The value at stake from government and regulatory intervention is huge. Companies that approach external engagement in a disciplined way capture more of it. November 2013 | byReinier Musters, Ellora-Julie Parekh, and Surya Ramkumar The business value at stake from government and regulatory intervention is huge: about 30 percent of earnings1 for companies in most industries, we estimate, and higher still in the banking sector, where the figure tops 50 percent.2 Translating those percentages into euros, dollars, or yen can yield eye-popping results: one European utility found that the ongoing value at stake from regulation was €1.5 billion, or about €30 million for every employee involved in handling the company’s regulatory affairs. Another large global company estimated that in a major acquisition, it was €500 million a year over a decade. 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.3 Only about 20 percent of executives reported frequent success at influencing government policy and regulatory decisions—a proportion that has not increased in the four years we’ve conducted the survey. Our conversations with external-affairs executives at global companies highlight the challenges: •“The government-affairs team in our company is buried under a support function, with limited clout and without the business leaders really understanding what they do.” •“We have separate government-affairs and external-communications functions. They operate independently and don’t report to the same executive. We don’t always communicate on key regulatory issues as much as we should.” •“Within the company we have different functions involved in external engagement; identifying the number of employees involved at the corporate, business, and country levels is a gigantic exercise for us.” •“Our public-policy team works in the shadows, so no one really knows what the worst outcome could have been if they had not engaged stakeholders smartly. Tracking and quantifying impact is very difficult.” In this article, we’ll highlight three organizational principles that we’ve observed leading companies apply to decrease the likelihood of such problems and to increase the value they get from their regulatory functions. The importance of these groups will only grow as industries such as food and beverages come under new forms of regulatory scrutiny (say, related to issues of obesity), while others (notably the extractive industries, such as mining) receive heightened attention from regulators in resource-rich emerging markets. 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. One telecommunications company learned the hard way how important it is to map connections, when its regulatory-affairs team discovered, after the fact, that one of its business-unit heads was often golfing on weekends with the president of the country in which it is based. To avoid such missed opportunities in the future, it explicitly mapped out its most important relationships and designated executives as either primary or secondary contacts to manage them. A mining company in an African country adopted a similar approach after learning that each of its business units was engaging separately with an important government minister—an arrangement that made it impossible for the company to communicate a consistent message. All of the companies we studied tend to structure their government-affairs units in one of four ways (exhibit). Yet they 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. Exhibit Companies tend to structure their government-affairs units in one of four ways. http://www.mckinsey.com/Insights/Strategy/'/~/media/McKinsey/dotcom/Insights/Strategy/Organizing%20the%20government%20affairs%20function%20for%20impact/SVG_RegulatoryStrategy_Ex.ashx'