FCPA Compliance and Ethics Blog

November 25, 2014

How to Avoid a Mousetrap – Resource Reductions in Your Compliance Function

The MousetrapOn this day, 62 years ago, “The Mousetrap”, a murder-mystery written by Agatha Christie, opened at the Ambassadors Theatre in London. The crowd-pleasing whodunit has become the longest continuously running play in history, with more than 10 million people attending its more than 20,000 performances. The play opened with Sir Richard Attenborough and his wife, Sheila Sim, in the cast. To date, more than 300 actors and actresses have appeared in the roles of the eight characters. David Raven, who played “Major Metcalf” for 4,575 performances, is in the “Guinness Book of World Records” as the world’s most durable actor, while Nancy Seabrooke is noted as the world’s most patient understudy for 6,240 performances, or 15 years, as the substitute for “Mrs. Boyle.” The play is still going strong in London’s West End and at theaters across the world today.

The Mousetrap has survived the vicissitudes of one of the most fickle phenomenons known, the theater going public. Unfortunately, not all businesses can make the same claim to longevity, either in revenue sourcing or spending. For instance the energy industry is now facing a future with the price of oil at something currently around $80 per barrel. This has already led to proposed contraction in the energy services industry with the number 2 company, Halliburton Energy Services, buying the number 3 company, Baker Hughes. Halliburton has already announced they hope to achieve financial benefits through elimination of redundancies in the combined organizations.

Given this new thread of economics going through the energy industry, I wondered what it might all mean for a company’s compliance function? I thought about this question when I read a recent article in the Harvard Business Review (HBR), entitled “How Not to Cut Health Care Costs”, by Robert S. Kaplan and Derek A. Haas. Their article posited that many “cost-cutting initiatives actually lead to higher costs and lower-quality care.” This is because “Administrators typically look to reduce line-item expenses and increase the volume of patients seen.” But the authors opine that this is not the best way to cut costs or even deliver a superior health care service. They advocate, “Administrators, in collaboration with clinicians, should examine all the costs incurred over the care cycle for a medical condition. This will uncover multiple opportunities to benchmark, improve, and standardize processes in way that lower total costs and delver better care.”

Just as health care providers deliver services, so do compliance practitioners. This led me to view their article with the angle of a Chief Compliance Officer (CCO) or compliance practitioner that has been told to cut head count or resources. First, and foremost, is to keep in mind the direction provided in the FCPA Guidance, which is well thought out and considered, and will be viewed with a better eye by the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) if they take a look at your compliance program after it has been cut. And, as with everything else that is Foreign Corrupt Practices Act (FCPA), UK Bribery Act or any other anti-corruption compliance program related, you must remember the most important aspect, that being Document, Document, and Document. Whatever you do, you should document that you have studied it, considered it and then articulated a reason for taking the steps you decided upon. This means you should take the authors advice and not simply reduce “line-item expenses on their P&L statements” but you should “consider the best mix of resources needed to deliver excellent [compliance] outcomes in an efficient manner.” To do so, the authors examine five cost cutting mistakes, which I will adapt for the compliance practitioner.

Mistake #1 – Cutting Back on Support Staff

Just as in the medical services-delivery world, the compliance arena support staff are a key component of a compliance program’s efficiency. Cutting such functions requires CCOs or others to spend more time on administrative matters and less on actually doing compliance. This can be up to ten times more costly for more senior compliance managers to perform such tasks than properly trained, efficient administrative staff. Arbitrary constraints or cuts in personnel spending, uninformed by the need to deliver high quality compliance outcomes can not only lead to a diminution in the compliance product but very dissatisfied internal compliance consumers.

Mistake #2 – Underinvestiging in Space and Equipment

While this is perhaps more self-evident in the health care services industry, I would argue that it applies to technology in the compliance arena. Underinvesting in technology can lead to a lowering of productivity for a company’s most expensive compliance resource; its compliance group. Further, once technology has been used in one area, the marginal cost to utilize it in a second area is often much lower than the initial cost. A case in point is translation services to translate your Code of Conduct, compliance policy and procedures into languages other than English. After the initial cost, the marginal cost for each update you make is considerably lower. Moreover, the authors point to the “folly of attempting to cut costs by holding down spending in isolated categories. More often than not, much higher costs soon show up in another category.” The key is to measure the costs of all resources used by the compliance function so that the appropriate trade-offs can be made. 

Mistake #3 – Focusing Narrowly on Procurement Prices

Often executives simply say that an overhead function, such as compliance, must “aim their reductions” at outside vendors. This may lead to more negotiations over suppliers’ pricings or attempts to negotiate high discounts. However the author’s note that this blanket approach often fails to take into account the precise mix of goods and services that a compliance department may use. Further, this gross approach focuses too narrowly on negotiating the price and fails to examine how the compliance function might actually consume goods and services from outside vendors. The authors note, “As a result, they miss potential large opportunities to lower spending.”

Mistake #4 – Maximizing Throughput

This mistake revolves around simply trying to get professionals to work faster. However, as with physicians, this mistake “is not sensitive to the impact of seemingly arbitrary standards on [compliance] outcomes.” Interesting what may be true is quite the opposite that a compliance function can receive greater overall productivity by spending more time with fewer problems. This is because by spending less time with problems up front, a compliance professional may be able to bring greater risk management techniques to bear, which can work to prevent or even proscribe a compliance issue rather than simply detecting it after something has occurred. The more time the compliance function can spend in counseling, monitoring or performing in-person training, the more benefits will be paid off from preventing compliance issues from becoming FCPA violative events.

Mistake #5 – Failing to Benchmark and Standardize

Benchmarking is recognized as a key tool of the compliance practitioner. However it is rarely thought of a cost-cutting tool or a cost-efficiency mechanism. Many compliance practitioners can only see the no ‘one-size-fits-all’ proscription which blocks them from seeing what other compliance practitioners might be doing to achieve similar results. If other companies can be used to determine a range of compliance techniques and strategies, perhaps they could also be consulting for the standardization of certain processes or procedures, which might lead to greater cost efficiencies. One constant about compliance is that there are no trade secrets in compliance. A constant about compliance professionals is that they will always share information on their program. Use the knowledge of others to help you deliver a compliance solution in a more cost-effective approach.

The compliance profession is maturing. Costs and inefficiencies can be the result of “mismatched capacity, fragmented delivery, suboptimal outcomes and inefficient use of technology.” In their penultimate paragraph the authors state, “The current practice of managing and cutting costs from a P&L statement does nothing to address those problems.” Unlike the theater version of The Mousetrap, compliance will experience ups and downs in funding similar to other corporate overhead functions. However, such pinch points might present opportunities for the compliance professional to review and assess a company’s compliance program and come up with ways to make it run more efficiently. For if it is true that there is no ‘one-size-fits-all’ approach to compliance; it is equally true that you are only limited by your imagination. But document how you got there and why and be prepared to defend how you identified your risk, coupled with your management of them.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014


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