Right move to cut consultant engagements

Wells Fargo's CEO Charlie Scharf makes the right move to rein in consultant fees that have run amok


There has actually been a lot of developments in the geopolitical front with regards to a potential military conflict between US and China. However, this will have to wait as we address this article courtesy of the Financial Times.

FT reports that Wells Fargo CEO, Charlie Scharf has decided to cut the amount of fees the bank pays for external consultancy. To give you a size of the madness in Wells, it amounted to $1 – $1.5 billion per year.

All we can say is : ‘Finally’.

The Rembau Times has never been a fan of consultants as hiring consultants to do a job basically means one of several things. Number one, the organisation is so flush with cash and its current resources earn a rate above the fee the consultants charge. In that case, go ahead.

In all other scenarios, engaging a consultant means is basically the organisation is wasting time, capital and resources. Especially in a bank, the business process and model is relatively well understood – we are not talking about building self driving cars but really about incremental process improvements that should take place at a a regular basis to achieve one of two things, increased revenues and/or reduced costs.

The article goes to say that a consultant has been contracted to overhaul the Risk Management and Compliance function, and a consultancy outfit was on the retainer for about $1m per month. This means the bank could have hired 30 folk at a salary of $30,000 per month and still achieve cost savings. Madness!

Lets state what Risk Management actually is. It is about costing the bank $1 a year to save the bank the $100 cost that comes once every 5 years. That is what is about. In order to achieve this, the Risk Management outfit needs to act simultaneously as a policeman and a priest. The policeman role is to be unyielding to transactions or business practices that present a higher risk than the bank’s risk tolerance. So what it means is that if a bank engages in High Risk lending as part of its business model, the tolerance is set as Extremely High Risk Lending Which Has Multiple Red Flags Which We Should Avoid. This necessarily means that Risk Management must have the capability to profile a risk, rank it in terms of some risk reward scale and present the results in a clear manner so that even a person who is half drunk will understand that the particular transaction presents a high risk.

Lets state what Risk Management actually is. It is about costing the bank $1 a year to save the bank the $100 cost that comes once every 5 years. Effective risk managers accomplish this by playing the role of policeman and priest within an organisation.

The priest role is equally important. Banks are like little fiefdoms ruled by various feudal lords. You cannot bash people today and expect them to be agreeable with you tomorrow. Risk Management can only accomplish its function only if the following is not clear to everyone who in the bank who is not called Risk Management.

  1. Fair dealing: Once Risk Management decides to play corporate politics and are unwilling to tactfully confront “powerful” fiefdoms, the job is considered a “gone case.” Bankers spend most of their time within their immediate little world so if it is clear that the function is not just and bends easily, do not expect others to show any respect to the function.

2.  Build relationships all the time. What most risk managers do not understand is that their role is considered to be mysterious to other folk in the bank. The IT department manages the corporate IT infrastructure. Relationship Managers go out and get deals. Backoffice process transactions – so what does Risk Management actually do?

The way how this is solved is by building relationships and guiding people. Risk Managers must be able to take a step back and assess the risk profile of processes or transactions and then influence the actual decision makers on the relative merits or weaknesses of each proposed path. This is done subtly and with tact.

Basically if 1 and 2 is actually performed, over time the organisation will actually understand the concept of risk. Anything from not placing your coffee cup too close to the edge of the table to not on boarding a 34 year old young chiko with several hundred million of assets with questionable income sources.

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