Simon Bittlestone, Managing Director, writes on markets and economics

‘Red tape’ has a privileged place in the British political lexicon. No speech about business is complete without a tilt at the demon of unnecessary regulation. And it is true that there is much unnecessary regulation in the UK; any effort to abolish it must be applauded.

The problems arise when it comes to necessary regulation. What looks like obstructive bureaucracy to the leaders of one business may afford vital protection for another. The rule of law is crucial if business is to flourish but, in an economy as complex and dynamic as the UK’s, that law is likely to be both complicated and liable to change.

It is curious then, given the UK business community’s watchfulness when it comes to red tape, that more businesses do not take a more sophisticated approach to planning for regulatory changes. Only in the last week or so, the media has focussed on several examples of regulatory interventions that could alter the very shape of the industry they apply to.

The UK telecoms regulator’s announcement, that it is to investigate the way in which wholesale broadband capacity is sold, could mean a fundamental change in the competitive context for retailers in the sector. Currently the retailers are lobbying for the infrastructure to be floated as an independent company, but the consequences of that may not be as simple as one might assume at first glance.

In the energy sector, last week saw the very visible impact of the halting of subsidies for solar energy, an already somewhat tenuous part of the industry, and one which, barring a technological leap forward, may have to resign itself to becoming a whole lot smaller.

Further, in banking, the Prudential Regulation Authority has announced that it will be investigating whether proposed tax changes may have the effect of stifling competition. Its conclusions may have a significant effect on the fortunes of either the established players (favoured by the new regime) or the challengers (favoured by the old).

These are very different situations, at different stages of the regulatory process. But, what they have in common is that the consequences of each possible outcome can be predicted. While it may not always be easy to guess what regulators will do, their options are rarely numerous, and their decisions often anticipated. Forecasting the consequences of a limited number of potential interventions for the business is possible, prudent and necessary. But scenario-planning of this type, which focuses on non-financial and environmental factors, often gets much less attention from business leaders than purely financial forecasting.

It is not enough to simply define the regulatory risks the business faces. For such analysis to be useful, business leaders must identify where changes to regulation would affect the drivers of value in the organisation. Then, each potential regulatory scenario can be modelled to quantify the potential impact on revenues, and to explore how the business model might be altered in response. Having a plan in place for each eventuality means that the business can respond as soon as regulatory changes are announced, and stay ahead of the competition.