Understanding Compliance Cost: What It is and How to Turn It into Opportunity

Introduction

Organizations today are required to comply with relevant laws, regulations, and standards at all times. However, this is easier said than done as regulatory requirements are increasing at an unprecedented rate.

As a result, organizations are spending a large amount of time and effort in understanding these regulatory requirements and obligations, mapping them to internal controls and policies, testing the internal controls, identifying issues, tracking remediation, compiling and cataloging evidence, implementing change control, and managing the entire process.

So while compliance is necessary, the costs can quickly add up and impact an organization’s bottom line. With the right strategies, organizations can gain control and visibility over their compliance costs. Taming this budget beast is possible when compliance teams leverage technology, optimize processes, and stay on top of an ever-changing regulatory environment. With the right data and discipline, organizations can transform compliance from a cost center into a great opportunity.

Key Takeaways

• Compliance costs are the expenses that an organization incurs to comply with applicable laws, regulations, and standards.
• Traditionally, compliance tasks have been manual, paper-intensive, and time-consuming, requiring significant human intervention at every step. This not only increases the likelihood of errors but also escalates operational costs.
• By leveraging automation tools and digitizing compliance documentation, organizations can streamline workflows, minimize manual labor, and significantly reduce the risk of non-compliance due to human error. 
• Once organizations have calculated their compliance costs and identified areas of waste, they should look for ways to simplify and streamline the processes. Even small changes can yield big savings over time. 
• Digitization facilitates easier storage, retrieval, and management of compliance documents. Instead of sifting through piles of paper or unorganized digital folders, compliance officers can easily access needed information through a centralized platform, saving time and reducing stress.

What is Compliance Cost?

Compliance cost refers to the expenses incurred by an organization to ensure adherence to all relevant industry regulations and standards. It includes the salaries of the compliance team, the cost of compliance software (if purchased and implemented), employee training, audits, fines, and legal fees.

Companies are realizing that the legacy compliance management approach is excessively resource-intensive and significantly increases the cost of compliance. In addition, it increases the risk of non-compliance, where penalties can be severe.

To ensure a cost-effective way to compliance, organizations need purpose-built software solutions that automate various processes such as regulatory horizon scanning, control testing and monitoring, issue and action management, and reporting while providing comprehensive visibility into the overall compliance posture. This can significantly help them lower their compliance costs, reduce their risk of non-compliance, and free up their personnel to focus on activities that deliver real benefits to the bottom line.

Factors Influencing Compliance Costs

Here are some of the key factors that influence compliance costs:

• Complexity of Regulatory Requirements At the heart of compliance cost lies the complexity of regulatory requirements. Like a tangled skein of yarn, the intricate weave of regulations that organizations must adhere to can be daunting. These requirements aren't static; they evolve, adding layers of complexity for companies to unravel. The more complex the regulations, the more resources and time are required to ensure compliance—be it deciphering legal language, implementing necessary changes, or conducting extensive audits.
• Industry-Specific Compliance Challenges Every industry comes with its own set of compliance hurdles. Financial services, healthcare, and energy sectors, in particular, find themselves under the strictest of regulatory eyes, which significantly shapes their compliance spending. These sectors deal with sensitive data, financial stability, and environmental concerns that necessitate rigorous oversight.
• Geographic and Global Regulatory Landscapes Companies often operate across multiple jurisdictions, each with its own set of regulations. Navigating this landscape adds layers of complexity to compliance efforts. A company based in the United States, for instance, must comply with local laws, but if it does business in Europe, it must also adhere to GDPR (General Data Protection Regulation), along with any other regional laws. Managing compliance across diverse regulatory environments requires a nuanced approach and, often, localized expertise, all of which contribute to the overall cost of compliance.
• The Pace of Regulatory Change Lastly, the pace at which regulations change can either inflate or deflate compliance costs. A rapid flurry of regulatory changes requires organizations to be agile, continuously adapting their compliance strategies. This agility, however, does not come cheap.
  Staying ahead of the curve requires ongoing investments in training, technology, and sometimes, even restructuring. It's like trying to keep up with a sprint when you are prepared for a marathon; the sudden bursts of speed demand more energy (and resources).
  The faster a company can adapt to new or updated regulations, the less disruptive these changes will be to its operations, ultimately influencing compliance costs.

Types of Compliance Costs

Here are the various types of compliance costs:

• Direct Costs These costs include fees, fines, and legal expenses that result directly from non-compliance events. For example, if a company fails an audit or violates a regulation, it may face penalties and pay sizable fines. It’ll also likely incur legal fees to address the issue. While these costs are typically unplanned, organizations should budget for potential compliance failures and set aside funds in case issues arise. 
• Indirect Costs Indirect compliance costs encompass expenses incurred indirectly as a result of compliance activities, such as staff training and system upgrades. Training employees on new regulatory requirements or investing in software upgrades to ensure data security are examples of indirect costs. These costs may not be immediately apparent but are essential for maintaining compliance effectiveness and efficiency over the long term. Failure to invest in staff training or technology upgrades can lead to inefficiencies, errors, and ultimately, increased compliance risks.
• Opportunity Costs Compliance efforts can also incur opportunity costs by diverting resources, time, and attention away from core business activities. For instance, a manufacturing company may allocate significant resources to ensure compliance with safety regulations, potentially limiting its ability to invest in research and development or expansion initiatives.
  These opportunity costs represent the value of alternative uses of resources that could have generated additional revenue or competitive advantages if not allocated to compliance activities. Balancing compliance requirements with strategic business objectives is essential for minimizing opportunity costs and maximizing overall organizational performance.
• Long-Term Costs Long-term compliance costs include the impact on reputation and customer trust resulting from compliance failures. Reputational damage caused by regulatory violations can have lasting consequences, affecting customer loyalty, investor confidence, and brand perception. Rebuilding trust and repairing reputation damage can be costly and time-consuming, which can impact revenue generation and market competitiveness. As such, organizations must consider the potential long-term costs of compliance failures when evaluating the effectiveness of their compliance programs and risk management strategies.

Effective Management of Compliance Costs

This journey begins with a clear map and a plan to chart the course through these regulations without draining resources unnecessarily.

• Identifying Costs

  The first step to managing compliance costs is understanding where they stem from. These costs are not only limited to the direct payments for licenses or fees but extend to the administrative efforts involved in maintaining compliance, training employees, and even the technological solutions implemented.

• Budgeting Strategies for Managing Compliance Costs Effectively

  Once compliance costs have been identified, the next logical step is to manage them effectively, which involves developing a robust budgeting strategy. The key here is to be as proactive as possible.

  Budgeting for compliance should not be an afterthought; it must be an integral part of an organization’s financial planning. This might involve setting aside a fixed percentage of revenue for compliance costs or having a separate compliance fund within the organization’s budget.

  To make this process more effective, organizations can also consider historical data. Are certain regulations costing the organization more year after year? Looking back at the compliance costs over the past few years can help identify trends and patterns and forecast future expenses.

• Allocating Resources for Ongoing Regulatory Changes

  One of the immutable truths about regulatory compliance is that it's always in flux. New regulations can emerge, and existing ones can be revised, which necessitates an agile approach to resource allocation. Here, flexibility is your ally. Allocate resources in a way that can be adjusted as new regulations come into play.

  Moreover, adopting a strategic approach to training can significantly reduce costs. Instead of generic, broad-spectrum training, focus on targeted training that addresses the specific regulations that impact your business the most. This ensures your employees are well-equipped to deal with relevant compliance issues without allocating resources toward unnecessary or irrelevant training.

• Deploying Regulatory Compliance Solutions

  Leveraging regulatory compliance solutions can streamline compliance processes and reduce associated costs. These solutions automate data collection, analysis, and reporting tasks to enhance compliance monitoring, reporting, and risk management while saving time and resources for compliance teams. Capabilities for automated regulatory horizon scanning help organizations stay on top of regulatory changes and proactively adjust their compliance strategies. For example, software that automatically captures relevant regulatory updates ensures that organizations are always working with the most current compliance requirements, eliminating the need for constant manual monitoring.

Compliance Cost Reduction Strategies

While implementing technology-driven solutions represents a step in the right direction, effective management of compliance costs also requires strategic planning and implementation. Here are a few strategies to consider:

• Centralize Compliance Management: Implementing a centralized system for managing compliance-related tasks across departments can significantly reduce redundancies and inefficiencies.
• Risk-Based Prioritization: Not all compliance requirements carry the same level of risk or potential for penalties. By prioritizing compliance activities based on their risk levels, organizations can allocate their resources more effectively, focusing on areas that could have the greatest impact on the business.
• Regular Compliance Audits: While audits might seem like an additional cost, regular check-ups can save money in the long run. Utilizing software to conduct these audits can identify gaps and inefficiencies early, preventing costly legal repercussions and ensuring that the organization remains on the right side of compliance.
• Review and revise policies: Compliance teams should review organizational policies, standards, and procedures with a critical eye. Some may be outdated, redundant, or inefficient. Eliminating policies that no longer apply and exploring ways to streamline document review and approval chains can help ensure there are fewer hoops for people to jump through, thereby driving more productivity and efficiency.
• Foster a genuine culture of collaboration: Silos and lack of communication are enemies of productivity. Cross-functional teams can bring fresh perspectives and innovative ideas. Organizations should implement measures to make it easy for others to tap into their expertise. When processes are smooth and seamless, compliance becomes second nature. Teams can focus on value-added work rather than wasting time on non-essential tasks.

How MetricStream Compliance Management Can Help

The MetricStream Compliance Management software helps organizations streamline firm-wide compliance programs with automated workflows and an integrated approach, driving significant time and cost savings. The centralized repository helps align regulations, standards, policies, and controls to provide 360-degree visibility into the compliance posture and eliminate inefficiencies and redundancies. Organizations are able to proactively identify control gaps and weaknesses while powerful dashboards and reports provide real-time insights into compliance processes.

To learn more about MetricStream Compliance Management, request a personalized demo today.