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Turning a Cost Center into a Profit Center

January 13, 2016

Turning a Cost Center into a Profit Center

Introduction

Documentation

The opportunity to change a cost center into a profit center exists for all investment management firms. Unfortunately, there is an entrenched, long held belief that the Front Office acts only as a Profit Center and the Middle and Back Office are Cost Centers. A simple approach to changing this mindset and creating an additional Profit Center can be done through a tiresome, time consuming and tedious approach: Documentation.

One must keep in mind that generating profits does not solely entail generating returns but also eliminating costs. The latter point is often overlooked or only looked from the unenlightened point-of-view of eliminating positions and overworking remaining staff. An “out-of-the box” thinking management group would look for efficiency gains which would empower the middle and back office into a profit center. The impact on a firm-wide basis would include but not limited to:

  • Transfer of knowledge
  • Facilitation of system implementation
  • Firm wide understanding of policies and procedures
  • Efficiencies (not replicating duties/work)
  • Leverage (Automation of Processes) (i.e. less time focused on repetitive tasks)

 

Why Firms Hesitate

Why do firms hesitate or even outright reject taking on such an important improvement? First of all, it is a time consuming process with upfront budgetary constraints. On top of that, you can add the detailed and intricate minutia that is inherent in documenting processes, policies, controls and any other important function of the firm. The task is quite daunting before you even begin and the existing complications places fear in most management.

Secondly, it is only viewed as an expenditure with no financial benefits. Unfortunately, this is the myopic view most firms have and miss out on significant financial gains available in many aspects of the firm’s functions. The financial gains will continue to be felt many years after having the proper documentation.

The cost-benefit misconception that firms have prevent them from taking advantage of this opportunity and continue to operate inefficiently and increase costs. The benefits are there for the taking and ridding oneself of this misconception is the only way to generate the gains available.

 

Benefits

The cost savings or better said, the profit gains, are direct results of the following benefits. With the proper documentation in place and the proper accessibility to that information, a firm will be in a position to see tangible results subtly but immediately.

Transfer of Knowledge

The most immediate impact of documentation is the facility in the transfer of knowledge. The areas most affected are the Key Man Risk, firm wide understanding of policies and procedures, roles and functions of different departments, and firm wide understanding of all interaction with external firms (clients & providers).

Key Man Risk

No more will firms have to face significant key man risk when expert personnel leave the firm and take their knowledge with them. More often than not, this is the case even though firms are keenly aware of this risk. Firms are then forced to reinvent the wheel and thus incur costs to redevelop that knowledge with no assurances that it meets the same quality.

Policies, Procedures, Controls & Other Firm Functions/Information

It is common place that on a firm wide basis and surprisingly on an inter-departmental basis, employees are not aware of the firm’s policies and procedures, controls and any other firm specific functions. Employees take decisions that may run counter to the firm’s policies and impact the P&L of the financial statements. One example would be when the front office decides to advertise performance counter to what the compliance and performance departments’ policies. This leads to legal and reputational risk, which can have a negative financial impact in the short and long-term.

Interaction between Departments

Another area that documentation assists with is identifying and clarifying the interaction between departments. Many times, one department is unaware of the functions of the other even though these same functions are impacting both departments. So much time is spent trying to understand where certain information comes from or how it is processed and this incurs costs in terms of delays that have a domino effect on a firm wide basis. It is never a good thing when one hand does not know what the other is doing.

Efficiencies

Operationally, an increase in efficiency is experienced when the proper documentation is in place. By taking advantage of the increased knowledge and awareness, greater automation of repetitive tasks can be implemented thus saving the wasted hours that cumulate over time and freeing employees to focus on more added value tasks. The most common justification for not doing this is that firms believe this is just part of the daily process and not much can be done. Letting go of long held beliefs will do a lot in clearing the mind to more positive action.

Facilitation of Systems Management

One of the biggest issues with systems management is that it is never a smooth process and always ends up costing firms a lot more than budgeted financially. Furthermore, the time spent by employees and the added stresses to the daily routines are hidden costs that contribute significantly the upfront financial considerations. Documentation goes a long way in relieving firms of the high costs and free up their budgets for more productive endeavours.

Unfortunately, most financial firms believe if you have a BRD (Business Requirement Document) it is sufficient enough to search and evaluate systems. The BRD is only as good as the documentation supporting it and most firms move ahead with poor BRDs because of the lack of supporting documentation. When things fail, they point to the BRD as their part of the due diligence process and place blame entirely on the vendor, thus missing out on an opportunity to improve themselves and save money going forward.

The proper detailed documentation will enable firms to understand their current and future needs, their limitations, and the resources they may require with systems implementation. This knowledge will assist with selecting the right system and facilitate the implementation process by limiting surprises. It is not during an implementation that a firm should be discovering itself, but prior to it where consultants’ hourly rates are not applicable.

 

Approach Required

Focusing on the issues without discussing the solutions is akin to telling Wile E. Coyote that he’s gone over the edge without providing him a rope. The following is a ten step approach to the documentation process based on experience but should be viewed more as a starting point so others can use their own experiences to improve the process. As mentioned earlier, most firms want to close their eyes to documentation, so anything that can stir discussion and generate action is a good starting point.

Step Description
1 Identify each Departments’ Processes:

·        The beginning of any such process is to get to know what you are doing.

·        A thorough review of every process with the aim to bring to light work that may have gone unnoticed and undocumented.

2 Identify all Interactions between Departments:

·        Coordinate inter-departmental meetings to identify what processes impact each other.

·        Provides a high-level view of how the firm operates and opportunity for improvement.

3 Identify all Key Employees in each Department:

·        Identify all employees with key process knowledge to eliminate Key Man risk.

·        Undocumented processes under the sole responsibility of one person creates significant operational risk (i.e. additional costs).

4 Identify all Existing Documentation:

·        Identify all current documentation and organize it appropriately.

·        This provides a snapshot of the status of documentation

5 Review all Existing Documentation:

·        Review the documented material to gain a greater understanding of what is being done.

·        Knowing something is documented does not mean it is understood.

6 Identify all Missing Documentation:

·        Conduct a Gap Analysis to identify how the missing documentation fits with what is already documented.

7 Document all Missing Documentation:

·        Document all missing processes and organize it appropriately with respect to the department and firm.

8 Save all Documentation in a Centralized Location:

·        Make available to employees based on access requirement.

9 Summarize in a Process Flow Chart:

·        In a process flow chart, summarize the whole firm’s processes and their inter-departmental impacts.

10 Train employees to understand the documented processes:

·        Train staff to create a culture of documentation.

·        Doing a little every day will facilitate the whole process and eliminate large projects such as this one.

Conclusion

Eliminating the static view that the Front Office is a Profit Center and the Back/Middle Office are Cost Centers and adopting more dynamic, fluid view of the two is the first step in creating opportunities to turn a Cost Center into a Profit Center. The inherent advantages of having the proper documentation leads to improvements at the departmental and firm levels by assisting in the day-to-day and the strategic decision process as well. Bringing everything together with an intricate flow chart that documents all processes, policies, controls and any other firm specific function provides the key to creating efficiencies and generating profits.

It was mentioned earlier that “Out-of-Box” thinking is required for such a simplistic idea because most people tend to discount the benefits. In reality, it is not an “Out-of-the Box” idea but rather just plain common sense and a must have for any firm. A lot more courage is required and true sense of embracing efficiencies and knowledge. Not being scared to peel aware at all layers of the firm to identify areas of weakness but also provide opportunities for gains and improvements, is paramount. Senior management needs to take the initiative and listen to an age old concept that has been around for millennia: “Know thyself” – Socrates.

 

 

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