InPart One, we examined the challenges; why it is so difficult to create good regulations — i.e. regulations that are cost-effective, not easily gamed, and most importantly, that actually achieve the desired outcomes. Here in part two, we explore ideas for alternative approaches to crafting better regulations, by looking at potentially applicable innovations from other domains.
There have been many attempts over the years to reduce regulatory burdens and assess their effectiveness. A good summary of major efforts within the federal government can be found here. These have, for the most part, failed to exploit a number of innovations from business and other realms, that might help improve regulation-making. Here we discuss the following ideas:
- Outcome-based Approaches and Metrics
- Continual Improvement, Agile Development, and Dynamic Regulations
- Market-based Mechanisms
- Self-Regulation: Transparency, Shaming and Praising
People who are much more knowledgeable than I am on these issues have been working on these problems for much of their careers. Since regulatory reform is not the primary focus of our research,1 I present these ideas with a good dose of humility, realizing some of them may be far-fetched (or already have been proposed and tried out), but also with the hope that perspectives from an outsider can bring fresh ideas into the quest for a better way.
Outcome-based Approaches and Metrics
Some businesses have been evolving to outcome-based business models (see Outcome-based Business Models, Outcome-Sourcing, The Outcome Economy). Instead of simply selling a specific product or service, they sell a specific desired outcome for their customers. The outcome might be energy savings, improved productivity, reduced accidents, or other goals. These are not consulting engagements. These companies are selling a specific outcome (often an ongoing outcome) and don’t get paid unless it is achieved. Outcome-based business models can require more upfront work by both the customer and provider to deeply and precisely understand and articulate the objectives of the customer and agree on the right metrics for measuring success. It often involves more risk-sharing and gainsharing, flexible relationships and agreements, deeper collaboration and integration between the parties, and deeper thinking about the desired outcomes.
Outcome-based models might be usefully applied to regulatory reform. It would require lawmakers and regulators to more precisely describe the objectives of the regulations and how success will be measured. This may be done in a hierarchal approach where the highest-level broad objectives and metrics are defined first by lawmakers, and then progressively more detailed supporting objectives and metrics are defined (probably by regulators, not lawmakers) to drive realization of the higher-level goals. This provides the basis for more precise measuring of success, as well as a foundation for continuous improvement. One of the trickiest parts of this is coming up with the right metrics to truly achieve the desired goals and objectives. Sometimes this takes experimentation, which is where crowdsourcing and gamification might have a role.
Crowdsolving is a form of crowdsourcing where distributed teams compete to solve complex problems. For example, CrowdANALYTIX hosts a community of over 21,000 data analysts that collaborate and compete to solve analytic problems for cash prizes. They have hosted 120 competitions to date. The Analyze Boston Open Data Challenge organized five competitions, such as how to reduce Boston’s carbon footprint or how to best identify fire risks in the city.
Could this crowdsolving be used to craft better regulation? Perhaps it could be done in stages, starting with a contest to best articulate the goals of a specific set of legislation, followed by competitions for coming up with the best metrics for measuring success, then specific legislative proposals, and finally regulatory rules. Meaningful monetary rewards for the winners would encourage participation. Figuring out how to properly judge entrants for optimal results and keep corruption out of the system is important.
Ideas generated by crowdsolving (or for that matter conventional legislation/regulatory rules) could be tested and ranked using massively multiplayer online role-playing games (MMORPGs). These are role-playing games in which very large numbers of players interact within a virtual world. In this case, the virtual world would be one where regulations are created and tested. There are already games that let players build virtual businesses, design cities, and simulate economies. Some combination of those could be used to create a virtual world where businesses, people, and regulators interact. Some people would get rewarded for creating successful businesses, others for creating successful regulations.
These environments could be used for testing out regulatory metrics, incentives, and punishments, to see how they work. If these games could be made entertaining enough, the operator should be able to charge for participation, to help defray the costs of developing, operating, and maintaining of the MMORPG. Designed properly, the same platform might be useful for a much wider variety of purposes, such as testing out various business strategies.
Bug bounty-hunting is a practice where software companies pay people for finding and reporting bugs and security vulnerabilities in the company’s software or websites. They strive to find the vulnerabilities before the ‘bad guys’ find and exploit them widely. A similar approach for regulations could be taken by the government, paying people for finding and reporting loopholes in existing or proposed regulations. The loopholes could then be addressed before they are widely exploited. This approach could also be part of the MMORPG role-playing games described above, incenting teams to try and ‘break’ the proposed regulations by finding legal loopholes and ways of circumventing the regulations. Those games then become a competition between teams of regulators trying to craft and enforce the regulations and teams of lawyers and businesses trying to find and exploit the loopholes (just like in the real world).
Gainsharing is used by some businesses as part of employee compensation. The employee receives some share of the value of gains that they contribute to the company (such as a % of the savings from any ideas they generate and implement). Some companies offer gainsharing with their customers; giving up a portion of their guaranteed revenue for a higher potential upside revenue, by sharing the dollar value of benefits they bring to the customer (cost reductions or revenue increases).2 Gainsharing might make the crowdsourcing and bounty-hunting described above much more lucrative and attract more ideas. A reward of 1% or less would be extremely cost effective,3 while at the same time potentially being extremely lucrative to the citizen that puts forth the idea. It incentivizes going after the biggest problems and gains.
Continual Improvement, Agile Development, and Dynamic Regulations
A continual improvement process (aka Kaizen) is used by businesses to encourage employees to continuously look for both small incremental improvements as well as larger bolder innovations. Metrics and incentives are important to measure, motivate, and reward continual improvements.
Agile development is being used for software development — instead of trying to formalize all requirements upfront, software is specified and developed in small increments on a regular repeating cycle (usually weekly) so that adjustments can be made continually. This enables developers and users to discover, much earlier in the process, which approaches and assumptions work and which don’t. It provides flexibility to deal with changing circumstances and objectives.
In contrast to continual improvement and agile development, lawmakers and regulators tend to use a waterfall development approach. Legislators and regulators try to figure out everything upfront and craft the complete solution. Then we are stuck with a relatively static set of rules and regulations for years or decades.4 Is it possible to develop, test, and continually evolve regulations in a more agile, incremental way? In some cases, regulations only work as an integrated whole, with the various elements supporting one another. In other cases, tweaks to specific elements may made independently. Consideration must also be given to the value of stability and cost of change management for businesses complying with regulations.
The MMORPG (online role-playing games) could be used to test out ideas in early stages. Various bounded sets of new ideas that have done well in the simulated online games could then be tried out in constrained ways in the real world; perhaps first within different geographic regions, or segments of an industry, or sets of volunteer companies. The winning approaches from those trials could be rolled out more broadly, but with continual monitoring. Once regulations are rolled out, incentives and mechanism for continually monitoring, reviewing, and improving the cost and effectiveness could be put in place. Improvement ideas could come from many sources: regulators, regulated businesses, citizens, NGOs, and others. Gainsharing and public awards could help incent the flow of ideas.
Markets can be powerful instruments in shaping behavior to achieve specific policy objectives. Some say they can work more effectively and less expensively than penalty/enforcement-based regulatory approaches. For example, market-based environmental policy instruments, such as the US’s sulfur dioxide (SO2) cap and trade program, have been very successful. In that case, the SO2 levels from the nations 3,200 coal-fired power plants were reduced from 26 million tons in 1995 to below 9 million tons annually in 2007. During that same period, the amount of electricity generated by those plants increased by 26%. The cost of compliance to industry was modest, less than 25% of the EPA’s original estimates of the cost. Market-based instruments aren’t suitable across all types of regulatory goals, but might be considered for a wider variety of policy objectives than they are currently used for.
Self-Regulation: Transparency, Shaming and Praising
When potentially onerous regulations are proposed, businesses often argue that they can effectively police themselves. That argument is often viewed with skepticism based on past performance. Usually regulations are being considered because businesses have failed to police themselves. However, if companies can somehow be encouraged and enabled to effectively self-regulate, that is almost always preferable to government-imposed regulations. So, perhaps more approaches to nudging companies and industry groups to become more effective at self-regulation should be explored.
Transparency is one mechanism to promote self-regulation. Existing examples include mandated financial reporting, and consumer protection laws mandating nutritional labels or cigarette warnings on labels and ads. Granted these examples involve regulations, but instead of mandating specific behaviors, they mandate specific information disclosure. If we find the right metrics and optimal ways of clearly communicating that information, we can have standardized ways of displaying how well a company or product performs against the desired goals. In some cases, some sort of periodic public media event could be used to shame and praise companies. Judicious involvement of activists and advocates in organizing and promoting those events could help amplify the energy, impact, and credibility. Various mechanisms would be needed to continually evaluate and verify that the rankings and specific metrics being measured are indeed producing the desired results.
Standards for presenting this information visually and electronically could be used by consumers not just in the shopping aisles of stores, but more powerfully in ecommerce search engines. What if, in addition to seeing the price of an article of clothing, you are shown the extent of abusive labor practices in the supply chain that produced that clothing. What if you could use that rating as one of the filters in your online shopping? Being a supply chain person, I know it is extremely difficult to consistently keep track of what is going on in a multi-tier supply chain; to objectively monitor and measure something like working conditions and labor practices in every sub-tier factory (they keep changing). But it’s not impossible. If enough consumers start using those metrics in their buying decisions, you would be amazed how motivated companies would be to change their practices.
Can We Have Our Cake and Eat it Too — Slimmer, Yet More Effective Regulatory Processes?
We started this article by looking at the opposing camps: one side advocating for the minimum possible government interventions, the other advocating for maximum corporate accountability. Hopefully some of the ideas presented here might help in achieving both goals simultaneously. We know success is 1% inspiration and 99% perspiration, so presenting ideas is a relatively easy step. I would be delighted if the people doing the hard work of regulation (lawmakers, their staff, regulators, and advocates) are able to use any of these ideas and make them work for the benefit of businesses and society.
1 Our research has focused on supply chain, IoT, and more recently blockchain. — Return to article text above
2 For example, LevaData offers gainsharing to their customers. — Return to article text above
3 A 0.5% reward on an idea that saves companies and the economy a billion dollars would only cost $5M, a tiny amount for the benefit realized, but very meaningful for the originator of the idea. — Return to article text above
4 To be fair, lawmakers typically create legislation that is high level and directional, leaving the details up to regulators. Regulators have review processes that allow for public comment. And rules can be updated over time. Nevertheless, the process is plodding and more of a static waterfall approach than an adaptable agile and continual improvement approach. — Return to article text above
To view other articles from this issue of the brief, click here.