PROVIDENCE, R.I. -- In the rough-and-tumble world of New England banking, it's "either grow or you will be taken over," says Fleet Financial Group Vice Chairman Michael Zucchini.

That's the reason Providence, R.I.-based Fleet is trying to raise $300 million through one of the most severe cost-cutting programs in the industry.

By the summer of 1995, the $48 billion-asset institution will lay off 5,500 employees, hacking its way toward an efficiency ratio of 55%, down 10 basis points from its current ratio.

Industry observers say the moves at Fleet are so drastic that they may force competing banks to shed some weight as well.

Fortunately for Fleet, though, analysts say that even if the bank doesn't meet its efficiency goal, outsiders won't know it. "They probably will have one or two more [acquisitions] that will be announced by the end of 1995 that will color or complicate the numbers," said Gerard Cassidy, an analyst at Hancock Equity Services in Portland, Maine.

But Fleet's lean-and-mean strategy could backfire. Replacing personnel and personal service with automation can be risky for two reasons. First, the technology may turn out to be unreliable. And second, customers may miss the human touch and flee to other New England banks.

Massive Layoffs

Chairman and chief executive Terrence Murray announced in March that Fleet Financial Group would fire 3,000 employees this year alone, with 2,500 more expected to go by 1995. Executives say overhead costs will be reduced by $300 million annually accompanied by a revenue increase of about $50 million.

But some Fleet employees say these executives have Wreaked havoc on their own bank. Current employees have watched their friends and colleagues receive pink slips after seven months of helping executives locate cost-cutting opportunities.

Victims of these layoffs who were interviewed by American Banker would not let their names be used because they feared they would lose their severance. One employee described Fleet executives as "genuinely evil" for the way she felt she was treated.

To soften the blow of firing employees who had come forward with cost-saving suggestions, Fleet gave two to three times as much notice as required by law.

But in spite of any morale difficulties at the bank, observers applaud Fleet's restructuring and say the bank needed to do it to meet its goals.

"As a manager you don't do anyone a favor by letting the business be driven into the ground because you're squeamish about laying people off," said Jack Aber, chairman of the department of finance and economics at the Boston University School of Management.

But one former employee who was fired after cutting more than 100 employees under his supervision said he thinks Fleet executives don't care about the costs to employees and customers.

"You cut beyond the bone to drive up the value of the stock. You're not terribly concerned with the long-term service and customer impact," he said.

Mr. Zucchini responds that the bank did everything it could for employees. He points to an outplacement service provided by Fleet for those who were fired.

To justify the layoffs, Mr. Zucchini described how much more efficient Fleet will become. Consider the simple task of approving checks. Fleet's policy used to be that a teller needed no approval to cash checks for less than $1,000. But if the customer wanted to cash a check above that amount, the teller, as Mr. Zucchini described it, had to ask a manager for approval.

Slicing Away Tellers

At the most that system took minutes out of a teller's time. But Fleet's recent self-analysis revealed that the bank could cut 154 tellers by simply raising the amount a check needed for approval to $2,500.

"It's a little slice of each teller's time," Mr. Zucchini said. Of course, now it's a little slice of each customer's time because, in at least one branch, tellers tell the customer to walk across the hall themselves to get approval from the managers.

Mr. Zucchini said the bank found hundreds of cost-saving measures like these. For instance, despite the popularity of ATM machines, older customers continue to request updates of their balance. Now customers need not ask because the receipt of every transaction will provide their balance. That time saver eliminated 50 positions, Mr. Zucchini said.

Like many of its competitors, Fleet automated its loan approval program so loan officers don't take so much time reviewing customer bank accounts.

The bank also has consolidated into one statement balances for second mortgages, car and boat loans, credit cards, savings accounts, and individual retirement accounts.

Most analysts praise the restructuring because they are impressed with the consultant Fleet hired. Fleet took a $125 million charge in the fall of 1993 and took another $25 million in the first quarter of 1994 to hire Chandrika Tandon, founder of New York City-based Tandon Capital Associates.

Ms. Tandon helped Edison, N.J.-based Midlantic Corp. transform itself. She also imposed her cost-cutting measures on Riggs National Bank in Washington.

Fleet's restructuring "is going to make Fleet more profitable, more efficient, and more focused," said Dennis Shea, an analyst with Morgan Stanley. "I think there are short-term risks to it, but when they come out the other end they will be a more potent force."

Doubts About Revenue

Widespread affirmation of Fleet's strategy, however, always comes with a few cautionary words. Mr. Shea says his "greatest skepticism" is that Fleet will not be able to reach its revenue goal of $50 million given the loss of staff. He is not at all convinced that Fleet's replacement of full-time tellers with part time tellers during peak hours will actually work.

That system only succeeds in areas where "high-quality" tellers can be found, such as in college towns where students need part-time jobs, he said. In addition, many part-timers are "poorly motivated and poorly skilled," he warned.

Mr. Shea also expressed skepticism about other changes, including imposing or increasing "nuisance charges." For instance, Fleet intends to standardize its charge for bounced checks. That policy could create a backlash if customers get insulted and leave the bank. "Consumers are sensitive to fees," Mr. Shea said.

Risk of Losing Customers Seen

Fleet also intends to stop giving away services. If the bank chooses to charge for reconciling accounts or examine accounts for estate planning purposes, it risks losing customers, he said.

Community bank presidents aren't licking their chops yet, but they are beginning to salivate. Mark Fox, a victim of Fleet layoffs in 1991, is now a bank consultant with his own firm, Fox Associates, in Avon, Conn.

"The growth strategy I suggest [for community banks] is get out there and focus on the small business customers of Fleet," he said. "I don't think that window of opportunity will stay open forever, but it certainly is there now."

Community bankers said it's too early to tell if they are getting business from Fleet. Joseph Kirby, president of Westerly, R.I.based Washington Trust Company of West Rhode Island, said Fleet's plan is "better for us," because automation alienates customers. We have received some deposit business," he maintained. "I wouldn't say it's significant. But some of the customers have done it as retribution," he said.

Analysts have heaped a lot of praise on Fleet's restructuring. But the bank has a lot to prove. As Mr. Abet, the Boston University professor, put it: "Terry Murray has grand ambitions." The industry will wait to see if those ambitions are too grand.

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