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Pure Business Project

Project Overview - Understanding the Issues

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1 Background

"The real difficulty in changing any enterprise lies not in developing new ideas, but in escaping from the old ones." - John Maynard Keynes

1.1 Introduction

This Project Overview Document explains the purpose of the Small and Medium Enterprises (SME) "Good Regulation" Project and the reasons for undertaking it, as well as detailing the scope and content of the Projects' deliverables for Phase One - Understanding Issues. There are two further phases planned for 2004/05 and 2005/06: Developing Solutions and Delivering Solutions, which are also outlined.

The overall purpose of the project is:

"to enable SMEs to thrive in a regulated world"

This organising principle is deliberated focussed on both SMEs and the reality of there being a lot of regulation. Regulation is pervasive across enterprise activities, but is often unnoticed unless there is a breach identified. The purpose/principle is intended to produce an approach to regulation that is centred on the daily practice of SMEs - that is being based on the reality of being 'the regulated'. It is also focussed on ensuring a thriving environment for SMEs, where regulation is more than just an unnecessary evil.

There are some core themes that have led to the development of the SME "Good Regulation" Project, these are:

  • it is very hard to successfully undertake 'whole-of-government' work with SMEs around regulation, both because there are so many interactions between agencies and various regulations, and because there are many different SMEs and interactions between them and the agencies
  • SMEs often conceive of 'the Government' as being a single entity, but do not experience agencies behaving in that way
  • 'regulation' is both pervasive but usually unobserved in its operation
  • 'regulation' is fundamentally not a set of written rules, but a dynamic social system, with elements that include mental models, behaviours, practices and tools (eg operational policies)
  • society is becoming more complex, and the layering of complexity in regulation is increasing (for instance, the increasing complexity in the international dimensions of regulation) - this is particularly problematic for SMEs because they lack resources to manage this complexity, and for the agencies that deal with them.

The SME "Good Regulation" Project is designed to address those core themes, through a government-initiated project to bring together agencies in a process that:

  • will take those agencies outside of the usual inter-agency approaches to problem solving, to allow for 'thinking outside the square'
  • brings together staff in agencies who deal with regulation and/or with SMEs, to consider what are the issues their regulations create for them and SMEs
  • brings together the various agencies that have the biggest regulatory impact on SMEs to understand the overall impacts of regulation
  • and brings together these people from agencies with others who understand SMEs (owners or SME advisers) to harness all perspectives, and then redesign how and what regulation does.

The method being used to do this is a system of work redesign which originated in Finland called 'Development Work Research[1]' . This system has been used successfully in New Zealand by private companies (Formway Furniture and EDS are two) and overseas by both private and public institutions, to redesign complex activities. It has been successful in overcoming some very knotty problems[2].

The SME "Good Regulation" Project seeks to overcome some of the tensions that government and SMEs face in dealing with each other. It is designed to develop an 'open space' so that government and SMEs can come up with better ways of working with each other - to make each others' jobs easier. It should assist both by reducing unnecessary 'compliance costs' and improving SMEs ability to meet the goals of regulation.

1.2 What does regulation mean in the SME "Good Regulation" Project?

Generally there is confusion about what regulation means. The Oxford Concise Dictionary says it is a: "prescribed rule, authoritative direction; fulfilling what is laid down, correct pattern, ordinary, usual, formal...". This project takes a different starting point: regulation is considered to be a complex system of social interactions, with 'the rules' playing a relatively minor role in that system. Regulation we argue is better described as something like:

"...the sustained and focused attempt to alter the behaviour of others according to defined standards or purposes with the intention of producing a broadly identified outcome or outcomes, which may involve mechanisms of standard-setting, information gathering and behaviour-modification.[3]"

Indeed, we argue that some of the confusion and difficulty that exists arises because of a clash in understandings, between the dictionary definition of regulation, and the broader social context within which regulation is played out. In this Overview 'regulator' means the responsible body or person for regulating an activity; 'regulated' means the body or person at whom the regulation is directed, and 'regulation' has a broad meaning, as described above. The debate about what is 'regulation' is developed further in section 1.5 below, and in Appendix 3.

1.3 Why concentrate on SMEs?

SMEs are vital to the economic and social life of NZ. Firms with fewer than 20 Full-Time Employee Equivalents (FTEs) make up 97% of all firms, and account for around 40% of both GDP and employment. NZ has a large number of both 'micro' enterprises and self-employed, and the numbers are growing. These enterprises often come into existence and disappear quickly. SME owners and operators have to be Jacks and Jills of all trades; they often lack time, sufficient finance and sometimes have too few management skills. Frequently whole families are deeply involved in SMEs. In addition, SMEs value their independence and often want to be left alone to 'get on with the job'.

Small and Medium enterprises regularly report in surveys and through other means that government regulation is one of their biggest problems, and a key factor in restraining enterprise growth. They also report much greater problems with regulation than large enterprises. Regulations repeatedly apply to many important activities that enterprises need to undertake, for instance, driving a vehicle. They are both pervasive and usually unobserved, unless there is a breach of a regulation. Regulators and SMEs often find themselves to be at odds with one another - agencies pursuing regulations' 'public goods' through the application of rules; SMEs struggling to understand what is impossible for them to fully comprehend because of the complexity and scope of what they need to manage.

Both regulators and SMEs face gaps and overlaps between regulations and regulators. Regulation is scattered amongst many agencies that manage an even greater number of rules. Regulator's interest in SMEs is generally limited to the aspect of the SME which they are responsible for regulating. These gaps and overlaps and specific interests lead to confusion and waste of resources.

The current government in New Zealand and many overseas governments have recently concentrated a lot of effort on SMEs and the larger 'compliance burdens' that they bear in dealing with regulation[4]. SMEs are acknowledged as a particularly difficult issue.

1.4 Regulation and management of risk are closely connected

Regulation is ultimately designed to support and protect enterprises from risks that they produce or face[5]. Enterprises generally have three main areas of risk that have to manage:

  • Commercial
  • Environmental
  • Social (in particular employment, health and safety, and risks to the public).

Diagram 1. over the page depicts common types of risk and some of the agencies involved in their regulation. Most regulation of enterprises establishes regimes to protect against, or distribute the costs of, risks. For instance, taxation provides a defence force and police, and public education, health or social systems. Accident Compensation is a scheme whose purposes are to prevent injury, and rehabilitate and compensate victims of injury[6]. Rules and regulators do not actually manage risk for enterprises on a day-to-day basis; the societal 'regimes' that exist to manage risk encompass both rules and regulators but are far broader than either, taken together or alone.

Diagram 1. Common areas of risk regulated by government

Diagram 1. Common areas of risk regulated by government.

The significance of these areas of risk to individual SMEs will vary depending on the goals the enterprise has and the type of industry it is part of. For instance, an eco-tourism business will likely see environmental issues as relatively more important to it than, say, a plumber.

1.5 Changes to the understanding of what leads to good regulation outcomes

This project builds upon changes in thinking about regulatory issues that have developed over the last two decade as a result of an ongoing international debate; these changes are discussed briefly below.

The debate in New Zealand and elsewhere has largely been about whether rules should be removed (deregulation) or reformed (re-regulation). Much less time in debate has been spent considering the combination of social institutions and interactions as they relate to rules. Regulation is now frequently discussed as being a system, or a regulatory regime[7]. This has been because changing rules alone has time-and-again been shown to be ineffective`. The process of regulation has been picked up by academic writers and some regulators[8] themselves as a vital or even principal part of understanding and changing regulatory outcomes.

Through different routes, and using different language, writers have developed some common understandings, grounded in examination of the practice of regulation. Essentially regulation needs to be understood as a: social system or process; complex adaptive system; regime; or craft.

Writers have emphasised the interconnections, networks and dynamics of regulation. They advocate consideration of regulation from this perspective, and argue that to change outcomes of regulation requires understanding the social system that it operates in and attempts to direct that system.

The SME "Good Regulation" Project starts on the basis that the social system that exists between regulators and SMEs is more complex that any one stakeholder in that system can manage or understand on their own. Also that the interactions between actors have unintended effects, as the individual parts of the system are not intentionally designed to be aware of those effects or to manage their consequences. It also begins with the premise that SMEs and regulators are together part of this system, with effective change best achieved through addressing all parts of the system.

The purpose of the project is to "enable SMEs to thrive in a regulated world". This focus will engage agencies and SMEs in the collective task of managing risk and regulation. Appendix 3 outlines the development of the international and New Zealand debates on regulation, and therefore the rationale for the form that the SME "Good Regulation" Project has taken.

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Footnotes

[1] See: http://www.edu.helsinki.fi/activity  The Center for Activity Theory and Development Work Research, Helsinki University.

[2] In New Zealand, Formway Furniture attribute about a quarter of their success with the design of the award-winning “Life Chair” to the use of this method.  For information on Formway, see: http://www.formway.co.nz/hmflash.html.

[3] Julia Black – Critical Reflections on Regulation  London School of Economics, Centre for Analysis of Risk and Regulation, 2002  www.lse/carr/.  See also Hood et al, The Government of Risk – Understanding Risk Regulation Regimes, Oxford University Press, 2001 p 21.  These ideas have their origins in cybernetics and ecology.

[4] See appendix 3 for further discussion.

[5] One definition of risk is: “A situation or event in which something of human value (including human beings themselves) has been put at stake and where the outcome is uncertain.”  Risk, Uncertainty, and Rational Action, C Jaeger et al, Earthscan Publications, London, p 17. See also NZPA note.

[6] Section 3 of the Injury Prevention, Rehabilitation, and Compensation Act 2001 begins: Purpose “The purpose of this Act is to enhance the public good and reinforce the social contract represented by the first accident compensation scheme by providing for a fair and sustainable scheme for managing personal injury that has, as its overriding goals, minimising both the overall incidence of injury in the community, and the impact of injury on the community (including economic, social, and personal costs)…”

[7] The idea of regulation regimes is explored in Hood et al, The Government of Risk – Understanding Risk Regulation Regimes.

[8] The best example in NZ has been the IRD, which has successfully adopted a culture across the organisation of reducing barriers to voluntary compliance for taxpayers.