A symbiotic relationship

All organisations have a Front Office and a Back Office. Many financial institutions also have, what is nomenclatured as, ‘Middle Office’. The ‘front office’ by the essence of its name, is the part of the organisation that interfaces with the outside world ; while the ‘back office’ is that part which handles the consequences of whatever is done by the front office.

In a manufacturing entity the sale and marketing of its products is the responsibility of the front office ; some organisations rightfully consider, ‘after sales services’ office, as an integral part of the front office. In a non manufacturing environment, the sale and provision of services is the responsibility of the front office.

The front office is a business generating unit, invariably, hence is seen as a profit centre; by virtue of which it acquires significance in the scheme of senior management strategy. Those who promote and bring new business to the organisation therefore are considered to be important for the entity. The growth and sustainability of any organisation is dependent upon the new generation of business. The front office generates revenue by stepping out into the market to gather and book new clientele for either the products or services. The higher the volume of business, the greater is the revenue and new streams of income.

In most organisations it is not unexpected to find management bias towards the front office. Generally speaking, the front office Is more prim and proper. It will have on display more facilities for the associated staff. The air conditioning and lighting would be better; so would the quality of furniture. The back office is literally placed in the backyard of the entity, with almost everything less in terms of facilities in comparison to the front office. Those who produce results through enhanced business are also the most endearing to the senior management. I recall in my younger days in London, being part of the Global Marketing Division, we used to get away with a lot of indiscretions committed, not of violative nature, but in terms of having better work stations, latest gadgetry , posh offices , etc. Front office is charged with the responsibility of playing the ambassadorial role for the organisation. Given this stature, the front office staff’s compensation benefits are normally more pronounced in the scheme of budgetary allocation by the Human Resources Department and the Finance Division.

To be posted in the front office of the organisation is not only prestigious, it also entails assurance of better salary increases and far more opportunities for accelerated career progression. No wonder, all management trainees and new entrants, first preference is to be posted in some front office roles, typically of sales and marketing; strategic product and and system development; and in the context of financial institutions, it is invariably the Treasury or the Corporate Division.

In contrast, the ‘back office’ is the processing unit of transactions, generated by the front office. Since the back office does not interact ‘directly’ with the marketplace, it is not generally considered as a resource generation unit ; instead it is seen as a ‘cost centre’. The processing cost of transactions are allocated to the back office so it gets classified as a cost centre. Any attempt to allocate the back office cost to front office constituents, based on utilisation of back end services is met with aversion, and ultimately more bloodbath, between Front and Back Office “

Cost centres, in spite of their unique importance to the efforts of the front office, usually remain a sore point with the senior management. The costs are seen independently and not in conjunction with the contribution they make in creating business efficiencies, like speed of settlements of transactions, error free settlements, etc. Processing costs eat into revenue and profitability, and hence are held as the avoidable burden in the allocation of attention and resources.

Is the back office, therefore, so unimportant — to the senior management or even the CEO/BOD ? Unfortunately, the back office suffers due to lack of comprehensive knowledge of the senior management about the effective role it plays in maintaining the smooth flow of business action. It is the back office staffs’ skill and ability to process transactions with speed and accuracy, an activity that gives impetus to the marketing efforts of the front office staff. If the IT platform (part of the back office) collapses, the front office will be rendered non- functional. That is just one example but there are several; dimensions of the back office that makes it equally as important a function as the front office. The significance of transaction monitoring at the Risk Management Division, the Compliance Division, the Systems And Operations Division and ultimately by the Risk Revenue Unit and Audit, cannot be understated by any stretch of management imagination.

If the front office foot soldiers keep marching forward, without knowing if they are leaving behind transactions in the safe hands of the back office, the captured transactions from the market or whether they are dissipating as loss making effort, can be a disastrous strategy. Even the human resource and finance division (whom I personally consider as front office units) distinguish the peril of the back office staff. The back office staff requirements reign secondary on their list of priorities, unless they are to do hiring due to regulatory compulsions and requirements.

The Middle Office does not typically process the transaction but evaluates them in respect of compliance to regulatory practices and internal controls and policies. The acute check undertaken by Back Office to aspects relating to conflict of interest issues, including related party transactions, is to monitor and be preemptive of this critical risk of diminution in reputation of the entity, inclusive, of all its relationships.

If the disparity between the staff of the front office and the back office is yawning, it will lead to each working against the other. The success of one is dependent on the other; if the business is not generated, the back office will be left only to twiddle their thumbs and ultimately will be shown the door. Similarly if the back office with malafide intentions or gross negligence blocks transactions, the front office efforts will be on fire. In such circumstances, the CEO must step in to create and strike the right balance, between the two. Firstly if attention is predominantly given to business generation then simultaneously, the positive impact of proper back office must be ensured. The hiring quality of the back office staff has to be better than the front office, because it is they who prevent fraud and fraudulent transactions. A watchful eye of the back office boys is the greatest assurance to the CEO and the board that the organisational machinery is well oiled and working in harmony.

Organisations that pay no attention to back office end up heavily , with either in regulatory fines or in the case of worst scenario through a closure of business; the recent US bank collapses make for a good case in point. Baring Securities and other such organisations are all a consequence of weak, faulty architecture of the IT platform middle and less than satisfactory back offices.

All supervisors must know that the back office is the graveyard of all successful front office managers, in case of management failure to appreciate the singularly important role of the back office.

The writer is a senior banker and a freelance columnist