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Honcho Talks Ep. 4: Too Soon to Talk About Compliance? No, It’s Already Too Late

Anish Parikh: I'm Anish. I'm the CEO of Honcho and I'm joined today by Brendan Cohen, principal of Annex Ventures. Thanks for being on the podcast, Brendan.

Brendan Cohen: My pleasure.

AP: I'm interested to get into what you find interesting about Honcho, but before we do that, our audience would love to know a little bit about your background, Brendan. You've got a very interesting story. How did you come to doing what you do?

BC: Sure. I think probably the first thing I should probably say is I love Honcho and I'm an investor in Honcho. Now what led me down the path of becoming an investor and why I picked Honcho to cut a check to. Yeah, I think my history is probably part of the answer. Most recent and probably of most relevance, most people know me as one of the key stakeholders in World-Check, which is a major player in the compliance space.

For those of you not familiar with World-Check, they basically track known risk. It's a database of known high risk individuals and entities from all over the world, and they consolidate that data into a structured database and service that folks like banks can use to screen their customers. It started right around 9/11 when the topic of terrorism became a household topic and the focus was put on the financial industry to do its part and screen for risk. We were fortunate enough to be part of a start-up that set out to help financial institutions and other businesses solve that very problem. That problem was trying to figure out who’s hiding in the customer base.

AP: One thing about that, Brendan. When you guys started out ... So today almost every major financial institution and a lot of other companies buy a service and helps them understand who’s kind of, quote unquote, lurking in their customer base, right? When you guys started out, that was far from omnipresent as it is today. Is that right?

BC: Yeah, there was no such thing. When we started out, folks hung up on us. They laughed at us. They said that's ridiculous. People don't care about who their customers are. They're not going to screen all their customers. Literally, I had folks laugh at me. I still have a list in the back of my mind of some of these people, but yeah, it was a journey.

AP: What you're saying is when you started out, you're either cold calling or calling into places or however you're speaking to folks that have a job of protecting their companies and you're saying, hey, you might have risk lurking in your customer base and we want to help you find that risk, and they effectively thought the proposition was laughable at first.

BC: Yeah, basically. Yeah, for sure. These folks are busy. They're doing everything in their power and spending every penny they can get to try and protect their institutions, from whatever the risk is that they face, and along comes a start-up that says what you're doing isn’t very effective and we have a new novel way of approaching it. In short, we want you to screen every name of every entity you do business with against our database. Just so we're clear, they weren't doing anything of the sort before we knocked on their door.

This was a truly novel concept. Beyond maybe checking their customer names against a list, a government provided list of a couple thousand names, that was the extent of it. Here we come along and say, no, no, we have a global database that extends far beyond any simple government watch list. Again, I don't say this figuratively speaking. I was literally laughed at.

AP: As so many entrepreneurs can relate to. Now, I'm interested in this though, Brendan, because just to put it in the ballpark, what are the financial value of the risks that these folks were facing by not checking all of their customers against a global database? You know, ballpark. What kind of risk? They didn't know they were running this risk, but how much could this cost them not to be doing this back in the day?

BC: That's a good question. Basically when it comes to risk, there's two places it comes from. There's compliance risk, first off. Now, compliance risk either means a lot or it means a little. In other words, it's all about the [inaudible 00:05:09]. If there are no consequences to being non-compliant, then ... And this might sound cynical, one could make the case that the path of least resistance is to do nothing and just pay a fine if you happen to get caught, being the fines aren't that significant, nobody is losing their job. It's basically a cost of doing business.

Frankly, after 9/11, as we probably all remember, within days Congress passed the Patriot Act. What most folks on the outside don't realize is it took the regulatory bodies years to figure out how to implement the Patriot Act, how to turn it into specific regulations, and then how to police those regulations. That process doesn't happen overnight. In the early days, the compliance consequences of not knowing who your customer were fairly low. Over the years, again, as the regulatory bodies upped their game and that not only meant figured out how to regulate the matter but they started fining and their fines became more and more significant. That's when the financial cost came in. That's one half of the equation.

The other half of the equation is reputational damage, and there is no question that the cost of reputational damage has skyrocketed over the last few years and it's on a trajectory to continue to go up even at a higher pace. Now, news travels fast and there is no hiding. It takes less to cause more damage. Back in the day what happened was if there was a scandal, going back to my old industry, if there was an enforcement action or a financial institution was investigated, that would cost that company tenfold whatever fine might come along. It will cost them tenfold in hits to their reputation and directly to their stock value.

AP: Yeah, I mean, what is it that Warren Buffett has famously said? Lose some money for the company and I won't be upset, but lose even a shred of integrity for the company and I'll be merciless in the penalty because for a number of reasons, but it ultimately also costs the company so much more.

BC: Yeah, quite right. I might add to that, Anish, you have to ask yourself who’s our audience here? The answer I gave you was the company. What are the consequences to the company in not caring about these matters? As I said, there's compliance consequences which take the form ultimately in fines and sanctions, and then there's obviously hits to their stock value and reputation, but also look at this from the viewpoint of the individuals. There's a CEO. There's a head of compliance and any other number of layers of management in between. We're talking about someone’s career ending.

I don't have to tell your audience that when a scandal hits, companies will almost always fire somebody. That's the easiest thing to do. That's the scapegoat. If you're a let's say a compliance officer who’s invested his entire career building his reputation and finding the opportunity and pursuing it and doing a great job, by no fault of your own, meaning you're not falling short of any standards set before you by your institution, but if that institution gets caught doing the wrong thing on the wrong day, they're going to have to fire somebody and not to be melodramatic, but you might be done with that industry. Who’s going to hire you to fill that role at their company?

AP: Here's one thing that fascinates me. What do you think it was that held them back? What made it hard for them to recognize the value you were bringing or what made it hard for them to embrace that value, even if they did recognize it? Does that make sense?

BC: I think you'll notice this pattern in various industries and it's probably more applicable to compliance than any other sector. Mainly the pattern I've seen is compliance is a very technical subject and so the C-suite, they address macro level issues that the company faces. Growth is the obvious one. Typically, I don't want to say compliance is the redheaded stepchild, but it's somewhat of a foreign topic to your average CEO or COO or head of legal. Maybe the head of legal has a little bit of understanding of the consequences of being in compliant or not being in compliant, but it's something your typical C-suite just hands off to the compliance officer and says I just don't want to hear about this. That's my objective. Deal with compliance so that we don't have to talk about it in our board meetings.

AP: Like no news is good news from your compliance standpoint.

BC: No news is good news. Exactly. You're doing a great job if we're not talking about compliance. As a result, you had some compliance officers ... I don't want to say they're in over their head, but maybe they didn't have the resources to properly get ahead of new compliance trends or changes in their industry and their boss, let's just say they reported to the C-suite or the CEO. The CEO certainly doesn't spend his or her days and nights reading compliance journals. I'm pretty sure that's the last thing they're going to read. It was a bit of the blind leading the blind.

The boss, being the CEO didn't know the first thing about compliance and reporting to him is a compliance officer who, again, no fault of his or hers, to be on top of emerging compliance risk, that takes a lot of time. It takes money. You've got to be active. You've got to be out there. You've got to be at conferences. You've got to have attorneys that are advising you. Your typical company, depending on what industry we're talking about, they don't commit those kind of resources to their compliance department.

Back in the day, we’d approach a compliance officer and some of them I dare say were a little bit of a dear in the headlights back in those days. Not anymore. Again, I'm not trying to be critical. It's understandable, you know. They're doing a back office function and all of a sudden the country drops the Patriot Act in their lap. My goodness. Where do you begin with? Again, you don't have attorneys in your back pocket to tell you what to do. You're kind of just left with this document.

AP: That's interesting. You had a couple things happen, right? What you said is a little bit redheaded stepchild and a lot probably somewhere in between a back office function if you want to really kind of unsung hero. You have folks that are charged with keeping the company safe but in the background. What happens is you have a tectonic shift in the landscape with the Patriot Act. It's dropped in everybody’s lap and the repercussions of that shift is not obvious. Like you said, you need advisors, you need attorneys. You need a litany of folks that can help, you meaning any of us really to understand what these shifts are and what the repercussions are. Once you see that and then once you see that other folks have kind of done it, it's easier for you to see that this is relevant now. Is that kind of it unfolded for you?

BC: Yeah. Going back in time, the pattern we saw was that the compliance industry, or at least the one we were focused on at the time divided into two camps. There were the deers in the headlight, meaning the underresourced, I'm not sure what to do first group. Then there were the early adopters. They were a smaller group. These folks were they were the thought leaders. Frankly, most of them didn't even know they were the thought leaders. They didn't realize how unique and different they were from the rest of the industry. These folks were the ones who were looking to be first. They wanted to figure this out. They wanted to invent new business processes to help their institutions be compliant. It's night and day.

As a vendor, you're out there ahead of the curve and I imagine this is very much part of the challenge that Honcho faces. You're helping companies address issues that are very bleeding edge and they're not complicated. Everybody could understand the subject. We're not talking about you need a degree to hold a conversation on the matter, but everybody’s aware of the issue. They just don't know how to tackle it, and you are the vendor that's in many ways leading the charge. We're out there looking for those early adopters.

AP: You're right. Sorry. That's a lot of what we're doing here really is bringing some of these issues to the forefront, because it is like you said, Brendan. You'll have a shift. Either it occurs instantly or it occurs gradually, but one way or the other it's a shift and that could be a shift. Something has changed out in the business landscape, technologies have changed in our case. I think we're looking at all of those really. The question is how do you adapt to that change and then not only how do you adapt as a person but how you get your organization to adapt. I've been in conversations with some of the top, say, commodities trading houses in the world where someone has said, listen, this is really extremely progressive, cutting edge, forward thinking. This is exactly where we need to be as a company.

That said, we are not there yet. You're selling horses, or you're selling cars and we're still buying horses. There's some internal education that has to happen, like basically you’ve got to help me out. You’ve got to help me explain to my boss and to my boss’s boss and the CEO why this is how we do things now, and that is a large part of our job. It's not just about making products and calling up and see if people want to buy them but we have to kind of help folks understand where the landscape has shifted and how it has shifted and what to do about that.

BC: You hit the nail on the head.

That is very much the reality of a tech company that is blazing new trails, especially when it relates to compliance risk. You're selling a ... You know ... Your product, you can explain it to virtually anybody. The devil is in the details obviously, but it's a fairly straightforward concept to understand what Honcho does. It's a straightforward concept to understand what it does the first time you hear it. When you pick up that phone and you have that initial conversation, I question whether that compliance officer understands what you're selling.

I can tell you from my experience the thought that's running through their head is my boss isn’t ready to hear this speech from me. That's what they hear when Anish is telling them the Honcho story. He gets it but he’s like, and I walk down the hall right now and relay this to my boss that we need to be monitoring all our employees every communication and what you're going to experience, what you have experienced based on what you've told me, and this is very much right in line with what I experienced with World Check was you're looking for the early adopters.

The early adopter is going to say to you, Anish, Anish, where have you been my whole life? I need this product. I've been dreaming of a product like this. This is what I need to do my job. What I find oddly enough, I don't know if it's chicken or the egg, the early adopters have bosses that empower them. Again, I don't know which came first. If it's the right type of boss hiring the right type of thought leader or if it's a thought leader influencing his boss or gaining his boss’s trust to let him or her just do their job.

Again, chicken and the egg. I'm not sure how it evolved but there is a pattern there where the early adopter, they're ready with you. You don't need to sell them on the risk. It's been keeping them up at night, and changing the way they operate. In other words, using a new product like yours, to them, it's like a kid in a candy store. It's like where have you been my whole life? This is exactly what I need. That type of early adopter, they have no problem marching down the hall and saying, boss, I need you to find me X dollars. I found a solution to our biggest problem.

As far as the rest of the market, they will come around. You kind of touched on this earlier. They don't have the buy-in or support from their boss that maybe the early adopter has and they don't have a law firm ready to read their boss the Riot Act about why this is more important than he or she may want to recognize and how they need to open the checkbook to help them do their job. They're just going to have to wait until there's a groundswell and you reach that tipping point where everybody in the market is starting to implement this, and at which point your challenge as a start-up changes. Now it's just a matter of fulfilling orders and delivering on your value proposition.

AP: That brings us to a point we were at a little bit ago. I mean, and we've already talked about a lot of it, but when you decided to, for lack of a better term, to put it bluntly, you decided to put your money where your mouth is, Brendan. Did you see similarities about ... Was it about reputation and risk? Is that what you saw or what kind of crystallized for you that, hey, this is the same track that's going to get run again just in 2015 instead of 2001.

BC: Right, it was definitely uncanny. Now I wouldn't call it serendipitous. We've been looking long and hard for companies like yours. I'd like to say it was out of a lot of effort that we found Honcho, but very much so. This is very familiar place in time, different date, but I can feel in my bones where you're at and the opportunity that lays in front of you and it's exciting to me. What excites me? As an investor and as a fellow entrepreneur, some entrepreneurs, some successful entrepreneurs keep it straight down the middle. They pick a service and they just do it better. For good or for bad, I find myself looking outside the box more than inside the box.

What attracts me are companies that are looking to solve problems where the legacy technology and business processes that were currently in place have reached their breaking point, where the only way to properly solve the problem is to leverage technology and start over. Leverage technology and start over. That's what attracts me personally like on an emotional level as an entrepreneur and an investor. I like tackling the bigger problems where you see there's a pain point, where you see the legacy systems that let's just say a compliance officer has cobbled together to stay compliant, and you can see where it started and you can see all the Band-Aid fixes that they've made to try and keep it together through time as their business has changed and their requirements have changed.

It gets to a point where that legacy technology, it just reached its natural end and it takes entrepreneurs like you, Anish, who speak a different language, who have a toolbox in front of them, namely technology, that allows them to just really wipe the slate clean and just take a fresh look at the problem at hand. That's what kind of gets me going and that's what I saw in Honcho. You guys were using a new class of technology to take a fresh look at how institutions train and monitor what their employees say online or write. As far as what lays ahead of you, I've been there, brother.

As I told you earlier, I remember those first phone calls. Hang ups and laughs. Laughing, like why would I want to do that or oh my goodness, I get it but gosh I can’t do that. That's a cultural change around here. I'm not looking for cultural change. Well, don't shoot the messenger but there's a new reality that ... There's an elephant in the room that they will only be able to ignore for so long and that's where you guys come in.

AP: You put it well there. That's part of our job is to be the messenger and I guess in addition to bringing the message though, we're here to help. We’ll be talking about this a lot more in other episodes and other thought pieces that we've got coming out, but the world has changed. The way that we communicate at work has changed, the way that folks work, period, has changed. What that means in terms of risk to the enterprise has changed. We're just kind of scratching the surface on what that means.

We focus a lot of our activity recently on the folks in commodities trading because they already are aware. It's such a constrained industry in that sense, in that every single piece of communication is already effectively required to be monitored or else there are consequences. Even there there's some resistance but a lot of folks know that an ounce of prevention is worth a pound of cure and that's what we're aiming to be here is the prevention.

BC: As far as the business model goes, as far as the Honcho business model goes, what was attractive to me was I was reading the same headlines ... Well, let me put it this way. The headlines that Anish was reading that were the impetus to your idea to start Honcho were the same articles I was reading. We were all reading them. There's no question in my mind that things have changed over the last few years. How long ago was it that our communication was primarily run through email. It wasn’t long ago. Maybe five years.

AP: It wasn’t that long, yeah.

BC: Now we're using all kinds of mediums. We're using texts, in work we're using texts. It's not just email and it's not just on personal level. Slack, social media. Again, not just on a personal level but as far as our business process to organize teams, to communicate with peers across institutions. We're using all kinds of mediums and platforms to communicate. It's no longer just about policing email. That's just wishful thinking. The world has changed and frankly this is not something a compliance officer can control. You can’t control or dictate how people within the company communicate. No chance. No chance.

Whatever you think they're using today, wait until tomorrow, something else will come out tomorrow that they'll start to use. Stay on top that of that, you can’t. The second part of that is nothing gets deleted anymore. Nothing. Back in the day you write an email. For all intents and purposes, it's gone. Now, data is so ... Or storage, excuse me, is so ubiquitous. Any communication, be it an email, a text, a post, you should assume it exists in perpetuity. It's going to live on your machine, it's going to live on a server.

There's no telling where in the cloud it's copied. It's going to exist on the recipients end, on their server, it's going to exist on their device. Actually devices, their desktop, their phone, their iPad. The point is, you write something, you should assume no matter what you write, no matter how many times you hit delete, no matter where you post it, you should assume your communication exists in perpetuity.

Now the problem as I see, and this is why I was so attracted to Honcho, this is not a challenge that human beings are designed to handle. We cannot police every word that comes out of our mouth. Nobody can. Sincerely, I don't think human beings were designed to police every word that-

AP: What is it that makes you say that, Brendan?

BC: It's unnatural in one word. We're busy human beings. We're social beings. We're emotional beings. On any given moment on any given day, as we write, we're imperfect communicators. For any of these reasons, and in any given moment on any given day we might type a word that in perfect hindsight we would say, “yeah I should have used this word instead or I shouldn't have said that at all or I wasn’t considering about the risk in writing such a thing.” But again, we're emotional, we have limited energy, we're rushed, we're overworked.

For any number of reasons, we're going to say something we shouldn't. There's no training in the world that will equip us to handle that, to police ourselves. The point is, training. That's not a solution. To me, it's just begging for technology. That's what I loved about what you guys are working on. Your technology is helping ... It's almost like augmented reality. You're helping human beings process data in a way that they can’t do by themselves.

One of my big things and you've heard me say this, Anish, before. Yes, Honcho is selling technology to companies but this is not a corporate challenge. This is as much a corporate challenge as it is a challenge to the individual. Meaning, it's as much the company’s reputation that's on the line as is the individual’s reputation. As we talked about earlier, somebody’s going to get fired. A tool like this is there to help the individual protect his reputation within the company and his career, his or her career, as much as it is there to protect the company’s reputation.

AP: Go ahead.

BC: That's what I love about Honcho. It's a tool that’s there for everybody. It's there for a company as well as the employee.

AP: We love having you on the team here on this journey. As you said, it's a journey wrought with uncertainty in many ways.

BC: No, no, no uncertainty. No uncertainty as far as I'm concerned. This is a real problem.

AP: You're right. It is a real problem. You're right.

BC: The training is not going to solve the problem. It's not going to go away. It's only going to get worse and it's begging for a technology solution. I've been here. What I see and it’d be fun to listen back to this podcast however many years or a decade later. I know where you are in the process. You're looking for the early adopters and you're finding them. They're out there. The folks who don't even ... They will jump in and stop you mid-sentence. Anish, you don't even need to explain what you do. Send me the contract. Where have you been all my life? Everybody else in the industry, they just need a little time to reach the tipping point, in which point everyone will jump onboard.

AP: I'll tell you what, we're going to set a date here for 2027 and I'm going to go buy a case of wine here that's vintage, I don't know, right now. We’ll listen back to this in 10 years. I'll bring it to close by saying this. What's interesting in what you said, I think there are two and probably three major technology shifts in the world that have happened, and they're largely technological.

One was the smart phone, which allowed the proliferation of devices effectively.

Two was the proliferation of software as a service companies that were underpinned by Amazon web services effectively and a number of other tools, but the ability to launch a lot of these different communications platforms which just multiplied like crazy in the last several years.

Alongside that is social media, because all the things you talked about, the different communication channels. It's not just email and the fact that nothing is erased and that it can appear everywhere. Really those three things, two technology and one sort of social, those three things have underpinned where we are. It wasn’t a piece of legislation like the Patriot Act. It was more technological in nature that has created the case for what we do. Brendan, as always…

BC: I would agree with all of that.

AP: Brendan, it's always a real pleasure to have you on here and to visit with you. Thanks for sharing and we’ll be back again soon.

BC: Anish, my pleasure. Thank you for the invite.

 

Topics:   Compliance, Regulatory, podcast, honcho talks, blog

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