Читать книгу Effective Product Control - Nash Peter - Страница 16

Whilst banks have always tried to run lean operations, since the global financial crisis (GFC) revenue pools have generally declined, capital requirements have increased, governments have introduced new taxes on banks and more restrictive trading directives have been introduced by regulators (e.g. Volcker).

All these factors make costs a critical issue and have necessitated that product control, along with other functions within the bank, become leaner. This trimming has occurred through a variety of methods, including outright job cuts, standardizing processes and transferring more work to cheaper locations.

Standardization describes aligning multiple processes into a single or fewer processes. The objective of standardization is to reduce complexity by simplifying operations, whilst reducing operational risk and the bank's cost base. This shift has generated efficiencies for the banks (i.e., cost savings), reduced complexity and been a key ingredient in the success of moving work to cheaper locations.

This transfer of work to cheaper locations has been the biggest game changer for product control over the past decade, as it has led to a significant reduction in roles based in New York, London, Tokyo, Singapore and Hong Kong. We now see large swathes of product controllers being employed in developing nations such as India, Philippines, Poland, Hungary, Brazil and South Africa.

Figure 2.2 illustrates the offshoring options for a firm. The first decision for a firm is whether the work will remain within its organization or be transferred to a third party organization. If the work remains within the organization, this is known as a captive model and if the work is sent to a third party it is known as an outsourced model.

Figure 2.2 Offshoring models

The current market is a mix of both models but has been more heavily skewed towards the captive model. My preference would be to use a captive model, as it gives you more control and influence over your workforce.

The next question, which may be less relevant if the work is outsourced, will be whether the work remains within the same country or not. Work sent to a cheaper location within the same country is known as nearshoring and work sent overseas is known as offshoring.

In 2013, recruitment firm Mondrian Alpha prepared a report that examined the offshoring/outsourcing and nearshoring activities undertaken by several large banks.1 Many of their findings still provide a good overview of the changing landscape of product control. Highlights from the report include:

• The goal of the overall offshoring programme is to have a higher quality product control function at a significantly reduced cost. This is achieved through having simpler production type work performed in cheaper locations, leaving a thin layer onshore to provide advisory services to the front office.

• Top locations for offshoring include India, China, the Philippines, Brazil, South Africa, Poland, and Hungary.

• Offshoring becomes easier when:

i. Time zones are consistent e.g. London offshores to Budapest or Singapore offshores to Manila

ii. Systems and processes are properly embedded before offshoring commences

iii. The offshore team is seen as part of the one product control team and are wholly accountable for their work

iv. Turnover can be managed and there is depth of talent in the offshore location

• Nearshoring is an attractive option as it keeps teams within the same country but in less expensive cities. Nearshoring avoids some of the challenges of offshoring, such as inconsistent time zones, shallow offshore talent pools and clashes of cultures. All this ultimately results in closer cooperation within product control and the bank.

My View

There is always a risk and reward trade-off for every investment and offshoring is no different. The main reward for a bank is a lower cost base, whilst the major risk is a weakened control framework. A bank needs to keep in mind that a weakened control framework is more prone to an operational risk event, which can cause losses that dwarf the benefit from the best cost-saving programmes. Rogue trading is just one of the operational risks that can be more difficult to detect when product control is offshored. Just think of the losses sustained by UBS ($2.3 billion)2 and Société Générale (€4.9 billion)3 through unauthorized trading! While the potential role of offshore product control in these cases is undetermined, when oversight is distanced from trading activity, the risk of rogue trading increases.

Risky Choices

In my view, the control framework is most at risk of being weakened when the following choices are made.

Unskilled Staff

If the bank chooses to employ offshore staff with very little or no product control experience, the level of operational risk automatically increases. Banks may be forced to do this if they are establishing an office in a city where a product control talent pool does not exist or the working hours are unattractive for experienced controllers (e.g. 3 a.m. starts).

Offshoring Is Rushed

Offshoring cannot be rushed! The control framework, skills and experience of the incumbent team has taken many years to develop and this set-up cannot be replicated immediately by the new team.

Consequently, the transfer of work should occur methodically to enable the bank to learn lessons from each transfer phase. It also allows the bank to retain more of the onshore controllers after the first phase(s) has been executed, to assist with any negative fallouts.

Benefits

In addition to cost savings, the other significant benefit of offshoring is the standardization of processes. Although a bank can standardize without offshoring, it often provides the catalyst for such change.

Life Post-Offshoring for Onshore Product Controllers

Offshoring can have benefits and drawbacks for the controllers left onshore. The most significant benefit for onshore controllers is the quantity of production work left onshore will be significantly less. This change should now free up time for onshore controllers to perform more analytical work.

The type of analytical work can vary at each bank, but typically the controller will analyse those components of the financials which can have a significant influence on the behaviour of the desk. This can vary quarter by quarter, but some examples include balance sheet usage, brokerage fees, capital, liquidity, return on assets, and so on.

Additionally, the controller will spend more time analysing the health of the control framework in finance to ensure the level of operational risk is not excessive. You could say that this role is becoming more akin to a CFO role.

The reality of a trading environment means additional work will always arise, yet cannot be anticipated. The main drawback for onshore staff post-offshoring is how to meet the demands of their new role with a reduced headcount.

As previously they were the controllers running reports and performing checks, but now they are receiving a finished product from their offshore colleagues and assessing its quality, this change throws up a need for onshore controllers to adapt and grow. This requires a different skill set and it can be quite frustrating at first, especially when the offshore person performing the work may have far less experience than they do. This change is a transitory period and the frustration should ease with time as respect and rapport between the onshore and offshore teams grows.

In addition to this, the question a bank must ask themselves is where will the next generation of onshore product controllers emerge from? From experience, I know that it can be difficult to manage a product control team effectively when you have no experience of the bank's systems and controls, let alone if you have no product control experience.

I expect the offshore and near shore controllers to grow in experience and take on more of the responsibilities that used to reside onshore. In this case, the onshore product control team as we now know it will become extinct and will be replaced by a pure CFO role.