CoreStates Painstakingly Puts Its Ideas to Work

A row of 18 thick binders rests on a long credenza in the president's office at CoreStates Financial Corp.

The neatly arranged volumes contain what is essentially a blueprint for a massive restructuring project begun last August. Over seven months, the Philadelphia-based bank collected and evaluated more than 6,000 ideas to cut costs and improve operations.

The $28.5 billion-asset company approved 3,500 of those ideas, which are expected to produce significant reductions in expenses ($180 million), employees (2,800), and branches (10%) when they are implemented over the next 12 to 18 months.

The process, was "difficult" and "tough" - but also necessary, said Charles L. Coltman 3d, president and chief operating officer.

"This is an industry that's headed for significant, ongoing consolidation," he said. "We're facing new competitors, different competitors, new demands from customers. And we need to be prepared for those changes."

But while the tough decisions were made by the end of March, CoreStates now faces the perhaps more formidable job of putting thousands of ideas into practice with a minimum of damage to the corporate culture.

"CoreStates was, and is, a fascinating organization that is committed to a fundamental cultural change," said Paul Allen, chairman of Aston Limited Partners, the New York consulting firm that assisted in the reengineering. The bank, he said, is well along in "the process of moving from a centralized, paternalistic, blame-driven culture towards one where they are aiming to empower employees close to the customers to make decisions."

Major bank restructurings like CoreStates' have been getting headlines for years. But the Philadelphia bank is among the growing number of institutions that are undertaking these programs from a position of financial health.

The bank's first-quarter return on average assets was 1.63%, excluding one-time charges. Return on equity during the period was 19.64%. The reported ROA, including the $110 million pretax charge, was 0.79% compared with -0.44% a year earlier, a figure that included a merger-related charge.

Analysts have praised reengineering efforts that seek to improve efficiency, but some voice skepticism that banks are focusing on cutting costs at the expense of building revenue over the long term. Critics say these reengineerings have the more immediate goals of calming investors and avoiding takeover bids.

CoreStates's program, known as Best, however, has received higher marks than some other bankwide restructurings.

Nancy A. Bush, an analyst with Brown Brothers Harriman in New York, said: "It's the best engineered program of this kind that we've seen" because it is not geared only toward cutting costs.

"It's not a slash and burn program, which some of the other programs have ended up being," said PaineWebber's Thomas McCandless. "I think they went about it the right way and came up with an intelligent and conservative plan."

But the admiration is qualified. Ms. Bush noted that the bank's timetable for reaching the goals is considerably longer than other programs. "Eighteen months is a lifetime in the banking industry these days," she said.

And Mr. McCandless said, "We just have to see how the execution flies."

Mr. Coltman insists, though, "We will accomplish the numbers that we have put out to the analysts."

Indeed, the executives were unusually frank in sharing details with analysts about CoreStates' plan, and a desire not to disappoint Wall Street may help explain why the bank established a longer-than usual implementation phase.

Mr. Coltman also conceded that the major technology investments and changes needed to meet its goal lengthen the timetable.

"There is back-end-loading of the results in our project because it will take some time for the systems group to make their changes internally," he said. "That's not something where you can snap your fingers and get done."

Of the 3,500 ideas CoreStates is pursuing, some 460 involve technology. Together, they are expected to result in $44 million in savings annually, about 25% of the total.

"There are some areas that we really need to make some major investments in," said Mr. Coltman. "There is a lot of moving from a traditional bank mainframe structure in our systems delivery into client/server technology."

CoreStates has budgeted $30 million for new technology, including an imaging system for the proof-of-deposit function in its check processing operations.

Such investments in technology are necessary to remain competitive, he said, particularly for Transys, the bank's third-party processing subsidiary.

Mr. Coltman also said the bank will spend to develop alternative delivery channels for the retail bank to compete against the likes of Pennsylvania rival Meridian Bancorp, which has gained a reputation as a leader in that arena.

To achieve these goals, CoreStates's reengineering has followed a by- now-familiar path. The bank brought in consultants -Aston. A top level executive - Mr. Coltman - acted as the "sponsor." Other company managers - some 26 - worked full time on the project. Some 71 group leaders, along with other bank employees, were charged with contributing ideas that simplify processes and speed up the flow of work. The five most senior executives reviewed each idea and set up a plan to implement the suggestions that were approved.

"We went into this saying, We need to look at every single thing we do, see how we do it, and see whether it adds value to our customers," said Mr. Coltman. "And if it doesn't, stop doing it."

The savings are expected to come from steps both small and large.

Some, said Mr. Coltman, were easy. Branches, for example, continue to take pictures of checks before they are sent off to be processed. CoreStates' policy was to change the film at the end of each week.

Now the film is changed as needed. "That idea alone is going to save $12,000 a year" said Mr. Coltman.

Quarterly reports mailed to shareholders had been very detailed. Now, the bank sends a shorter version, which reduced the paper, production, and postage costs by 83%.

The cumulative savings of such ideas, said Mr. Coltman, runs into the millions of dollars.

One major area of savings was in slashing the number of reports generated for internal use.

"We had a very complicated, detailed, profit center system that allocated expenses and revenues down to groups as small as five or six people," said Mr. Coltman.

CoreStates plans to cut the number of those "profit centers" from 1,900 to 125. Among the benefits: savings of $500,000 a year in paper costs. (The bank is also investing in new management information systems to generate more meaningful data.)

The biggest saving, presumably, will come from reducing the work force by 19%, or 2,800 employees. Fewer employees, along with fewer branch offices, also means CoreStates can substantially cut costs - by some $18 million, or 10% of the total - through the consolidation of office space.

Taken together, these measures can mean big savings. But managers concede they do not come without risks.

"The impact on revenue, the impact on the internal culture, the impact on the customer were things we worried about going in," said Mr. Coltman. "And they are things we continue to worry about."

Whenever a company lays off people, he said, morale inevitably suffers. But he noted that the work force reductions were largely achieved through attrition and voluntary departures. Fewer than a third of the layoffs - 843 - involved pink slips.

Mr. Coltman also acknowledged that morale at the bank is still recovering. "Things are slowly moving back on the upswing," he said, "but I would also say that we still have a way to go before we can look back and say the process is ended."

The bank also tried to be fair when it made layoff decisions. "It would be based on their performance in the past, it would be based upon their leadership around core values of our company," said Mr. Coltman.

"Any fundamental redesign change program is going to be threatening and intense for employees," said Aston's Mr. Allen. "The question is, how do you structure and tailor the redesign process in any bank to minimize those things? CoreStates was dedicated to telling their employees everything as soon as they knew it."

Another risk was that streamlining operations could impair customer service quality. So each idea was assigned a rating to gauge its impact on the customer and on the bank's culture.

"There were a number of ideas where the customer risk just seemed too excessive, and we pulled back," said Mr. Coltman.

For example, process changes in the commercial lending business suggested that loan officers could be responsible for many more accounts than they had been under the old system.

"We decided not to go that far," said Mr. Coltman. "In some cases, we only went half as far as the pure analysis suggested."

As the various measures are implemented, CoreStates' team of "implementation coordinators" is also looking for unintended consequences. In those situations, the bank will forgo the change. "That's something that we've learned from watching other reengineerings," said Mr. Coltman. "There is a process in place to make sure that there is not too negative an impact."

Management also hopes that an organizational change resulting from the reengineering will help the bank keep an eye on customer needs. Previously, management had been organized around lines of business. Now, the delivery of all products is divided into four geographic regions.

"The person who comes into the branch to cash their check all the way up to the $250-million-in-sales corporate client are served in that geography," said Mr. Coltman.

The presidents of each of the four regions, along with the senior managers for corporate and retail delivery, report to Rosemarie B. Greco, president and chief executive of the lead bank.

"Their job is to look at the entire delivery process of their segment across all four markets and to design product for specific market segments within that," said Mr. Coltman.

That reorganization followed last August's trimming of the senior policy committee from 13 executives to five. The current members are Terrence A. Larsen, chairman and chief executive; Mr. Coltman; Ms. Greco; Charles P. Connolly Jr., senior executive vice president; and Robert N. Gilmore, chief technology officer.

Although Mr. Coltman said the bank's reengineering was at times grueling - the five senior executives met for nine consecutive 12-hour days to consider the 6,000 ideas - he had high praise for the process.

"One of the key decisions you make around reengineering is, Do you want the reengineering accomplished over a long time or over a short time?" said Mr. Coltman. "And while I would say that probably every one of our working team members would say the seven months we took was 'too short,' everyone would also say, they wouldn't want it to have been any longer.

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