as the regulators – if we impose too many controls, we stifle growth and risk bringing our company to its knees. Yet if we fail to identify and manage risks effectively, we will find our commitments spiraling out of control, until we burn and crash.

There have been many examples of the disasters that come from a lack of effective commercial controls in recent years. These range from the collapse of the ‘dot-com’ boom, to the demise of corporate giants like Lucent Technologies, Marconi, Barings and now Bear Stearns. If we are to provide effective support to our organizations, we must begin to use networked technologies to better manage and oversee our networked world. Old forms of knowledge management and traditional working methods will be no more effective than they have been in areas like financial services. We must use technology to gain better insights; and we must also broaden our skills to undertake the necessary analysis and to drive the right internal debates and commercial decisions.

This point is emphasized in the current Economist debate which focuses on the connections between networking, regulation and risk. It also reflects a campaign that IACCM has been waging for the last three years – the need to re-think education and create a greater understanding of relationships and their alignment. We have pushed academia to support fields like contract and commercial management, but (as The Economist indicates) the response has been that such topics are too inter-disciplinary. The same challenge exists in most corporations; powerful ‘specialist’ functions prevent the emergence of functions that could deliver strong commercial oversight. At the international level, The Economist debate sums up the argument as follows:

“We need an education that values different modes of intelligence and sees relationships between disciplines. To achieve this, there must be a different balance of priorities between the arts, sciences and humanities in education and in the forms of thinking they produce.  It goes without saying that the only way this shift can be effected successfully is through sophisticated and thorough governmental regulation and the intervention by leading political figures to create a discourse of innovation and creativity, as the UK government has done through its creative industries policy.

The thrust of the argument, then, is that the contemporary economy, operating in a world of work dominated by new technologies and cyber-commerce cannot be advanced through tinkering with disparate elements of regulation. The system needs to be completely rethought and delivered in the context of a set of regulatory policies which allow for the taking of risk, innovation and flexibility, but always in a safe environment for consumers and workers. And it would be naive to imagine that companies would deliver this environment without constant and active governmental regulation and intervention.”

The same considerations apply to the creation of an effective internal governance structure within companies, with this same balance between ‘risk, innovation and flexibility’. That is the framework which IACCM’s ‘commitment management’ concept seeks to provide; and its ‘capability maturity model’ is designed to provide the roadmap for its implementation.

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