ORGANISING THE GOVERNMENT AFFAIRS FUNCTION FOR IMPACT

Article written by Reinier Musters, a principal in McKinsey’s Amsterdam office, Surya Ramkumar, consultant; Ellora-Julie Parekh , consultant in the London office. The article has been edited.

"The business value at stake from government and regulatory intervention is huge: about 30 percent of earnings. Translating those percentages into euros, dollars, or yen can yield eye-popping results. Since there’s so much money on the table, you might assume that companies would organize government relations as carefully as they do other business functions. Surely, for example, companies have people in place to understand the relevant economics, structures, and processes to drive this understanding into important business activities, and regulatory-affairs professionals who work in a collaborative and integrated fashion with business-unit leaders to capture value.

Yet the reality is quite different. In our most recent annual survey, fewer than 30 percent of the executives responding said that their external-affairs groups had the organizational setup and talent necessary to succeed. Only about 20 percent of executives reported frequent success at influencing government policy and regulatory decisions

1. Clarify scope and structure

Regardless of what the groups are called (public affairs and government affairs are common choices) top companies make sure that these organizations excel at economic analysis and stakeholder engagement, not just at lobbying and industry-group participation. By having staff dedicated to handling tasks such as identifying issues, developing positions, and gathering compelling international benchmarks, leading government-affairs units can anticipate a much broader range of possible regulatory outcomes. Notably, leading groups quantify the impact of these outcomes on all parties involved, not just their own companies, by including the regulator and even the broader industry in their analyses. This approach dramatically improves the quality of engagement and can even break through seemingly deadlocked situations—for example, when a company can quickly and accurately show a regulatory proposal’s negative consequences for national employment rates or tax revenues.

Top companies identify important stakeholders up front and work with them using a key account management–style approach that borrows from best-practice sales organizations. Designating senior executives as “owners” for important relationships, including those in social media, allows for smoother scheduling and coordination of day-to-day activities. More important, this approach makes it easier for a regulatory-affairs group to provide consistent, coherent, and proactive communication supporting a company’s regulatory strategy.

All of the companies we studied tend to structure their government-affairs units in one of four ways:

1. Corporate Function

• Single unit in corporate center shared by all business units, regions or both.
• Reports to CEO or CEO minus 1

2. Embedded Function

• Central unit ensures alignment on priorities, best-practice sharing and engagement with global stakeholders (Reports to CEO or CEO minus 1)
• Regional teams 'own' local engagement and report to country head, central unit or both.

3. Virtual Team

• Small unit in corporate center forms virtual teams that manage cross-functional efforts on project basis (e.g. involving finance, country and R&D experts)
• Central unit reports to CEO or CEO minus 1

4. Matrix Function

• Central unit ensures alignment and engagement with global stakeholders, reports to CEO or CEO minus 1
• Local operations have both regional and product-specific units; regional unit coordinates locally to ensure the company speaks with one voice.

 Yet companies face a host of design considerations, such as the size of the team, as well as its physical location (including special ones chosen for strategic reasons, such as Brussels; Washington, DC; and, increasingly, Beijing). In situations where decentralized regulatory-affairs teams are required—say, in highly regulated industries calling for deep country-level expertise—we’ve seen companies successfully create dual-reporting relationships to link external affairs with both the country head and the corporate function. The home office helps quantify the value at stake, shares best practices, and makes sure the company’s broader interests are accounted for.

Regardless of how the government-affairs function may be structured, companies that take its role seriously typically give it some prominence on the organizational chart. Engagement with high-level stakeholders (such as government ministers), after all, is a CEO-level concern, so having the function’s leader report to the chief executive, or at most one level down, is appropriate.

2. Orchestrate activities across the business

When ties to the CEO are more distant or ambiguous, regulatory-affairs groups risk losing touch and becoming disconnected from important business issues. Once isolated, the function may even come to seem as if it speaks a language different from the one the business units use—a common complaint. Such disconnects are deadly, since the ability to convene and collaborate across functions on regulatory issues is vital for success. When regulatory-affairs units aren’t viewed as good partners, they can’t help the businesses to engage with regulators, coordinate the development of positions proactively, monitor social media, or profile stakeholders, among other activities.

Regulatory-affairs functions can also become alienated from organizations by getting involved with issues too late—for example, reviewing proposals from other departments after they are completed. This often breeds misunderstandings and casts the regulatory group in the role of naysayer, a perception that’s tough to overcome. Late involvement can have substantial economic costs as well, if, for example, a product is developed without input from regulatory affairs and later fails to get approval from regulators.

3. Build talent and accountability

Once a company clarifies what the external-affairs group will do, how it should be structured, and how it should collaborate with other functions, the next task is staffing it with good people. Among most companies, we have observed three types of leaders: industry veterans, with deep legal or economic training (the role’s classic profile); high-profile lobbyists or former politicians, who bring credibility and clout (useful when companies face pressure on a particular issue); or internally promoted business insiders (useful in strengthening cross-functional connections and gaining buy in).

Any of these three can work well, so long as the leader coordinates effectively across business units while getting—and keeping—the respect and attention of senior management. Increasingly, leading companies tap all three types—for instance, by choosing people who are strong in one area and complementing their skills with those of others outside the function, including providers such as specialist lobbying firms.

Moreover, some companies are starting to use rotation programs that move staffers between the regulatory function and the business units to give these employees experience and improve the odds that their insights will be relevant to the businesses. Companies that combine the regulatory and strategy functions, as some utilities do, tend to be best at this approach. The instinct to cross-pollinate talent is a good one: among low-performing companies, very few external-affairs personnel have line experience. At one company we studied, only the department head had it; more junior colleagues played supporting roles. Such arrangements not only deny these employees valuable opportunities but also put companies at considerable risk if experienced staffers decide to leave.

Even among companies that otherwise excel on the talent dimension, nearly all struggle to measure the impact of regulatory affairs in a structured way and thus provide meaningful incentives for staffers. While few best practices have been identified so far, some companies are taking the same analyses they use to understand the regulatory value at stake for a given issue and adapting them to their performance-management systems. These quantitative measurements are then complemented by more indirect indicators, such as the quality of relationships with important stakeholders or changes in the level of access to them over a period of time. Such approaches, while still in their early days, could prove a useful means of linking performance to real business outcomes.

Good regulatory management starts with good organizational design. Companies can increase the odds of getting more business value from this important function by picking the right design and making the most of it, breaking silos and building bridges with other functions, and developing talented people and quantifying their impact."