Cutting a Bank's Corporate Staff Down to Size
No area of a large bank is more open to criticism than its corporate staff. That group of service providers and policymakers includes disciplines such as human resources, legal, tax, audit, real estate, general services, insurance, accounting and financial control, technology, and public affairs.
With banking industry earnings under extreme pressure, the stereotype of the corporate staff as a large and slow-moving group of departments is magnified.
Whether the perception is deserved or not in a particular firm, cutting corporate staff down to size has become an obsession for the 1990s.
Banks that now move decisively to redefine the role of the corporate staff, reengineer essential activities, and outsource aggressively will gain important competitive momentum. Competitors that began this downshift process several years ago are already reaping benefits as low-cost leaders.
New Business Paradigm
A sea change is now under way in corporate staff thinking in many different kinds of organizations. Indicators of this transformation abound:
* Bankers Trust decided to award facilities management contracts to Xerox Corp. for administrative areas and Northern Telecom for telecommunications.
Such arrangements, known as "vendings," now cover service units for payroll, the personnel information data base, mail delivery, central telephone operators, accounts payable, voice communications, and many others.
These areas are largely staffed with former Bankers Trust employees. Savings from vendings involving many areas of the bank and several large suppliers now well exceed $3 million per year on a running-rate basis.
* Merrill Lynch & Co., Citicorp, and Chase Manhattan Corp. all decided to vend out portions of their global telecommunications networks. This is, without question, a strategy reversal from the mid-1980s.
* Institutions of significant size -- such as First Fidelity Bancorp. -- announced plans to hand over their data-processing operations to nonbank suppliers like EDS and many other qualified technology providers.
Clearly, the landscape has changed. And major corporations, including banks and nonbanks, are creating new opportunities for vendors willing to expand into services formerly considered proprietary. Implicit in this process is a rethinking of what corporate staff is all about.
Companies like Bankers Trust have adopted the view that redefining and restructuring centralized staff resources can provide a competitive edge in business strategy.
At Bankers Trust, these initiatives have brought corporate staff levels down by over 650 employees since the mid-'80s. This has been achieved through a carefully designed program of task eliminations, job vendings to outside suppliers, and selective decentralization to major profit centers.
Central staff roles have been narrowed to focus on policy and standards issues (such as regulatory compliance, financial reporting, quality assurance, talent attraction/retention), rather than day-to-day operational concerns.
The absolute size of staff departments has been trimmed by shifting activities (mail delivery and payroll data entry, for example) to qualified external suppliers, chosen through competitive bidding and by the use of temporary workers.
Managerial staff have been significantly upgraded via recruiting and training in advanced personal computing and office technology.
Finally, efficiency has been gained as measured by year-over-year expense containment in people costs and the degree to which expense levels have been variabilized, as opposed to staying fixed.
As business volumes change, so too should compensation, technology, and real estate-related categories; these should move down as well as up.
Thus, the benefits of Bankers Trust's corporate staff streamlining are tangible. Most important, the techniques used in the transformation are transferable to many large firms.
History Is a Poor Predictor
Knowing just how to reorganize the corporate staff for the 1990s is a vexing issue for banks and other financial services players.
During the 1980s, most commercial banks and investment banks underwent substantial geographical expansion, business diversification, and decentralization of operations.
This placed considerable growth pressure on centralized staff areas charged with monitoring and supporting the rate of business change. Citicorp's push at the retail and wholesale levels into over 90 countries illustrated this trend at the extreme -- the attendant support required from corporate utilities, including real estate and telecommunications, was unprecedented.
Bankers Trust, Chase, Manufacturers Hanover, Chemical BankingCorp., Security Pacific and others all experienced their own versions of expansion and cost buildup. So, too, did the brokerage firms and investment banks such as Merrill Lynch, Shearson Lehman Brothers Inc., Salomon Brothers Inc., Goldman, Sachs & Co., Morgan Stanley Group Inc., and First Boston Corp.
But staff units must now adopt new standards of behavior consistent with a vision of emerging bank leadership. The most successful banks are now noted for being focused, quick, innovative, and lean, with fluid organizational structures.
Marketplace premiums are being placed on the ability to achieve low-cost leadership and transform a historically fixed expense profile to a mostly variable one.
Collaborative behavior is reaching new heights in both policy making and implementation.
Managers performing corporate staff duties must now contribute effectively to the setting of strategy, policy, and standards, as well as managing the delivery of specialized services.
In their managerial capacities, they must become less involved in coordinating and aggregating information from the business lines, since a large number of their former responsibilities should be decentralized and automated.
Instead, staff people must fixate on specific activities that they are uniquely qualified to do and which are not redundant with other parts of the organization.
Essential Activities to Perform
For each activity, judgments must be made about retaining existing operations, downsizing, vending, or decentralizing.
At a corporate level, staff should add value in one or more of the following: revenue enhancement, expense reduction, risk management, and/or standards enforcement.
Since managers of specific disciplines often tend to view their respective functional organizations in homogenous and indivisible terms, it is useful to find common ground for comparing budgets and head counts across all staff disciplines.
One approach is to establish broad categories for the nature of staff work to be performed in the future: policy formulation and management, professional administration, and operations processing and clerical support.
Policy formation should be a small group of professionals and senior managers dedicated to charting the future corporate course within specific areas of expertise.
Examples include functional heads of finance, human resources, and legal, plus related heads of accounting policy, compensation, and regulatory compliance. Activities at this level of importance are generally not candidates for downsizing, vending, or decentralizing.
Professional administration should comprise "doers" who transact business related to policy and standards review. In certain areas, activities performed by these "doers" can be streamlined, decentralized, and performed by external suppliers.
Examples include a decentralized controllership structure in accord with highly automated MIS, decentralized recruiting activities strongly leveraging on outside agencies, and a legal function that relegates routine processes (such as contract review) to the business lines while retaining purview of high-risk areas (litigation, for example).
Operations processing and clerical support should be the residual of all other activities not contained within the above. For most corporate staff organizations, it is the largest category in terms of people and expense.
This residual should be managed to an absolute minimum and targeted for substantial downsizing (mostly through automation), decentralization, and external sourcing.
In trying to assess where actual headcount and expense fall among the three categories, some managers will invariably try to avoid placing the bulk of their respective organizations in situations where vending is actively explored.
This psychological barrier frequently arises because managers believe that corporate staff activities inherently require substantial critical mass and achieve benefits from scale economies; however, this is rarely the case.
Advantages can include cost reduction, variabilization of expense, and a gradual contraction of infrastructure.
More important, as the number of employees declines, management is freed to address issues of real concern to the shareholders.
Thus, the key question is less one of determining the appropriate size of the corporate staff than it is one of creatively selecting the sources of labor supply and expertise internally (among business lines or staff) as well as externally.
Common Goal Orientation
Once a traditional corporate staff structure has been shed in favor of the redefined orientation, objectives and experience become more closely aligned between line and staff.
Staff realize that the goal is to optimize results in the business lines, not to control behavior.
Conversely, line units come to value that staff's contribution in policymaking, shaping organizational culture, and serving as a "second opinion" on the reasonableness of new ventures -- all without stifling initiative.
The proactive sharing process between line and staff is information-based and enabled by the marriage between personal computing and telecommunications.
This evolving management practice has no historical role models. Experience-based benefits will undoubtedly be more pronounced at competitors who advance the limits of office technology through greater computer literacy among managers.
The resulting concentration on policy and standards is not only simpler, but will be essential to achieving competitive advantage in the 1990s against banks and nonbanks alike.