What Does Peter Principle Mean?

This principle was first brought up by Dr. Lawrence Peter in his book The Peter Principle, published in 1969. It draws the reader attention to the fact that many people get promotions based on past work performance and they climb the corporate ladder taking positions that may not be suited for their skill set, since the only factor considered sometimes is performance, not suitability.

In such scenarios, promotions stop at the moment the individual starts to under-perform and that means everyone in the corporate ladder is condemned to be placed in jobs they are incompetent at. The logic behind this principle lies in the fact that many employers are basing career-path decisions in performance evaluations rather than competence assessments, to properly allocate personnel. There are two practical solutions that might reduce the Peter’s principle; the first one is to train individuals properly before they take a new job position and second one, to assess the skills of each person and find out if they actually suit the position that they are being promoted to.

Example

Marcus is currently a Plant Manager at White Woods Co. a company that manufactures furniture made of wood. He started working for the company as a Plant Operator, sawing wood logs. After a few months, since Marcus was outperforming his peers, he was promoted to Production Line Supervisor. Marcus didn’t had proper management training but since he substituted other operators when they didn’t show up to work, he was viewed by his bosses as a very effective manager.

Finally, he was promoted to be Plant Manager, still having no knowledge or training about management whatsoever. After a while the plant experienced problems with maintenances and staff complains about Marcus being unresponsive. He is the perfect example of the Peter Principle. Marcus was promoted because of excellent past performance but he was placed in a position that he was not prepared to fulfill, therefore he reached the level of his incompetency.

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What Does Front Office Mean?

What is the definition of front office? In its most broad definition, the FO is responsible for generating a firm’s revenues, and, therefore, it integrates the sales and trading personnel, which may be people who work in the investment banking, private equity, trading floor, etc. depending on the type of the company. Some people argue that the traders should not be considered front as they are not coming in direct contact with the clients.

However, they are generating revenues for the firm. Another special type of front office is the equity research department, which, although is not generating revenues, it has a direct impact on the firm’s revenues with the reports that the analysts produce. So, at the end of the end, it all boils down to the roles that people play in a company and how these roles can positively contribute to the firm’s income.

Let’s look at an example.

Example

Cate works in the sales department of an investment bank. She gets up at 5:30, and during her commute to the bank, she reads Bloomberg and Reuters to news to grasp the vibe of the day. At 7, she is at her desk, preparing for the 8’o clock meeting with the sales and the research department. The meeting involves a wrap-up of what happened in the past hours and the Asian markets.

One of the most important tasks in Cate’s daily schedule is meeting or talking to institutional investors and fund managers, who are investing funds on behalf of pension funds and hedge funds. When a client comes with a certain idea about a call option or a bond, Cate cooperates with the trading department to get a quote for the product and with the research department to make sure that this makes up for a good investment.

When the markets close, Cate goes out with some of her colleagues to celebrate some successful sales. At the end of the day, competition exists in the industry, but it is also all about cooperation.

Summary Definition

Define Front Office: Front office means the department of a company that manages client relations and customer services.

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What Does Back Office Mean?

What is the definition of back office? In general, the backoffice provides the required documentation and technical support to the front office to facilitate the course of work and the business transactions. People in the backoffice perform processing and data management tasks on projects handled by the front office such as keeping accounts, maintaining records, and checking regulatory compliance.

In some companies, the backoffice is also specialized to the offering of accounting and finance services as well as settlements, clearances and IT services. Although the backoffice is not facing the customers, it is the backbone of the company as it handles several functions that are important for the best representation of the organization to the customers by the front office.

Let’s look at an example.

Example

Georgia works as a backoffice manager at a brokerage firm in Chicago. Currently, the company occupies 35 brokers, but it is expected to grow soon. Georgia’s key role is to oversee the firm’s trading activity to ensure it complies with the regulations. She supervises the tasks of the back-office to ensure a good workflow with the front office, including reconciling trades between the front office and the back-office as well as with the brokers.

Furthermore, Georgia holds a BA in accounting. She is an Excel expert; therefore, she generates P&L reports to track the company’s performance. Also, she keeps a calendar of expiration days, and she manages the expiration process. Other tasks include improving the backoffice control processes, developing a back-office procedures manual, ensuring that the procedures are followed by all back-office employees, and implementing new processes when and where required. Georgia loves her job, and she is a team player with the skills to efficiently bring together the backoffice tasks with the front office responsibilities.

Summary Definition

Define Back Office: Backoffice means the admin employees who run the administrative side of the company.

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