Third Party Oversight

Outsourcing Conglomerates and Their Bitter-Sweet Relationship with Regulators

Written by Anindita Chakraborty

Outsourcing conglomerates and regulatory agencies have for long, managed to co-exist without having to interfere much when it came to conducting day-to-day business activities and market expansion operations. This arrangement served well for both parties through 1990s and early 2000s. Nevertheless, this arrangement has evolved considerably in the last decade. The expanding need of global connectivity and technological disruption has led the path for new ways of conducting business where the conglomerates and the regulators are bound to cross each other’s path more often than ever before.

In July 2017, the EU slapped Google with a record breaking fine of €2.42bn (~US$2.72 B) for antitrust violations over online shopping searches. The fine was imposed after Google was found guilty of abusing its market dominance to favor certain sites through its search algorithms. This will perhaps be one of the most stunning examples of a regulatory agency’s scale of impact and will compel IT service providers and outsourcing conglomerates to revise their rulebook of engagement with the regulatory agencies. Google’s recent tryst with the EU, irrespective of its scale, is not an isolated incident. The company is currently battling multiple regulatory violations charges in The Netherlands and Turkey, amongst others. Apart from Google, a string of global organizations and outsourcing providers have found themselves caught in the crossfire.

  • Recently, PwC found itself in a labyrinth of regulatory tussle with the Public Company Accounting Oversight Board (PCAOB), US imposing penalty of US$1 M in fine over PwC’s flawed audit report on Merrill Lynch. Furthermore, the National Bank of Ukraine moved ahead and cancelled PwC’s bank auditing rights citing irregularity in financial reporting. Additionally, UK’s National House Building Council (NHBC) has sued PwC UK for ~US$46 M on tax overpayment. NHBC claimed PwC failed to provide accurate advice following a change in the law in 2005, that no longer mandated tax payments on increase in the value of its investments in index-linked, gilt-edged securities.
  • A few of the major IT companies operating in India such as Capgemini, Wipro, Cognizant, Tech Mahindra etc, found themselves in a tight spot over allegations of unlawful mass layoffs as the affected employees approached the Forum for IT Employees (FITE) seeking justice.
  • The Minnesota Pollution Control Agency accused 3M of violating decade-old anti-pollution agreement.

Evolving Role of Regulatory Agencies

Amidst evolving market dynamics, it has become extremely important for outsourcing organizations to recognize the multilayer role of regulatory agencies to ensure smooth cross-border commerce. With the increase in international trade, the role of regulatory agencies has become pivotal in maintaining free and fair competition amidst constantly changing dynamics of the business world. These agencies are required to constantly monitor market dynamics for any irregularities or undue dominance or influence by suppliers and consumers alike.

Source: Supply WisdomSM

In the US, some of the major federal regulatory agencies responsible to ensure free and fair market place include:

  • Securities and Exchange Commission (SEC) which administers federal laws to prevent unlawful buying and selling of securities.
  • Consumer Product Safety Commission (CPSC) which enforces prescribed federal safety standards of product and services.
  • Federal Reserve System (FED) which regulates banking and manages money supply.
  • Federal Trade Commission (FTC) which ensures free and fair competition in the market, protecting consumers and producers from unfair or deceptive practices.
  • Food and Drug Administration (FDA) which administers federal food purity laws, drug testing and safety, and cosmetics.
  • Environmental Protection Agency (EPA) which establishes and enforces uniform pollution standards.
  • Federal Deposit Insurance Corporation (FDIC) which insures bank deposits, approves mergers, and audits banking practices.
  • National Labor Relations Board (NLRB) which prevents/corrects unfair labor practices by the organization and labor unions.
  • Occupational Safety and Health Administration (OSHA) which develops and enforces federal standards and regulations ensuring hygienic working conditions.

Outsourcing Service Providers and the Way Ahead

Global outsourcing services providers have to be mindful of the regulatory requirements specific to the country where they operate and the nature of business to maintain efficiency and profitability. Striking a balancing act between complying with the regulatory requirements while maintaining optimal resources utilization can give an organization unprecedented competitive edge, and that in turn can ensure long-term sustainability.

The ongoing disruptions of digital technologies and accelerated adoption of internet services across different geographies have opened up new markets, ripe with billion-dollar opportunities. In order to evolve and maximize the competitive edge, it is extremely vital for organizations to channelize their resources to ensure maximum compliance as required by the regulatory agencies’ requirements. Failure to do so may not just play havoc on the company’s brand strength but also carry unwelcome financial implications.

Source: Supply WisdomSM

In recent years, governments of multiple countries, especially in the lucrative emerging markets of the APAC region have had a profound role in the policies that have direct impact on the degree of autonomy for the outsourcing service providers in conducting their business operations. The regulatory agencies tend to be sensitive to the changing political climate of the country. Therefore, responding to these changes becomes vital in sustaining and improving a firm’s market position. An effective corporate governance structure can play a vital role for an organization to stay relevant in the land it operates in.

Service providers such as Accenture and Capgemini have channelized their efforts in staying relevant by formulating governance practices that are adaptable to different geographies where they have operations. Google too, is making consolidated efforts in incorporating the requirements of regulatory mechanisms in to its governance practices across different geographies and markets.

In conclusion, it is vital for outsourcing conglomerates to monitor and adapt to the technological disruption and constantly evolving geo-political landscape. Compliance to the requirement of regulatory agencies’ guidance and the nature of engagement with the regulatory agencies can not only assist the companies in averting legal hassles, but also provide the pivotal competitive edge required to sustain their market and profitability.

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