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What is Your Cost of Compliance

  • Written by Fred N. Blitt

mug blittI have written extensively about compliance related issues and consent decrees over the past few months and wanted to take a different approach with the topic of compliance. For purposes of this article, we will define “cost” as employee expenses, benefits of efficiency, costs of key management, “pushing back” and opportunity cost of noncompliance.

I have been asked repeatedly by clients and colleagues about the costs to me and my law firm relating to compliance in today’s hyper-regulatory environment. So let’s start with the easy stuff, the direct employee cost. For example, if you hire a new chief compliance officer for $100,000 annually, that cost is easy to see. But what about those costs that are not so visible?

The costs related to your key management team are also significant. The days of having lower level staff work on testing, training and compliance are gone. Compliance management systems are administered and supervised by a chief compliance officer who works with the compliance committee or board of directors. Frequently, compliance issues are those that hit the “top of the funnel” from a staffing standpoint. As a managing partner of a law firm, I can tell you that many of the significant compliance issues come to me, my partners and key managers. Consequently, time spent on these issues takes away from time spent on issues that actually increase revenue! Proper management of your compliance team will help keep these costs in check.

I believe one of the less visible but major costs of compliance is that of “pushing back.” We all want to receive accounts from our clients in the proper format with the correct information. Recent consent decrees have caused us to change the manner in which we accept new placements. Frankly, some clients are better than others at providing everything needed at placement in a usable format. A significant amount of time is spent working with our clients to create better efficiencies. While clients are not always happy with this “push back,” they know it needs to be done. Client delays add another layer to this expense. If a client places files that you need to put on hold for insufficient account level documentation, the time spent keeping them organized and compliant could become significant.

There are so many other costs of compliance today that are not so obvious. An example is the cost of hiring the wrong people. Another example is the cost of hiring the right people and having them in the wrong role. Both scenarios increase risk, which in turn results in increased compliance costs. The costs can be very tangible like the costs for defense, or much more intangible such as the interruption to production flow. Yes, this is an issue for any company; however, hiring for the compliance area requires a person who is detail oriented and requires much more training than hiring for a functional role.

The cost of an internal audit person or team is important. While this may be expensive, having the ability to identify areas of opportunity in policies, procedures and training is invaluable. It provides an avenue to test whether client specific and firm policies and procedures are being followed. Testing has also taken on new meaning today. Our staff has taken tests for many years but today’s testing looks nothing like the testing we used 5 years ago. The testing is so rigorous now that we have had new hires leave the firm prior to finishing testing as they knew this job wasn’t for them!

Finally, what about the opportunity cost of noncompliance? Compliance costs are impacting all collection law firms and each of us needs to make the business decision that works best for themselves. There really isn’t a middle ground. Either make the effort to be compliant or risk suspension or termination of a client relationship. Having a well-thought-out compliance management system is a key component for most client relationships today.

This article is not to necessarily imply doom and gloom for collection law firms. It is more about a reality check for people to account for their expenses as they relate to compliance. There are many benefits from meeting today’s compliance requirements in the form of opportunities for new business and overall firm efficiencies. That being said, we all need to be aware of the risk and benefits of these items and work with our staff and clients in a positive way. Compliance can be cumbersome. It is timeconsuming and costly but proper management and communication can make your processes more efficient, identify potential problems and lead to more success in the long term.

Fred N. Blitt, Esq., is a partner with Blitt and Gaines, PC in Illinois and Couch, Conville and Blitt in Louisiana. He is past president of NARCA.