In order to survive this marathon recession, experts say fund companies will need lean cost management operations with the stamina to endure prolonged, stagnant growth.
"When cost management is done in an effective manner, the results can be felt on the bottom line," said Michael Fay, a principal at Deloitte & Touche. Poor cost management, on the other hand, can result in increased risk, he said.
The challenge is to find the right balance of cost reduction and risk, weighing current profitability with future growth. Cuts need to be made when revenue and assets under management are down and expenses are up, but short-sighted cuts could jeopardize long-term growth opportunities.
For example, reducing headcount makes good business sense up to a point, but if you cut too many employees, eventually there won't be enough people left to do the work and quality will plummet.
"The question managers need to ask is: Am I creating risk by reducing cost?" said Adam Broun, a principal at Deloitte Consulting. "How do you know when you've gone too far and taken too much out?"
Laying off workers is hard on most managers and on employee morale, but from a business standpoint, it makes sense to cut unnecessary, surplus workers early, before the cost of keeping them decimates a firm's budget. It's much easier to bring back employees once business rebounds, Broun said.
In the case of a slow rebound, when business gradually begins to pick up, it may not make sense to begin hiring right away. Many firms are outsourcing small segments of their business to subadvisors until they see stronger signs of recovery. This process is known as transformational cost management, Broun said.
Cost management is about balancing short-term and long-term planning, Fay said. Many vendors offer solutions that will pay off in three to five years, but the recession could be far behind us by that time and many firms are looking for cost savings now. Successful vendors will sell both the short- and long-term benefits of their products.
"There are potentially a great number of great cost management initiatives, but firms should keep in mind that all of these activities bring a cost as well," he said.
Cost analysis efforts should begin by scanning for places where things may potentially be over-controlled, he said.
Sustainable cost management planning requires having a portfolio of initiatives that begin with "quick wins" and gradually mature to long-term strategic changes, said Atul Subbiah, a senior manager at Deloitte Consulting.
Sustaining a robust cost management discipline across a large company will likely require a shift in thinking, and firms will need to visualize the future of their company, he said.
Quick wins, or initiatives that can be implemented in three to six months, include incremental cost cutting measures, improving employee performance and retention and finding ways to reward employees for increased productivity, he said.
In the six- to 12-month period, firms can look at transformational, multi-functional savings initiatives that improve a firm's overall cost structure over time, Subbiah said. This includes reducing channels and rationalizing clients and products to focus on high-value areas, he said.
In the one- to two-year planning period, firms should look at restructuring their enterprise-wide business model and consider carve-outs, roll-ups or spin-offs, he said.
"Maintaining a balance between cost management initiatives and risk management is one of the keys to long-term sustainability," said Miguel Miranda, a senior manager at Deloitte & Touche. "Having limited resources due to headcount reductions may result in certain key controls and practices not being performed or being performed in an incomplete or untimely manner, thus increasing the operational and compliance risk."
In a December letter from the Securities and Exchange Commission's Office of Compliance Inspections and Examinations, the office reminded firms of the importance of maintaining proper compliance controls.
"Now, more than ever, companies need to take a long-term view on compliance and realize that their fiduciary responsibility requires a constant commitment to investors," the OCIE said. "That means sustaining their support for compliance during this market turmoil, and beyond it as well."
When organizations are forced to undergo substantial headcount cuts, Miranda said there are several things firms should do to ensure that the risk management program remains effective. These include ensuring that all key controls, roles and responsibilities are documented and assigned to qualified personnel, changes are communicated to senior management, and quality control measures are implemented to make sure certain activities are being performed.
When organizations undertake large-scale cost management initiatives, several practices could help ensure the design and operating effectiveness of the control environment include performing risk identification and assessment procedures, implementing control rationalization strategies and identifying control improvements, Miranda said.
Firms seeking to build a risk intelligent enterprise should establish a common definition of risk that is used consistently throughout the organization; establish a common framework; clearly delineate key risk roles, responsibilities and authorities; make sure governing bodies like boards and committees have appropriate transparency and visibility; make sure executive management is charged with and has primary responsibility for designing, implementing and maintaining the risk program; and establish business units and audit functions that monitor and report on the effectiveness of the risk program, he said.
When outsourcing certain management and administrative functions to vendors and service providers, "the risk management program should incorporate comprehensive vendor oversight controls and procedures to reasonably ensure mitigation of the various operational and compliance risks posed to the firm," Miranda said.
"The governance structure that has transparency leads to better communication," he said. "Information flowing up and down through the firm is essential. Becoming a risk-intelligent enterprise will help companies."
"Doing nothing is not an option anymore," Subbiah said. "The possibility of failure is real, but you can learn from those who have gone before. Firms should keep their long-term risk profile in mind when considering risk compensation."
Most importantly, he said firms should avoid or minimize the short-term mindset, which is what got us into this mess in the first place.
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