After the Reengineering Hype, An Ambiguous Legacy

Perhaps no other person has been more closely identified with cost- cutting at banks in this decade than reengineering maven Chandrika Tandon.

Wall Street has generally cheered when her consulting firm, Tandon Capital Associates, is hired by banks to trim fat and improve efficiency. During the 1990s, the 41-year-old consultant worked shoulder-to-shoulder with chief executives at six major banks and helped them shed more than $680 million of expenses. Together, these major reengineering projects led to the elimination of more than 13,000 banking jobs - nearly 1% of total industry employment.

But a close look at the long-term results of reengineerings at some of the first banks to go through the process reveals the projects were something less than an unqualified success for the concept.

Two of the banks Ms. Tandon worked with - Midlantic Corp. and Michigan National Corp. - were later sold, rewarding shareholders who held onto the stocks but casting doubt on the ability of the reengineering process to generate long-term revenue growth.

Another client, Riggs National Corp., continued to struggle with losses years after restructuring took hold, and it still posts numbers well below its peers. And at Fleet Financial Group, the largest of Tandon's clients, two recent acquisitions make analysis difficult, but noninterest expense began creeping up again last year.

How banks fare in these endeavors is critically important to the industry, which continues to embrace broad-scale reengineering as a way to cut costs. In the last two years, 10 of the nation's top 100 banks launched such efforts, using the services of such hired guns as Tandon, First Manhattan Consulting Group, and Aston Limited Partners. Already in 1996, Firstar Corp., Milwaukee, and Barnett Banks Inc., Jacksonville, Fla., joined the list of banks seeking higher levels of operational productivity.

Enough time has now passed since the programs of the early 1990s to look for answers to hard questions: Does this brand of restructuring cut so deeply into the bone that revenue growth is impaired? Does it help banks create and maintain a strong culture of expense controls? Does the process - which can last six to eight months even before changes are implemented - create such fear and anxiety among employees that a bank loses earnings momentum?

Answers rarely come in black and white, because over time it becomes increasingly difficult to weigh the impact of the downsizings against economic conditions, interest rate swings, and management decisions that come later, observers admit.

The banks themselves are curiously reluctant to talk about the long-term value of the projects. Of the first four institutions Ms. Tandon worked with - only Fleet offered a comment, and that through a spokesman. Riggs, Michigan National, and former executives at Midlantic either did not return calls or declined to comment. Ms. Tandon declined to be interviewed.

But Neil Smith, a managing director at the consulting firm, defended the approach. He said the banks all have information systems that track results to the dollar and monitor progress by correcting for "noise" - the acquisitions, interest expenses, and other changes that skew the results. "That would be the only way you would really be able to tell it," he said.

Bank stock analysts agree that without more detailed information - which the companies won't provide - it's impossible to know exactly where these programs succeed or fail. But some are openly skeptical of high-profile reengineerings, saying they're the last refuge of a bloated organization trying to boost its stock price and stay independent.

But a look at the specific goals of the banks' reengineering projects, financial statements, and the stock price compared with peer institutions can be revealing.

Fleet, then based in Providence, R.I., hired Tandon in the summer of 1993. During these projects, Ms. Tandon insists on working adjacent to a bank chief executive, who must also agree to devote half his time to the project. At Fleet, another 50 senior executives reportedly worked full-time on Focus, and 150 more spent half their time on the initiative.

Ms. Tandon's method involves looking closely at the way everything gets done in the bank. Workflows are dissected and processes simplified with an eye toward reducing costs. To do this, the consultants and bankers ask employees for money-saving ideas. During Focus, the bank received some 20,000 suggestions.

Two months into the eight-month project, executives said that within two years the bank would cut expenses by $125 million and reduce the ratio of noninterest expense to revenue from 67% to 60%.

When the process was completed, Fleet had enough confidence to up the ante. In the spring of 1994, a set of more ambitious goals were announced: carve out $300 million of expenses, increase revenues by $50 million, eliminate 5,500 jobs, and achieve an efficiency ratio of 55% by mid-1995.

Those goals have not yet been achieved. The bank notes its acquisition of Shawmut National Corp., which was completed last November, affects the results. (Fleet's acquisition of National Westminster Bancorp hasn't yet closed.)

While the Shawmut deal has muddied the waters of the fourth quarter, the efficiency ratio for the third quarter of 1995 - before the Shawmut deal closed - was 59.06%, a marked improvement over 1993 but far short of the 55% goal.

Goals for cutting noninterest expense also apparently came up short. The number declined dramatically in 1993 and 1994 as a result of the Focus program. But noninterest expense began to creep up again last year, before the deal with Shawmut closed.

Once the banks merged, the restated numbers get muddled - but not hopelessly so. Last year, noninterest expense for the combined bank rose by $100 million from 1994, excluding $317 million in merger-related charges.

But don't be too quick to blame that on the Shawmut acquisition. That bank, like Fleet, had also been aggressively cutting costs in 1993 and 1994, and on its own had eliminated nearly $200 million of noninterest expense - about the same amount cut out by Fleet.

When all is said and done, Fleet and Shawmut together posted $3.1 billion of noninterest expense in 1995. That's about $200 million less than they posted separately in 1993 before they merged - and before hundreds of millions of dollars were spent on restructuring charges and consultants fees, and thousands of jobs were lost.

Analysts say that some of the other expense savings may have gone for new investments, such as new technology for the bank's mortgage subsidiary. And additional expenses from other acquisitions may have been included in the number.

Jim Mahoney, a Fleet spokesman, wouldn't comment on these numbers, but conceded "it's a very complicated equation."

The legacy of the program at the bank, he said, is this: "Basically, our feeling is that we completed an 18-month effort which, in the end, not only boosted our profitability but also, I would say, sharpened our insights into the mechanics of cost reduction generally."

That effort, he added, brought costs into line where it was able to take advantage of opportunities that came along - namely, buying Shawmut and Natwest. "In essence, that's kind of where we come out at the end of the whole process," said Mr. Mahoney.

Many Wall Street analysts won't go that far. "Did (they) ever really get all of Fleet Focus - who the hell knows?," asked PaineWebber's Lawrence Cohn. "The only people who know how Fleet Focus worked is Fleet management. And I'm not convinced they know."

Lawrence Vitale of Bear, Stearns & Co., agreed. 'I'm not sure we'll ever know," he said.

Others however, point to tangible benefits. "The bottom line with Fleet is, (Focus) definitely helped to jump-start the franchise and streamline operations," said Michael Mayo of Lehman Brothers. "Even though they didn't quite reach the target, they got most of the way there."

"Fleet was really in need of something like that," said Goldman Sachs' Sally Pope Davis. "I think they will tell you they are a much better organization, and (that) has made the Shawmut transaction a lot easier."

If looking at efficiency ratios is too narrow a measure of success, what about revenue growth? That picture, too, is clouded by the lackluster economy in New England in the 1990s.

"You have to separate Fleet Focus from the New England economy," said Ms. Davis. "If they didn't cut expenses, the results would probably have been more difficult."

But other analysts are less forgiving about the bank's record of revenue growth since the restructuring. "Revenues have gone no place at Fleet for quite some time," said Mr. Cohn. "In the first quarter of 1994, revenues were $1.176 billion. And in the fourth quarter of 1995 - eight quarters later - they are up $100 million, which is peanuts."

Mr. Cohn of PaineWebber said, "Fleet Focus was a process that was very clearly damaging to the organization, at least in the short run. There was a tremendous amount of turmoil, there was a tremendous amount of anxiety.

"I don't think there is any doubt that, at least in the very short run, there were revenue losses that came out of that process," he concluded.

Ms. Bush, a Brown Brothers Harriman analyst who has been critical of reengineering programs in general, questioned whether they are a waste of money. "I think the biggest issue is, do they ultimately cost you revenues because employees get so dispirited and the whole system just kind of grinds to a halt while these things are going on?"

Ms. Bush added that the programs themselves are expensive in terms of consulting fees, which run into the millions of dollars and get buried in one-time restructuring charges.

Industry sources believe Tandon is paid a percentage of ongoing savings, but declined to estimate what they might be.

But John Floyd, chief executive of John M. Floyd & Associates, a bank consulting firm, estimated that his more well-known counterpart, Tandon, would charge "at least" $15 to $20 million for hitting expense reductions of $200 million.

Mr. Floyd charges his clients on a contingency basis. Earlier this year, Management Strategies reported that Floyd & Associates would receive $3 million on $16 million of annual cost savings at Merchants Bancshares in Burlington, Vt.

While restructurings at these banks have indisputably led to major cost savings, it's unclear how effective they are in transforming a culture to remain cost-conscious. Some analysts say these programs are only as good as the management left in place after the consultants pack their bags for the next job.

"I guess what it comes down to is: How do you change the culture?" said Mr. Vitale of Bear Stearns. "The Wells Fargos of the world already have that kind of culture. It took them a long time to build that culture. It's not something you build in the space of six or eight weeks."

He added that the banks with strong cost-control cultures, such as Wells, Bank of New York, and First Bank System, always "find a way to keep the expenses down no matter what they are doing."

Those banks not only have strong expense controls but long track records of revenue growth, which executives said contribute to stellar efficiency ratios.

Some critics of reengineering programs say that they are too geared toward expense control, and that they cripple a bank's ability to grow revenues. "There is almost this implicit assumption that banks employ too many people," said one banker who asked not to be named. "If revenue is the problem, why are they spending time cutting costs?"

The inability to produce revenue growth was also a factor leading to the sales of Midlantic and Michigan National last year.

"What does it say that for Midlantic and Michigan National both, the ultimate solution to their problems was they had to go find a buyer?" said Mr. Vitale. Part of the reason was the "revenue wall" that many banks face, including those that didn't reengineer.

"You can't save yourself into prosperity," said Mr. Vitale.

Others note that the economic picture in New Jersey was an important factor. "There never really was a revenue growth story at Midlantic," said Mr. Cohn. "I mean, it was really always more lower expenses, and lower credit expenses. But again, it's hard to know how much of that was because the recession lingered in New Jersey."

And, unquestionably, investors who held onto the stock profited. Midlantic's stock was at $6.125 a share the day after the initial restructuring announcement. When the bank was sold to PNC three-and a-half- years later, shares where trading at $55.

Shareholders of Michigan National stock did well, too. When Tandon's hiring was announced, shares were trading at about $75 a share. When Michigan National was sold to National Australia Bank Ltd. a year ago, shares were trading at $110.

Stockholders at Fleet, however, didn't fare as well. Shares have been trading around $40 recently, not even 10% more than in 1993, when Tandon was hired.

But Fleet downplayed the stock price as a measure of success. "If you pick two particular points in time for the stock price, or whatever, an exercise like that can be extremely misleading," said Mr. Mahoney. "In terms of picking two dates - and saying from this date to that date there was this change - is fraught with arbitrariness."

Tandon's Mr. Smith also played down the relationship between stock prices, acquisitions, and the reengineering work his firm engaged in.

The reason for the premium paid for Michigan National, he said, is hard to quantify. "How much of that is attributable to the cost work - obviously it contributes in some strong way - and how much is a premium because the Australians want to get into the U.S. market?" he asked.

An important distinction must also be noted for Riggs and Midlantic, banks that were heavily burdened with bad loans when the cost-cutting programs were launched. The restructurings, along with efforts to clean up the balance sheet, had a major impact.

But unless and until banks further reveal to Wall Street and shareholders the precise impact of restructurings on earnings and efficiency, the legacy of these programs will remain, at best, ambiguous.

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