The True Cost of Non-Compliance in Business

4th December 2018

The cost of non-compliance is more than twice that of compliance costs. Although some companies might be tempted to continue running the way they always have, rather than changing to meet new compliance requirements, this can have significant financial – and reputational – impacts. According to a study by the Ponemon Institute and Globalscape, being compliant can actually save you money, thanks to the onerous cost of fines, business disruption and loss of revenue. 

Compliance is a big business, no matter what industry you work in. As your operation begins to expand, compliance costs will too. It’s also important to realise that expanding into new markets all over the world will incur much higher compliance costs than operating solely in one location. 

What are compliance costs?

Compliance costs encompass everything that goes into keeping a business compliant with relevant regulations. 

In addition to local and national industry regulations, compliance costs can be incurred as a result of international regulations. As a company begins to expand its global operations, these costs will naturally increase as the company moves into new jurisdictions. 

Data security has the highest compliance cost to all businesses. However, in the vast majority of cases, the reason to invest in data security is because of laws and regulations and not a drive to improve business security. 

As you expand internationally, compliance costs can be a significant burden that requires dedicated professional staff to curtail risk and allocation of legal and non-legal penalties for non-compliance. 

In order to reduce potential compliance costs, more and more businesses are looking to third parties to ensure that compliance is achieved on their behalf. 

Cost of Non-Compliance

The cost of non-compliance can include fines settlements, business disruption, productivity loss, and revenue loss. What’s more, it’s getting more expensive every year. 

The average cost for organizations that experience non-compliance problems is now around $14.82 million, a 45% increase from 2011. While it’s easy to ascribe this increase to the highprofile fines, the real cost of non-compliance is much more serious. 

Examples of how non-compliance impacts companies 

In addition to fines, companies will find that the true cost of non-compliance also refers to disruption to business, and damage to their reputation. 

Business disruption 

According to the study, the biggest financial cost of non-compliance is business disruption, rather than fines or penalties. This is often because when they’re found to be non-compliant, businesses can be forced to implement compliance changes before being able to resume business. 

This can have a knock-on effect on business areas that aren’t even subject to the regulations being breached, potentially paralyzing the entire business. If compliance has to come in the form of new processes being introduced, further disruption will come in the implementation and training of staff. One frequently seen example of this is the General Data Protection Regulations (GDPR). 

GDPR

gdpr europe

Data protection regulations are increasingly complex in nature, due to the increased value and sensitivity of personal or proprietary data. As data becomes more valuable, the risk of data breaches, data loss, cyberattacks or insider threats becomes an urgent issue. GDPR came into force on 25th May 2018, and concerns businesses that handle or store the personal data of EU citizens. The regulations require that businesses:

  • Designate a Data Protection Officer
  • Ensure data is handled, transmitted and retained in a manner that meets the requirements of the legislation
  • Carry out “Data Protection Impact Assessments” (DPIAs) to ensure compliance with data protection obligations and employee expectations of privacy

The enforcement of GDPR demonstrates the new era of complex policies developed to protect data at an individual level, from increasingly sophisticated cyberattacks.

Damage to business reputation

Another aspect that business-owners may not have considered is the cost of non-compliance to a company’s reputation. This is one of the worst consequences of non-compliance in business, because reputational damage can be very difficult to bounce back from.

If a company is found to be non-compliant with EU legislation like GDPR, or industry-specific regulations such as relating to licencing or insurance, this will instil a sense of doubt in stakeholders. Employees may feel that their personal information is unsafe, customers and clients may question the competency of your company, and investors might feel unhappy and unwilling to continue to supply financial backing.

Once a business has lost the support of its stakeholders, the sad fact is that it may need to close, or at least show that significant funds are being invested in rectifying the non-compliance issue.

Cost of in-country compliance

The worst mistake you can make is to underestimate the complexity of international payroll compliance. No matter how skilled your organization is at managing payroll, global expansion presents new challenges that threaten your company’s ability to operate overseas.

Gambling with employment law in the hopes that you are in compliance can greatly impact your organization. If you think you won’t get caught, think hard about the cost of non-compliance.

If your hiring misses a step, or is delayed due to fines, your project or expansion begins to cost more money. Delays set strategic plans back, cause disruptions and can cost businesses dearly.

Studies show that maintaining in-country compliance is considerably cheaper than taking a hit from fines and setbacks. This is why it makes sense to have the expertise in place before you start your expansion. Find out more about managing global payroll in foreign countries, with our in-country HR and payroll guides.

How to reduce the consequences of non-compliance in business

There are a number of ways to reduce compliance costs, from outsourcing tasks to reliable experts  to performing regular audits.

1. Audit more than once a year

The Ponemon Institute and Globalscape study has revealed that organizations that conduct five or more internal compliance audits per year have the lowest total compliance cost. Or you could reduce the risk even further by outsourcing tasks to an external provider.

2. Establish best practices & processes

It’s important to establish best practices for the enforcement and roll out of new compliance obligations. This doesn’t just cover you for existing regulations, but futureproofs your business at the same time.

Best practices that are cost-saving include corporate training programs, seeking out legal experts, integration of security and privacy functions and a fully functional incident response process.

3. Delegate your responsibilities

As a business grows, compliance obligations grow too. That’s why it’s important to have a reliable and scalable means of managing your responsibilities. Outsourcing your international HR and payroll compliance to expert third parties can reduce costs across all compliance activity.

Many nations go through phases of increased regulation followed by deregulation to a point. That said, the general rule is that once a regulation is on the books, it gets tweaked rather than erased. Keeping up to date with every change across every market is a job all of its own, and therefore a prime candidate for scalable outsourcing.

 

At IRIS FMP, we specialise in ensuring global compliance for payroll and HR regulations for all our clients. We have an in-depth understanding of the requirements your business faces, as well as regional experts to address any compliance issues you may have. Having worked in 135 different countries, our teams are adept at navigating the world of foreign employment law. We know how to make sure your company adheres to all regulations, so you can avoid the consequences of non-compliance in business.

If you’re interested in finding out more about our payroll and HR management, download our brochure today.