In Search of Savings, Bankers Try to Avoid Past Errors

Remember reengineering?

Big banks jumped on that bandwagon in the first half of the 1990s, aiming to be lean and efficient enough to at least ride out the century.

They didn't quite make it, and here we go again.

Cost control is again an obsession, and as bankers look back at the last wave, they are vowing that this one will be different.

The latest programs-also labeled by "re" words, restructuring and redesign-bear many earmarks of the earlier efforts.

The big difference is that whatever happened in the first go-round failed to prevent, and may have hastened, the round of mergers that peaked last year. The new reengineering follows in those transactions' wake, at a time of increased concern about revenue growth. Consultants are urging bankers to wield their machetes with a little more finesse.

"Typically, the banks with the least revenue growth are the ones most urgently turning to cost cutting," said Seamus McMahon, a consultant at First Manhattan Consulting Group in New York. "But these are the same banks that have already admitted to not being able to control costs and grow revenues."

As too often applied, cost-cutting tactics "work in the short run, but in the long run the patient dies," Mr. McMahon said.

CoreStates Financial Corp., Philadelphia's largest banking company before its sale in 1998 to First Union Corp., has been held up as a prime example of what can go wrong with reengineering.

In 1995 CoreStates hired the consulting firm Aston Limited Partners to help it reassess business strategies.

The objective of the program, dubbed CoreStates Best, was to improve operating efficiency after a succession of acquisitions, said CoreStates' former chief financial officer, Albert W. Mandia, in a recent telephone interview.

"We started to believe that efficiency ratios were critical," Mr. Mandia recalled. "People on Wall Street were challenging the industry, saying efficiency could be improved."

"There was also a belief that we had not done our mergers as effectively as we could have," said Mr. Mandia, now CFO of American Business Financial Services outside Philadelphia. "We left layers of management in, particularly senior management."

The result of months of analysis was the elimination of 19% of the company's employees, or 2,800 people, and the setting of a $180 million cost-reduction target over 18 months. The savings were to come through closing offices and streamlining businesses.

At the time, Wall Street hailed the project as a profit booster.

But the savings never materialized, analysts said. Mr. Mandia said the cutting was done so swiftly-over nine months-that it destroyed morale and took attention away from running the businesses.

The cutting also occurred across the board, Mr. Mandia said. "Each department was told to cut a certain percentage, regardless."

"The whole process was so inwardly focused and disruptive that we lost momentum on the revenue side," Mr. Mandia added. "There was very little revenue growth after that. It paralyzed the organization."

In hindsight, Wall Street deemed CoreStates Best "an unmitigated disaster," said Nancy Bush, an analyst at Ryan, Beck & Co.

Mr. Mandia's tale has echoes elsewhere. Deborah Talbot, a group executive of Chase Manhattan Corp. who left after it merged with Chemical Banking Corp., listed some consequences in a letter published in the November 1998 issue of Fast Company magazine: "little or no real value for customers, the inevitable problems springing from culture clashes, and a loss of the time-to-market concept that had been key to our competitive mind-set ... .

"As a stockholder I was pleased. As a business leader, I was history."

Now the reengineering messages and goals are refined.

"The big payoff is not just to save a dollar," said Marc J. Shapiro, vice chairman of finance and risk management at Chase, which announced a restructuring last March.

"If you don't reinvest the savings in the business, you run the risk of not being able to grow revenues," Mr. Shapiro said.

The current focus on expenses is part of a normal business cycle, consultants said. Revenues from lending and retail banking have been pinched by interest rate trends. At the same time, fees from businesses that were big contributors to earnings gains in 1997 and early 1998- especially securities underwriting and investment banking-all but dried up late last year.

"Inevitably, when earnings opportunities become less automatic, people begin to focus on the cost side" of the ledger, said Paul Allen, consultant and founder of Aston in Greenwich, Conn.

The earlier wave of restructurings came after a turbulent period when many institutions were teetering on the brink of insolvency, in many cases because of bad real estate loans.

"The industry was just beginning to recover from 1991, and it was not terribly confident as a group," Ms. Bush said. "The lack of confidence led to cost cutting."

Though the current wave comes after a period of unprecedented growth, it has been sparked by the belief that investors are impatient for even higher returns.

"In the last five years one of the most significant changes in banking has been the focus on shareholder returns," Mr. Shapiro said. "Twenty-five years ago you didn't talk about making money for shareholders. Today, you have people who look at banking like any other business. There is a productivity standard."

"In general, bankers are looking at the individual business areas and seeing where they can't grow the revenues, so they try to manage the costs," said Susannah M. Swihart, vice chairman and chief financial officer at BankBoston Corp., another company in the midst of reengineering.

"We are operating in an environment where we know we have to deliver," Ms. Swihart said.

The industry has been getting more efficient since the early 1990s, consultants said. In 1990, the typical efficiency ratio-which measures what a bank spends to reap a dollar of revenue-hovered around 70%. Today, good ratios are 60% or below; the best are moving toward 50%.

"Banks are tremendously stronger than they were just a few years ago," said Charles Wendel, president of Financial Institutions Consulting in New York. "But like barnacles on the bottom of a boat, expenses build up over time."

Indications that expense growth had outpaced revenue growth over successive quarters prompted J.P. Morgan & Co. to cut nearly 1,600 jobs, or 10% of its work force, last year.

Morgan's restructuring, announced in two stages, in February and December, which included $315 million of pretax charges, was aimed at realizing nearly $600 million of annual cost savings in two years. Much of the savings would be reinvested in growth businesses such as stock underwriting and asset management, the New York banking company said.

Chase's restructuring included a $510 million pretax charge in the first quarter last year and the elimination of 4,500 jobs, or 6.5% of its work force, much of that in support functions such as marketing, legal, and accounting. Chase said it would have $460 million of annual cost savings, also to be reinvested in growth businesses.

Citigroup recorded a $1.5 billion pretax charge in the fourth quarter and said it would eliminate 10,400 jobs, or 6.5% of its employee base, many of them in consumer operations.

Citi also said it was analyzing consumer businesses and could decide to spin off some of those units. Much of the $975 million of savings targeted by 2000 is to go directly to the bottom line.

BankBoston is in the middle of a two-year project it calls a redesign. The effort focuses heavily on processes in slow-growing retail operations, Ms. Swihart said, adding that the program does not involve heavy job cutting. The bank has also been selling underperforming consumer businesses in the last two years to improve overall efficiency, she said.

Another regional holding company, Huntington Bancshares of Columbus, Ohio, said it would eliminate 1,000 jobs, or 10% of its employee base, as it faces slower revenue growth in the coming year. Huntington, which announced its program with third-quarter earnings, is aiming for $125 million of cost savings.

Honolulu-based Pacific Century Financial Corp. said it would announce a restructuring effort in the current quarter.

These examples show that banks have been approaching costs from three directions, observers said.

Some have pursued the sort of across-the-board cuts that consultants call "slash and burn." Others have been spinning off poorly performing businesses.

The last approach is to reallocate expenses from slow-growth businesses toward what are thought to be the catalysts for future growth.

There are case examples in each category. But some of the institutions that sought steep cost cuts in the early to mid-1990s no longer exist. Among these are CoreStates, Firstar Corp. of Milwaukee, Michigan National Corp. of Farmington Hills, and Midlantic Corp. of Edison, N.J. All were sold in the years after their restructurings, and only Michigan National, owned by National Australia Bank, and Firstar, bought by Star Banc Corp., retain their identities.

Consultants pin the failures on shortsightedness.

"I would say that 90% of what people call reengineering is really classic cost cutting," said Mr. Allen of Aston. "When you are caught in a classic slash-and-burn spiral, you cut costs, which leads to less revenue, so you cut more costs and see even less revenue."

A common practice is to eliminate the most obvious expenses without changing the underlying pattern that led to the higher costs in the first place, consultants said.

"You can get rid of the plants and the free coffee, but you are essentially dealing with the tip of the iceberg," said Mr. McMahon of First Manhattan Consulting. "All that is demoralizing, and morale affects revenues."

To be sure, there are successes.

Star Banc Corp. of Cincinnati, which hired Mr. Allen in 1996, acquired Firstar and took the Wisconsin company's name last year. Fleet Financial Group in Boston, which brought in another well-known consultant, Chandrika Tandon, in 1995, grew stronger and surpassed $100 billion of assets through a succession of large-bank and niche acquisitions.

Comerica Inc. of Detroit, another Tandon customer, has also survived and thrived, consultants said.

Eugene A. Miller, chairman and chief executive officer of Comerica, hired Tandon Capital Partners in 1996 and ended up slicing 1,900 jobs, or 16% of the total.

The cuts were not across the board, Mr. Miller said in a recent interview. "We benefited from others' past mistakes."

Mr. Miller said he met with executives from Fleet and Firstar to talk about their experiences with restructuring programs. Those bankers warned him about potential revenue losses, Mr. Miller said.

As a result, Comerica assigned bank officials to be "revenue guardians." Mr. Miller said there was no revenue decline at Comerica as a result of its restructuring.

"You've got to be very careful about how you make cuts," Mr. Miller said. One of Comerica's key businesses, corporate banking, did not sustain cuts as deep as those in other areas.

Undifferentiated, across-the-board actions are always a mistake, Mr. Miller said. "You never go in and say my objective is to cut 2,000 jobs."

Consultants said banks that have been successful have focused on a longer-term strategy to change the underlying processes used in serving customers. This can include consolidation of some operations-but also reanalyzing how individual businesses spend money.

Chase was able to cut 14% of its administrative expenses last year by creating a central group, Chase Business Services, to give marketing, legal, and accounting support to all business units. The annual savings are being applied toward investment banking, securities processing, and national consumer services, Mr. Shapiro said.

Similarly, BankBoston has a budgeting committee to prioritize spending by business units "to make sure investment spending reflects the strategic direction of the company," Ms. Swihart said. BankBoston also clamped down on the use of outside vendors, saving $100 million over the last four years, she said.

Management consultants said they expect more banks to fall into line with restructuring programs this year.

Mr. Mandia urged caution.

"Cost-cutting programs are bad," the former CoreStates executive said. "When you do mergers, that's when you can do the cutting. After that you can go after duplications. Beyond that, I'm not a proponent."

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