Cost Reduction by Eliminating “Junky Speaker Wire”
Our last article showcased a true cost cutting story from a global manufacturer. It ended on a happy note. Spoiler alert: This article will end on a cliff-hanger. It’s a story taken from the intersection of high finance, IT and risk management. See if you can recognize all of the cost cutting opportunities it presents.
Cost control: Audiophile Edition
Home-theater enthusiasts quickly learn a painful lesson. Their precious, expensive gear is only as good as its weakest link. Using “junky speaker wire” undermines the performance of their investment in premium speakers and amplifiers. That’s why sophisticated audiophiles invest as much on speaker cables as many people spend on their entire system.
Today’s executives should learn from these audiophiles. Currently they under-invest in critical connections. Businesses buy expensive technology for core business operations and high-stakes risk-management requirements. But they skimp on makeshift, inefficient processes to connect these costly “components” to employees, data, customers and regulators. The result is the operations equivalent of “degraded audio”: degraded business value.
This is precisely what one of the world’s largest securities brokerages did. Let’s examine their story in detail.
Strategic cost reduction from the front office to the back office
This brokerage began a cost reduction program. It was supposed to be sustainable. They implemented a new, state-of-the-art trade execution technology in their back office. That’s the expensive “component.”
Here’s the “junky wire.” Before making this investment, they never considered two related improvements:
1) Upgrading the outdated front-office processes for sales and client service.
2) Making sure this new system was compatible with the rapidly growing risk and compliance requirements.
Consider their current front-office business processes. Customer onboarding, for example, was a mess. Operations, sales, risk, legal and compliance had wholly different onboarding approaches. No consistent process reconciled these often competing views. Even the files were scattered digitally across the globe. Every customer onboarding effort spawned its own, one-off, poorly documented, improvised action. This was usually done in a last-second sprint to the customer’s deadline.
They did this without a central repository or process to marshal the diverse onboarding activities. This enterprise actually reversed the traditional power of the learning curve. The more clients they onboarded, the more process variations they developed. The onboarding cycle lengthened and errors increased.
The operations staff struggled to keep up with the countless customer contracts that the sales staff was busy creating. All of these, of course, were rife with inconsistent terms. But operations staff felt pressured to comply with whatever terms the sales team set. They also had to meet the growing, often contradictory requirements from risk, legal and compliance. Doing so required extensive manual adjustment and reconciliation. And this sapped the new technology of its promised efficiency gains. Sustainable cost reduction was nowhere in sight.
Cost reduction strategies and their impact on risk and regulation
As we hinted above, the customer onboarding process was only half of the problem. “Junky wire” also degraded risk and compliance.
The back-office operations executives toiled to interpret and integrate all of the new regulations. The board of directors, meanwhile, doubled the size of the risk and compliance organization. This was supposed to allay the concerns of both shareholders and regulators. HR hired new employees daily, qualified or not.
This was clearly no way to reduce operating costs. As one senior risk executive put it, “I feel like we’re spending a dollar to insulate against a dime’s worth of risk exposure. Despite spending hundreds of millions of dollars, we still get hit with massive, unexpected fines for violations. It’s the worst of all situations.”
It was a rat’s nest of junky speaker wire.
An audiophile approach to cost reduction strategies
The home-theater enthusiasts we mentioned know how to squeeze the best sound out of their systems. They obsess over the details. They ferret out performance bottlenecks in their systems.
The same can be done for cost saving initiatives. It’s a matter of becoming an obsessive “business process-phile.”
Let’s look again at the brokerage. And let’s examine each facet of this complex problem.
The IT group developed business requirements to automate the work. But these failed to reach deeply and broadly enough into the business lines to provide meaningful value. IT digitized tiny, trivial transactions and called it process automation. They weren’t alone in their errors. The business lines’ process-improvement efforts were piecemeal, inconsistent and imprecise. They were no help to IT’s automation efforts.
Junky speaker wire bridged the gap between the two efforts. Employees informally created one-off methods and inconsistent processes. It should and could have been a clean, well-standardized operational process hub. Like an audiophile’s meticulous wiring, it could have consistently connected business line operations with the internal “components” of risk, compliance, legal and audit. It could also have connected the external components, such as customers, vendors and regulators.
Opportunities for cost reduction aren’t always apparent
To an outsider, this story is a showcase of wasted effort. Then how did it manage to happen in the first place?
It depends on your perspective. To those inside the organization, their daily connection and remediation efforts weren’t wasteful. On the contrary, they regarded these as essential. They believed they were being innovative. Virtuous.
We disagree. We label this “virtuous waste.” It causes more than just unnecessary cost. It also breeds unintended and unmanaged risk. This hides in user-developed workarounds, such as desktop spreadsheets and operating procedures. Undocumented tribal knowledge creates time bombs of liability throughout the rat’s nest of junky wiring.
One last example
Virtually all risk-organization workers will rank “operating efficiency” and “cost effectiveness” low on their priority list. They’ll regard the detection of fraud, money laundering and other financial crimes as their chief concern. Invariably, they will tell you that these two objectives are mutually exclusive.
In reality, the opposite is true. Superior operating capability is essential for superior risk management. Risk organizations are routinely dysfunctional. And their false tradeoff is the single greatest obstacle to improvement. Consider these examples from other, inefficient, real-world risk operations:
- Inbound data errors on accounts subject to Anti-Money Laundering regulations during onboarding should be at or near zero. In reality, they often approach 10-15 percent.
- The Suspicious Activity Report (SAR) process can last 30-45 days. The average touch time for the work, however, is only 3-4 hours. And it’s still rife with avoidable handoffs, error correction and reviews.
Without adequate documentation, such ineffective practices can persist indefinitely. Worse yet, they often attract regulatory action and ever higher levels of risk-department staffing. Since the Great Recession of 2009, this lack of operational discipline has increased risk staffing in many industries by 200 to 500 percent.
That’s neither a cost reduction nor a risk mitigation strategy. It’s a recipe for a costly liability disaster.
Learn more about how The Lab Consulting delivers operational cost reduction strategies for business. It’s our way of eliminating the junky speaker wire.
Email us at firstname.lastname@example.org to learn more today.