10 JulThe Canons of Cost Allocation. What is that charge for? Be Transparent.
“What gets measured gets managed.” That saying is as well known in banking as it is in any other industry. Less well articulated is the obvious first derivative of that: “If you can’t measure it, you can’t manage it.” Sometimes in banking we do that well; we are pretty good at differentiating between what is STP, Straight Thru, and what is not, at least in terms of charging Nostro and Custodian fees. But we’re not that good and clear everywhere in our industry.
Napoleonic law turns what we would consider the normal course of law on its head: “Guilty until proven innocent.” What, you might well ask, has a rule from a pint-sized Frenchman got to do with banking. Every bank I have ever worked in uses this principal for cost allocation. The charges are passed to you and they sit with you until you can move them away. Sometimes they look very standardised, yet it is still very difficult to know if the costs you are seeing are normal or not.
In days at Credit Suisse, the monthly cost centre reports were often as hard to decipher as the Times crossword puzzle. Not to single out CS; for sure, the grass is only optically greener elsewhere. It does though help to use real life examples. One part that always troubled me was understanding the costs for real estate; the desks we occupied. This was broken down into many lines on the report, with many small charges, often with some description starting with the word “Standard”. I had though no way of knowing if the charges were what was budgeted or a deviation from that. Any real estate service could be charged for; if we had been a private business, we would have seen an invoice, reviewed it, approved it and paid it. In the CS world, the real estate folk had what was in effect the authority to direct debit costs, without any approval by the cost centre owner. Quite often those charges would be for some trivial amount, perhaps in the tens or hundreds of Swiss francs. Just as the canons of taxation suggest that it must be economic to collect a tax, so it follows that fighting a charge for a couple of hundred bucks is not time well spent. From the perspective of the person dolling out these small costs, one might call that a “cunning plan”; greta chance of getting away with it, without being called to account.
Those who know me well know that I often rail against all forms of “direct debits”; I just don’t like them and this is another piece of evidence in the case for the defense. Standard costs are a good thing; whilst I might balk at the total cost of having my car serviced, I am always impressed by the way the bill shows exactly the parts and labour involved. Costs that are allocated in without showing “budgeted” vs. “additional or extraordinary” are unhelpful to the cost centre manager and do not offer her a chance to manage them.
Using the idea of standard costs is one of the ingredients in something called Activity Based Costing. You set a rate and charge for it. No different form buying a plane ticket. But, and there will be those quick off the mark with that but, what happens if you are over, or even under budget, if you are not a cost centre. The answer is a simple one; you have to have the right to adjust the cost allocation, in both directions of course. Watch the fine print; you might think your plane ticket cost is fixed. In the summer of 2012, the Spanish government are using that fine print. Changing the landing fees and passing them on. Now no one person is going to fight the Spanish government, although you can go and buy cheap assets there, but at least the charge is transparent. You can see the variance.
Back to banking. Operational costs are always a topic of debate. One shared cost that all users need to pay for is for payments and Nostro services. Nostro providers typically charge differentiated rates for STP and exception payments. Add to that there are often service charges to go with that, as well as debit and credit interest. The STP vs. Exception distinction is a good one, however it is beyond the capability of every bank I have ever worked at to carry that cost distinction all the way back to the actual user. But, that distinction is one that should drive discipline in the Network Management (NetMan) team to understand the exceptions and try to fix their root cause. If there is a really widespread case where one desk or unit either cannot or will not adjust to the required standard, then that area should bear the extra costs. Bank fees are of course, direct debited to the account. Another evil practice.
In the second of these Blog posts on the Canons of Allocation, I mentioned a method I have seen around capturing and allocating these costs that deserves special mention in the “don’t do it this way” guidance; in one bank I am familiar with, every time there is a charge to the bank account in the real world, that cost, however large or small, is immediately sprayed out the users of the payment service. Literally “sprayed” to every possible trading book that books trades in that currency. Surprise, lots of those small charges remarkably similar to those annoying real estate charges I mention above. The only thing that is transparent about those charges is the amount.
Lessons Learned: A cynic might suggest that the notes above offer an art lesson in how to spray costs around in a way that reduces the chances of people asking questions. Even if the cost accounting processes are such that its hard to make you accountable, you are still ultimately responsible for the costs. In the long run, you will do better with a clear and transparent process for collecting those costs up and passing them on to your end users in a way that they can easily understand, check versus what they expect and work with you to manage. Standard costs, with an agreed way to adjust for any under or over recovery is are a great way to do that.