A back office in most corporations is where tasks dedicated to running the company itself take place. The term "back office" comes from the building layout of early companies where the front office would contain the sales and other customer-facing staff and the back office would be those manufacturing or developing the products or those involved in administration without being seen by customers. Although the operations of a back office are seldom prominent, they are a major contributor to a business. Broadly speaking, back office includes roles that affect the left side (costs) of business' trading statement.
Back offices may be located somewhere other than company headquarters. Many are in areas and countries with cheaper rent and lower labor costs. Some office parks such as MetroTech Center provide back offices for tenants whose front offices are in more expensive neighborhoods. Back office functions can be outsourced to consultants and contractors, including ones in other countries.
Examples of back-office tasks include IT departments that keep the phones and computers running (operations architecture), accounting, and human resources. These tasks are often supported by back-office systems: secure e-commerce software that processes company information (e.g., databases). A back-office system will keep a record of the company’s sales and purchase transactions, and update the inventory as needed. Invoices, receipts, and reports can also be produced by the back-office system.
In investment firms, the back office includes the administrative functions that support the trading of securities, including record keeping, trade confirmation, trade settlement, and regulatory compliance.
In sales, the back office typically plays a key role internally, providing support to the sales force for administrative duties such as legal, finance, marketing, order management, operations support, as well as customer facing roles typically positioned to include functions that support customer order fulfillment and duties involved with readying customer-support call centers.
Areas of Back office
The essential roles of back office cover the three main areas of reputation, risk, and reward, which are described below:
Reputation- any institution needs to protect its reputation in the competitive market. Due to negligence on the part of back office, an excellent service from the front office can be destroyed. Therefore efficient processing and follow up operation can make all the difference.
Risk- Risk management is of utmost importance in today’s world. If risk cannot be properly managed and the original input is either incomplete or inaccurate, then it leads to incorrect data being included in management or external reports.
Reward- Back office cannot make money, but it can easily dissipate profits earned by the front office. An efficient back office today has the incentive to perform to its utmost by the right to participate in the front office profits. Essentially back office role falls into two phases- physical settlement of all transactions and post settlement functions.
- Physical settlement- This phase carries out a series of duties with respect to all the transactions arising from front office (treasury, capital markets, corporate finance, syndicated loans, etc.) that lead to making an actual payment- in full or as part of a netting arrangement- in the right currency, in the right place and at the right time.
- Post settlement- This involves a lot of responsibilities relating to processing/payment (e.g., Confirmations and account maintenance) to the consequences (e.g., cash management, nostro reconciliation and margin account management) and ancillary matters (e.g., management reports, P&L calculations, tapes & risks) Back office staff is responsible for correct retention period for records- i.e. the legal or recommended period for retention of records varies both by law and by internal rules. If insufficient attention is given to the set up then all the roles that flow from it are at the risk of failure.
Back office operations manager has to do the following:
- Input processing
- Reconciliations Cash Management
- P&L revaluation
Challenges faced by Back Office
Though there is wide scope of back-office operations, indeed, there is an urgent need to consolidate and streamline these vast operations, as most of these are cost oriented. In essence, the back office is a cost center, usually running legacy systems, operating under an annual budget and charging expenses to product and distribution units. Managers are rewarded typically for cost control and occasionally for service effectiveness. Banks have been trying to cut-down costs by building scale through mergers and acquisitions. Combined with narrowing margins and increasing transaction volumes in their main lines of business, banks now face processing costs that are at all-time highs as a percentage of bank revenues. In addition, the complexity and operational redundancy are rampant in the distributed environment of the back office.
- Business Link (2006). Maintaining your web content and technology. http://www.businesslink.gov.uk/bdotg/action/detail?r.s=sl&type=RESOURCES&itemId=1075383691. Retrieved Jun. 25, 2006.
- Haag, S. et al. Management Information Systems for the Information Age (3rd Canadian ed.) Toronto: McGraw-Hill
- MSN Encarta Dictionary (2006). "Back Office (Archived 2009-10-31)." Retrieved Jun. 24, 2006.