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Are Rules Destroying Value?

July 11, 2008

The debate over the desirability of rules and regulations will never go away. Humanity has long struggled to determine the ‘right’ balance – and clearly different cultures have different perceptions of what that should be.

 

But this debate – and the effect of the answers – should be a very active topic for discussion by the contracts, sourcing and legal community. These groups are typically charged not only with creating many of the rules in their organization, but also with their enforcement.

Not surprisingly, many see ‘the rules’ as important and valuable. There is a natural inclination to want more of them – since that is surely the route to greater power and more resources and to ensure control over the ignorance or poor judgment of others. That is the quintessential ‘police force’ mentality – and as the challenges of modern policing reveal, it is not especially effective and becomes a slippery slope of ever-greater constraints on freedom.

There is a counter view to that position, which is that rules should be minimal and that adherence to acceptable ‘codes of conduct’ should wherever possible be voluntary. Proponents of this position argue that a rules-based culture inhibits innovation and creativity; it becomes innately risk-averse. By reducing freedoms, we force people to choose either to comply or to leave. And of course it is those that leave who are typically the value-generators, the entrepreneurs, the people with personal drive and ambition.

The challenges facing political decision-makers are therefore reflected in the corporate world. Indeed, many of the new rules that our community is being called upon to enforce are today being driven from outside the company. 

Contracts experts, lawyers, procurement professionals are in a unique position to observe the effects of more rules and tighter controls. And because these groups are seen as having an innate interest in supporting them, a voice raised in opposition would have significant impact.

The time has come to start raising those questions. It is clear that governments in the free world are steadily undermining freedoms, not just to protect their citizens, but increasingly to protect vested interest groups that have seen an opportunity to drive new regulation. Those rules may be protecting our jobs – at least short term; but longer term, they are destroying competitiveness and will lead to major economic shifts of power.

IACCM has announced that it will increasingly monitor the areas where external regulation damages world trade and jobs (export / import controls is a current example). It has also called on its members to monitor the way that internal rules are having similar effects on their company’s competitiveness. Together, we must start to campaign for (and describe) an environment that maintains intelligent balance between regulation, trust and education – and structure our contracts and associated policies and practices accordingly.

2 Comments
  1. Perhaps a good example of the problem noted in this posting is the HIPAA business associate contract. This is a contract required under the HIPAA Privacy Rule (“Rule”) adopted by the U.S. Department of Health and Human Services (“HHS”). All health care providers covered by HIPAA, as well as health plans and health care clearinghouses, must force any third party service provider accessing a patient’s health data to sign this contract, which includes provisions protecting the privacy of the patient. While an interesting debate could be held as to whether this contracting requirement should exist in the first place, assuming the requirement is appropriate, its implementation has resulted in a tremendous waste of resources. The Rule describes the clauses that must be included in the contract, but allows covered entities to write those clauses as they see fit. As a result, soon after the Rule came into force, covered entities and service providers confronted each other with a dizzying variety of clauses which led to long debates and negotiations as to whose incarnation best reflected the Rule. Even worse, HHS then proposed a sample contract which itself did not match the exact language of the Rule. Ultimately, many lawyers in the health care, health insurance, pharmaceutical and medical device industries have spent countless hours negotiating these contracts. This is time that could have been much better spent elsewhere, and HHS could have prevented all of this waste quite simply by just mandating that everyone sign the HHS sample contract, which is more or less palatable to all parties. In sum, the HIPAA business associate contract offers a tale of a regulation out of balance with the needs of those whom HHS regulates. More importantly, the collateral cost of time and legal expense to comply with this requirement is a good example of how such a financial drain limits choices we can make with our limited dollars, thereby constraining our freedoms.

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  1. Over complicating things is a bad idea | AccMan

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