Compliance leaders are balancing constrained budgets and tech investments

Compliance leaders are in a tricky spot right now, and it’s a bit of a one-two punch.

Dilemma #1: Many compliance departments are finding their budgets squeezed or cut amid a tricky global economy. And that hurts even more when it’s paired with Dilemma #2: We’re also in an era of increased regulatory scrutiny and tighter audit standards, making corporate compliance all the more important.

The solution for many compliance leaders? Tech investment. But that also requires convincing finance chiefs that these investments are worthwhile, according to Eric Young, senior managing director for global compliance monitoring firm Guidepost Solutions. That can be an uphill battle when many C-suites and boards of directors view compliance “as overhead and a cost center as opposed to an important component to invest in,” he told CFO Brew.

The trick, according to compliance experts, rests in knowing which tech investments are working for other compliance teams, and crafting a thoughtful argument for why they’re necessary.

Yesterday’s tech: Chris Audet, VP of chief compliance officer research at Gartner, said just five or so years ago, the majority of compliance tech budgets were allocated toward employee-facing ventures, like compliance training and internal communications about staying on top of changing policies.

“If they had the budget, that’s where it went, on the tech side, to make these things roll out all the smoother,” Audet told CFO Brew. The current moment has brought about a shift in budgets, with more orgs thinking about “compliance risk tech,” he continued.

That takes a few common forms. One prevalent focus is risk or third-party risk management tech, to help design “better systems of record, and better ways of managing enterprise risk within a consolidated platform,” Audet explained. The other big pillar of focus is on regulatory intelligence platforms, which tell compliance leaders “about new and sometimes divergent regulations that are coming down the pike,” he added.

“[It’s] really like a composable graphic,” Audet said of the different methods, noting that they’re interconnected to the point of sometimes operating off the same platform. “It’s those spaces where, if you’re not spending on tech, you probably already had to invest in additional headcount to staff up and better manage the risks associated with either risk management, third-party risk management or learning about new and upcoming regulations.”

Look at it like this: Five years ago, a compliance leader might have hired an additional staff member to focus on regulatory intelligence if they didn’t trust the tech, Audet said. Now, you simply have more options: A compliance leader might “hire an additional person or I may look to my existing FTE and use part of that individual’s time for regulatory tracking and supplement their time, by bringing in an additional piece of software to assist them.”

That’s a crucial note for compliance leaders to keep in mind as they demonstrate the value of these kinds of investments, Young says. Yes, you might be able to save money by reducing headcount, but it’s just as important to look for ways to supplement tech with people power.

Young invites the imaginative exercise of a driverless Ferrari, an invention which (for now, and maybe forever) is purely fictional. For that to take off, you’d need good steering wheels, solid GPS, and stellar brakes—in short, the compliance components.

“Without that, you’d just have really fast crashes,” he said. “The brakes and the steering wheel are just as important as the gas pedal, the speedometer. That’s the point CFOs don’t always understand [about] compliance. That [it] takes technology, but it still takes humans to also know when to grab the steering wheel.”

Changing budgets: Even with an increased focus on compliance tech, there’s still plenty of traditional investments happening, like the aforementioned compliance training. “You’ve got your usual suspects of where the money’s going.” Audet noted. “The shift isn’t going to happen overnight.”

Part of that is because of a disheartening reality for many compliance teams: Budgets have always been modest. “In times of recession, but even in good times…compliance oftentimes becomes, as I like to say, the ‘stepchild priority’ from a budget point of view,” Young said.

“Compliance budgets have always been fairly inelastic. They’ve never had a whole lot of money to begin with, so it’s not like they can pull back all that much,” Audet added. “[But] if you think about that fixed pot that they are working from, they’re thinking about the smartest ways to allocate it, and that’s always been true.”

What CFOs should know: CFOs and other finance leaders play a key role here, and need to recognize the changing budget argument for increased compliance investment.

“CFO[s] should recognize that, in the past, a lot of what legal and compliance teams were asking budget for was intra-functional, to help them maximize efficiency within the department,” Audet said. Now, many compliance leaders are making a new argument, he said, building “the case of the enterprise, that this is going to benefit the company as a whole.”

When that becomes the argument, “budgetary constraints seem to recede a little bit,” he explained. Once compliance tech is framed as something that can prevent reputational and financial harm, Audet noted, “there’s a stronger business case made for investing in that thing.”

Young adds that savvy compliance officers underscore “that without this technology, the cost of non-compliance can be exponentially higher because of mediation costs, reputational costs, and damage,” he said. “The technology now is compulsory; it’s no longer nice to have.”