The economic case for standards
Technical standards are a contentious topic in many industries. They add cost to businesses – taking a share of budget that would otherwise go to more profitable objectives. They also add cost to compliance enforcement and monitoring programmes – who also have significant budget constraints.
Not all standards are created equal. Some standards such as the COSO’s Enterprise Risk Management Framework, the XBRL Business Reporting Standard and the ISO 31000 are widely adopted across industry – whilst others languish as unsold inventory. In most cases, they require significant investment in time and intellect.
It follows then, that investment in standards should be properly justified.
Standards are a public good to the extent that they facilitate the cooperation of people and organisations towards a common objective. They are a shared resource, that when made publicly available at a reasonable cost oils the machines of government and commerce. Where would we be without the standardisation of electrical plugs, international phone dialling codes or the Internet protocol? These didn’t necessarily encourage the most technically sophisticated design but they succeeded because they facilitated benefits from cooperation.
We believe standards should be adopted where practical but only when they can be compared with other non-standard options on its own merit. In practice, this is difficult to achieve because it is often far too easy to implement a unique way of doing things then selling people on a generic approach.
This is why, in practical terms, standards should be closely associated with the strategy management and policy functions of organisations. It is often easier to provide a strong economic justification for a standard when it is linked to a winning strategy, leadership intent and financial objectives. It is possible to quantify benefits of standards adoption but more practically so within a strategic context than on a case-by-case basis.
For example COSO’s ERM Framework emerged in response to a crisis in the financial industry. It is supported by legislation. Organisations have strategic advantage in complying to it. Network externalities – the benefit to others from compliance – extend far and wide: even to the growth of regulatory technology ‘regtech’ innovation. Over time, industry has shaped the evolution of COSO ERM to be simpler and less expensive to implement. Viable, lower cost alternatives – such as ISO 31000 have emerged.
In our approach to Governance Risk and Compliance, we are committed to the practical adoption of standards where it make sense to decision makers, increases cooperation between organisations, improves competitive advantage and tangibly contributes to the public good.