Software Market: Hurray for More Regulation!

Tuesday Nov 4th 2008 by Joshua Greenbaum
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To software vendors and business users alike, the growing regulatory climate represents an enormous opportunity.

With doom and gloom dominating the news, and that’s only on the economic front, one hopeful scenario that can be dragged out of the current disintegration of laissez-faire capitalism is the growing recognition that we need more regulation, more oversight, and just a little bit more control over Adam Smith’s now infamous unseen hand.

Welcome to the regulatory economy.

Why I think this scenario is a hopeful one is, of course, based on its impact on the enterprise software market – vendors, the IT community and the business user alike. To these three constituencies, the growing regulatory climate represents an enormous opportunity to sell more software, buy more software, consume more software, and, happily for all, run a more effective and efficient business in the process. I’ll admit this may seem to be a controversial position to take – advocating more regulation, and cheering its impact on the enterprise software market – but there’s a method to this madness. It goes like this:

First, there’s the problem that is necessitating the regulatory economy. It turns out, in case you hadn’t noticed, that Smith’s unseen hand, which everyone assumed would magically act to curb excess and manage risk, has of late been dope-slapping a generation of deregulators with the reality of what unbridled greed and excess can do to an interconnected global economy.

This realization, of course, is playing havoc with the formerly prevailing wisdom that less regulation is better than more. To give credit where credit is due, one of the reasons the proponents of de-regulation were so adamant in their opposition (other than because the crooks among them wanted free reign to pillage and plunder) was that regulation is expensive, complex, and largely useless.

Admittedly, this perspective rings true for the many legitimate business people who actually play fair, and it’s a legitimate argument to say that burdening the honest with an onerous regulatory burden is an unfair form of collective punishment. While I don’t believe that regulations by themselves impinge innovation and entrepreneurialism, I do see some validity in trying to limit the burden placed on the innocent in our pursuit of the guilty.

Here’s where enterprise software rides to the rescue. The trick to being able to afford large amounts of regulation at a relatively low cost is to automate the processes that monitor, report, verify, and audit regulatory compliance. This is, of course, the modus operandi of the governance, risk, and compliance (GRC) market, which was birthed in the aftermath of the last economic binge/purge cycle, a.k.a. the dotcom bust. It turns out that GRC, which got its start as a means to meet the Sarbanes-Oxley regulations that were put in place post-dotcom bust, is one of the ways in which we can ease us into the regulatory economy without excessively burdening those the new regime means to protect.

But GRC isn’t the only tool for the regulatory economy. Business intelligence – which I consider a superset of GRC – is finally reaching a level of domain specificity that allows it to contribute directly to solving the cost/complexity problems of the regulatory economy. Indeed, the verticalization of BI, once the exclusive purview of largely horizontal tools, is poised to play a significant role in driving regulatory compliance. Verticalized BI solutions, which have been a major focus of vendor activity in recent years, will by their very nature be easily pointed at the problem of managing the regulations at force in a given industry.

The reason BI gets to play this role is that these tools provide a window into the vast amounts of data captured in enterprise software systems, data that, in terms of sheer quantity, is exactly what the regulators are looking for. BI’s role will be to elevate the quality and usefulness of these data to meet the regulatory market’s requirements, and that will include integrating data from outside partners and customers as well.

Essential to these functions will be a high degree of industry specificity, and with it a significant increase in the amount of automation that is currently the norm for BI tools. What is needed in the regulatory economy are tools that – as much as possible – fully automate the virtuous circle of discovery, reporting, and remediation that will make the regulatory economy run as smoothly as possible. A lack of automation is what has historically made compliance an expensive and onerous task, and fixing this side of the regulatory economy will be one of the ways in which enterprise software softens the blow of significantly increased audit and reporting requirements.

Nonetheless, complying with the regulatory economy won’t be cheap, let’s be honest. There will be the need for new software, new processes, maybe new skills. But virtue won’t be the only reward of the regulatory economy. In fact, it’s a distant third on my list.

Reward number one is improved governance and oversight: being forced to comply with the regulatory economy will force your company to be better managed, or at least have the tools to better manage itself. This effect is not dissimilar to the secondary impacts of the Y2K hoax: Y2K fears drove thousands of companies to upgrade their enterprise software environments to cope with the unfounded fear of a Y2K meltdown, and in the process gained a leg-up on the efficiencies that modern enterprise software can provide.

For most companies, the real payback for their Y2K investments came after January 1, 2000 turned out to be a non-event. While the need for the regulatory economy is genuine, as opposed to the Y2K nonsense, a similar secondary effect from investing in the regulatory economy will be felt across the enterprise.

Reward number two comes from the benefits of having a safer and more highly visible ecosystem. One of the downsides of living in a global economy has been the domino effect that obtains when one link in the global chain breaks. For example, a single supplier interruption in China can impact multiple businesses up and down the line: supplies aren’t shipped, manufacturers can’t meet their obligations, retailers don’t have product to sell, consumers have nothing to buy.

Living in a more regulated economy will mean that these potentially catastrophic events will be easier to see, easier to plan for, and easier to mitigate once they’ve taken place. And knowing that the other companies in your supply chain are being forced to play fair and play safe means your company is less likely to be whipsawed by the results of illegal or illicit activities.

And then there’s virtue – reward number three. As cynical as I tend to be, I hope some businesses will be proud to be well-regulated, and use that in their promotional activities the way everyone – polluter and green business alike – is now touting the eco-friendliness of their company.

The regulatory economy might not be an ideal solution to our current problems, but, to paraphrase Winston Churchill’s famous comment about democracy, it’s the best one we can come up with, considering the alternatives. I, for one, am sick of the alternatives running the show, and, in particular, running the show into the ground. If this is what it takes – a little more regulation – and if enterprise software can help limit how onerous that regulation can be, then I’m all for it. Considering the alternatives....

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