Balancing growth and control
Businesses are basically comprised of revenue-generating and non-revenue-generating functions. This simplification highlights product, marketing, and sales functions as the engines of growth, with legal, compliance and risk as (vital) cost-centres to support that growth hand in hand with managing risk for the business. In balance, these stakeholders collaborate and cooperate to manage business expansion and customer growth with little fuss. But in a high growth setting, there is a risk that the engines of growth outpace the control functions, such that growth outstrips the level and capability of current controls. Out of kilter, the front office can rush to expand products, services, and even markets leaving the back-office struggling to catch-up and in some cases never catching-up.
For example, front-office growth can lead to an increase in customers to be onboarded and screened, or increases in contracts to be reviewed, agreed, and then managed, or expansion into new markets or territories where the back-office staff are less familiar with the laws and regulations. Most will agree, greater risk is inherent.
The key to ensuring investments in the front-office can be supported by appropriate investments in the back-office is to understand the elasticity in the current risk and control mechanisms (including the level and skills of staff in those functions), capacity to accommodate growth and any development of control activities needed to support expansion.
In our experience compliance, legal and risk departments should:
- Ensure that all legal and regulatory obligations are fully mapped, aligned to a clear view of key risks and controls, and maintained with a visibility to how key risks and compliance are managed.
- Establish a single view of critical business processes (especially those that if they fail are likely to create the largest impact on services and customers), including acceptable performance tolerances for key elements of those processes and a framework for monitoring performance and identifying failures or near-misses.
- Maintain a complete population of mapped controls and associated indicators, including data on volumes of controls and records of incidents, to stress test and forecast the impact of growth.
- Create a robust approach to resource planning, recruitment, and allocation so that headcount can be optimised to address emerging challenges, including the back-office ability to carry out their own analysis and activity to ramp-up staffing.
Considerations for Global vs Local
In situations of rapid growth, consideration should be given to global versus local organisational structure and operations – what is the right approach to centralisation versus local jurisdiction autonomy?
A strategy based on centralisation of standards and controls has advantages for a global organisation but can create challenges in local jurisdictions, especially where there is a need to demonstrate local mind and management. Some regulators demand that local regulated entities have robust governance and control at a local level.
Companies expanding into new territories or globally enjoy economic leverage to invest in shared infrastructure, standards, and methods. Economies of scale in shared services can also be significant. On the other hand, it can be increasingly difficult to be locally flexible and adaptable when there is a singular, global approach. Processes for developing strategy and allocating resources can struggle to cope with the increasing diversity of markets, customers, and channels. Global risk management processes may not always prove to be the best way to deal with risk in markets where global organisations must move quickly to lock in early opportunities.
Global organisations benefit from geographically diverse operations that provide a natural hedge against the volatility of local growth, country risk, and currency risk. However, pursuing emerging-market opportunities can take organisations to markets with unfamiliar risks that may be difficult to evaluate at arm’s length.
Through recent benchmarking surveys, Morae confirmed there is no “one-size-fits-all” approach to organisational structure for Legal, Compliance, and Risk departments, especially for those handling the realities of rapid growth in emerging markets.
That is partly because the opportunities and challenges facing companies vary, depending on their business models. But striking a balance between “global and local” needs is critical for companies experiencing rapid growth.
Examples of approaches that have enabled other organisations to find and maintain a balance include:
- Clarifying and documenting the split between global and local accountabilities and confirming expectations.
- Considering the regulatory expectations for specific local entities to have local operations, controls, and governance.
- Staffing local entities with “mini” group functions to give focused local support.
- Establishing regional hubs, to provide a global perspective but with a local focus.
- Ensuring that any need for global oversight is proportionate and fit-for-purpose, empowering local entities to work within guiderails rather than constant escalation for decisions or approvals.
Companies experiencing rapid growth in new or volatile regulatory environments are forced to respond quickly, and responses can often conflict with rigid planning protocols. It can prove challenging to deliver agreed plans and maintain business as usual where external influences are not fixed. So, the ability to spot, pivot and respond quickly to change is vital to navigate these choppy waters.