The impact of simplification on residual risk

Red tape increases risks

Red tape is likely to lead to increases in residual risk profiles of organizations. These organizations are overburdening their external and internal customers with these increases in rules and regulations they need to comply with. Contrary to their expectations, this will not lead to more care. The more rules exist, the more this will lead to less care. Less care will reduce the risk awareness of the customer facing employees because they too are jumping through the hoops. The reduction in risk awareness will result in a higher residual risk profile because the assumptions are not checked nor questioned and may turn out to be false.

Past relevance of red tape

Introducing red tape in organizations was initially done to ensure that operations ran smoothly. A lot of the operations in larger organizations in the industrial era were ‘standardized’ to reduce costs. This approach was copied in service organizations and public sector entities as well. This led to productivity increases, which were a good thing from a cost side. However, the more you standardize a process, the more difficult it will be to provide deviations to the standard product. As Ford (presumably) has said: “You can have any color of car, as long as it’s black.” The choice in the Model T was limited. You had the choice of black, black or black. In addition, people on the work floor were discouraged of showing initiative and thus did not take ownership of the process. This part was also mirrored in different organizations.

Assymetrical information availability influences risk

A risk profile of an organization is a view on the risks to which an organization is exposed. A risk profile is specific to a company but heavily influenced by the industry in which is operates as well as the overall business environment in which the organization lives. A lot of different elements can influence a risk profile. First, there are risks external to the company. These risks in the organizations environment will influence its risk profile. The organization can do little about these risks, which can include the business environment, demographical evolutions, weather, disasters such as the Deep Water Horizon … but they will impact it, and may impact it severely. A risk profile also consists of operational risks. These risks occur in everyday operations of the organization. One of the possible risks which can influence or worsen other risks is the red tape. More on that later. Finally, we see decision making risks. Information out of the external and operational environment is reported to the decision making levels which are not necessarily intimately aware of the situation on the ground. They base themselves on decision information. Any errors in the assembly and presentation of this information can lead to faulty decisions. Therefore, these risks influence the risk profile as well. These risks in turn can be significantly influenced by the red tape risks.

What happens if you leave red tape unchecked?

Imagine a situation in which an organization continues to develop red tape procedures beyond the point of marginal returns, i.e. the point where the procedure stops making sense. Compliance, if reached at all, will be reached with minimal care as the users do not see the relevance or the benefit of the additional requirements. More rules lead to less care.

Now, imagine a situation in which an organization is run based on rules and only rules, with any remarks or dissenting opinion ignored or punished, because its deviant behavior. New hires will very quickly stop caring. This is exactly what is witnessed in this type or organization, often hierarchical organizations. Now, if your collaborators no longer care, they will not be aware of will not mention elements influencing risk profiles. In essence, their risk awareness will be significantly reduced.

And when the risk awareness in an organization reduces, the likelihood that risk exposures are identified, flagged, assessed and managed reduces. What happens is that the real residual risk profile of the organization will become higher. Now, every increase in risk has an associated cost, all other elements remaining equal. So, either the organization accepts the higher cost of the risk management, therefore losing the assumed benefits of red tape increases, or the organization will be exposed to more risk.

The simpler the process, the lesser the risk

Introducing simplification projects which aim to reduce red tape will likely bring terror to the corporate identity. They are not used to these exercises, and they are counter-intuitive to much of what they have learned. However, think about the following: you will introduce more care in the execution of the activities of your organization, which will be appreciated by your customers. The increase in care will lead to an increase in risk awareness, which should lead to a reduction in the residual risk profile of the organization.