In the past decade, governments around the world have been establishing new international regulations that are driving companies to gain a better understanding of the complexity of their customer relationships. As new regulations propagate, and long agreed regulatory elements are now vigorously enforced, traditional approaches do not meet the new paradigm and are coming up short of regulatory expectations. Companies need new techniques and methodologies that reduce the cost of managing compliance processes by understanding the complexity of products and customers.
HSBC Holdings PLC has spent hundreds of millions of dollars to overhaul its anti-money- laundering system, including hiring a former British spy and a tobacco-spitting former drug enforcement official from the U.S. The message from U.S. officials: Not good enough.
Source: Wall Street Journal
The business mantra has been that “complexity drives inefficiencies” for so long that even bringing up the topic of complexity in the board rooms sends shivers down most executives’ backs. It is time to declare war on business complexity lost and understand the difference between unwanted complexity that drives up cost and true complexity that drives business opportunities. Real business complexity is dictated by the business environment, with companies having multiple products, across multiple countries, being delivered through multiple channels, supported by various partners and technologies. Understanding real business complexity and managing it can drive business growth and operational efficiencies. Organizations that do not manage complexity create an environment in which unwanted complexity thrives.
Companies that have tried to simplify for so long have pushed compartmentalization to the point that only the customers and regulators see across the compartments. How can you know the totality of the customer relationship when companies treat a single relationship as multiple customers and provide different interpretations of regulations that drive inconsistent customer experiences? For businesses to fully understand and mitigate their risk, they need to change from avoiding complexity to understanding complexity, embracing complexity and most importantly managing complexity.
Understanding complexity requires companies to recognize which complexity drives business opportunity and which negatively impacts the business by siphoning resources and affecting the customer experience. To better understand complexity we must understand the most common complexity traps that impact company thinking.
The Fox Trap: Underestimating the hidden complexity because it’s mostly unseen. The complexity that results in the inability of an organization to uncover the real information, and promotes perception- based decisions.
The Iceberg Trap: Staying above the surface and not getting into the details that lie below. This type of complexity blocks the ability to get information quickly, resulting in decisions that may not be based on the whole picture.
The Fractal Trap: Not realizing the problem gets more complicated the closer in you get. The complexity that creates misrepresentations of the true problem, making organizations waste money on solutions that fix only the symptoms.
The Low-Res Trap: Simplify for a moment, but underlying complexity rises and creates chaos out of order, and nothing gets done. This complexity results in simple solutions that seem to solve the problem for the short term but cannot be maintained. Examples of this complexity are solutions that throw more resources at a problem, which solves the immediate problem but causes over staffing and employee dissatisfaction when you later lay employees off.
The False Simplicity Trap: Implementing solutions because everyone in the industry is doing it. This complexity type hides the fact that your problem may not be the same as other companies in your industry, or that the other companies did not solve the problem by implementing this solution.
Industry Low-Res Trap Example:
Michael Cherkasky, the U.S. monitor in charge of checking HSBC’s progress, spoke in July about banks’ efforts to overhaul their systems. He didn’t address HSBC specifically in that interview, but said that, broadly, “Throwing bodies at it and putting your finger in the dike—that’s not a sustainable system.”
Source: Wall Street Journal
By avoiding the understanding of the business complexity, companies are unable to fully map out how to ensure regulations are implemented consistently across their organization. Embracing complexity means having a framework that provides a way of understanding the components of the business and how they interact with customers and regulations. Understanding these interactions will enable companies to identify common patterns that may drive redundant policies and procedures across products and regions. When you embrace complexity, you provide a framework which enables transparency, information sharing and harmonized controls that drive efficiency and improve risk mitigation. A framework provides a structured way to look at risk by understanding the customers’ complete relationships across all lines of business, their contact points, the processes servicing them and the technology that support them.
Understanding and embracing complexity enables companies to eliminate false simplification that drives compartmentalization and segregation of business organizations and start to leverage flexible frameworks that allow simplification of shared services and information. A flexible framework aligns business patterns to the complexity of the business diversity enabling understanding of the similarities in the diversity that can be leveraged. For example, A checking product takes monies in and calls it a deposit while a credit card takes monies in through a payment. Even though they are coming from different perspectives, can policies and procedures be shared? Can technology? Managing complexity enables businesses to understand that approximately 80% of these activities are the same, and synergies exist that can be leveraged. By contrast, false simplification through compartmentalization will drive 80% redundancy.
The FDIC released a statement to financial institutions—consistent with, but seemingly more expansive than, earlier statements made by federal banking regulators encouraging institutions to take a risk-based approach in assessing all individual customer relationships rather than “de-risking,” or declining to provide services to entire categories of customers.
Source: Recent developments in BSA/AML, Sullivan & Cromwell LLP
As companies face the new paradigm shift in business complexity along with changes in regulations and how they are enforced, it is time to rethink the techniques and methodologies being used to understand and manage risk. Current methodologies that only focus on the tip of the iceberg or dive down to the details without consideration of the overall business operating model need to be updated and modified with new techniques that consider the bigger picture and leverage existing knowledge. Companies need to focus on new flexible techniques in managing the business complexity that does not rely on an army of resources to create the plethora of tables and PowerPoints that will not be relevant in six months. The investment in embracing and managing complexity will not only reduce the cost of the compliance process but can provide the business with the ability to manage all transformation more effectively.
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