Alan G. McNally has gotten off to a flying start in the renovation of Harris Bankcorp, the sleepy Chicago subsidiary of Bank of Montreal Corp.

Since he became chief executive and vice chairman of the $14 billion-asset bank last fall, Mr. McNally has plunked down $246 million for Suburban Bancorp, marking the first acquisition for Harris in five years.

He's drawn up plans to build more than two dozen branches. And he's pulling 550 employees out of back offices, shunting them into marketing, sales, and service.

But a larger challenge lies ahead, and that is winning the employee cooperation he so crucially needs if all of his ambitious efforts are to work.

A Decade of Drift

Distracted by problems and priorities in Canada, Bank of Montreal let Harris drift for almost a decade after its 1984 acquisition. Left to their own devices, pampered bank managers spent too much time feathering nests instead of pounding the pavement, which weakened the subsidiary's financial results.

In 1993, for example, Harris posted a 0.88% return on assets - a far cry from the 1.21% ROA of an 11-bank Midwest peer group, according to data from Sheshun-off Information Services.

Mr. McNally, 48, also has had to face a downturn in the mortgage-backed securities market that will cause a $33 million charge to second-quarter-earnings.

On top of all this, he's been given the task of tripling Harris' assets, branch network, and earnings. Such growth will be rendered hollow unless he also raises profitability. This means feet have to come off the desks.

"The question is whether Mr. McNally can build an energetic marketing culture at Harris," said Alan Hibben of Richardson Greenshields of Canada Ltd., a Toronto-based brokerage.

The stakes are high.

Facing constraints in the highly consolidated Canadian market, Bank of Montreal is counting on Harris as a major growth vehicle into the next century, pledging $700 million of capital for a Midwest expansion.

Thus, investors will be watching Mr. McNally's every move - as will Matthew Barrett, Bank of Montreal's hard-driving chairman and chief executive.

Born in Quebec City, Mr. McNally holds an undergraduate degree in industrial engineering from Cornell University and an MBA from York University. He joined Bank of Montreal in 1975, after a six-year stint at Aluminum Co. of Canada.

Dispatched from Toronto, Mr. McNally assumed the CEO slot at Harris from B. Kenneth West, who remains chairman.

The official explanation for Mr. West's sidestep was that he was too close to retirement to complete an expansion that is slated to last until 2002. By many accounts, however, Bank of Montreal grew dissatisfied with Mr. West's performance, politely but forcefully moving him to the sidelines.

Mr. McNally remains a vice chairman of the parent company. His rapport with Bank of Montreal confers all sorts of advantages in acquiring necessary financial and human resources. And he has a strong track record as a strategist and tactician, having overhauled Bank of Montreal's huge personal and commercial financial services division, which encompasses 1,200 branches, $40 billion of assets, and five million customers.

Senior officers at Harris say Mr. McNally, a former varsity hockey goaltender, brings an unprecedented intensity to his post. They express borderline intimidation at his high energy level - but also express relief that logjams are being broken.

"People will say there's. an erosion of midlevel power and decision-making authority," confides one Harris officer. "On the other hand, Al came with a checkbook, enthusiasm, and a public, long-term strategy."

Though unwaveringly diplomatic, Mr. McNally acknowledges Harris hankers must be "inconvenienced" if the hank's productivity is to improve.

"It would be terrific if we were running a lemonade stand that didn't require teamwork," says Mr. McNally. "But the fact is, the economic and competitive forces of consolidation and deregulation demand heightened leadership and coordination."

Sitting in his corner office in downtown Chicago, Mr. McNally is candid about some of the financial shortcomings at Harris.

At more than 70%, the bank's ratio of operating expenses to operating income is way too high, he says. Exacerbating the situation is a weak marketing effort that, by his estimation, has left Harris $1.2 billion short of its ideal loan concentration.

"From a financial perspective, Harris is underperforming, by any measure you want to talk about," says Mr. McNally, who is a former chairman of MasterCard International Inc.

The banker has three cures:

* Capture scale economies, both by integrating Harris and Bank of Montreal operations and by building Harris' assets.

* Build the Chicago branch network, thereby expanding the distribution pipeline for Harris' products and services.

* Redeploy operations resources into marketing, sales, and service, lowering back-office expenses while boosting revenues.

In the early going, analysts worry most about the price and timetable of Mr. McNally's expansion plans.

The executive is paying a hefty 240% of book value for the $1.4 billion-asset Suburban, a move that Burns Fry Ltd. estimates will dilute Bank of Montreal's earnings per share by 3.5% in 1995. In the attractive metropolitan Chicago market, future acquisitions are likely to be just as costly.

And building branches is a time-consuming process, both in terms of site selection and construction, and in achieving breakeven volumes.

But Mr. McNally has little choice but to buy while the buying is good. Myriad regional banking companies are building Illinois franchises, and Mr. McNally can't sit idly by while all the attractive takeover targets fall into the hands of competitors.

Moreover, Mr. McNally says, the ratio of total population to bank branches in Chicagoland is high in comparison with most modern banking markets worldwide, making de novos a much more feasible proposition.

One obvious ploy in achieving economies of scale is integrating the operations of Bank of Montreal and Harris, and this avenue seems to hold great promise. Mr. McNally is taking pains to reorganize Harris almost exactly along the lines of the parent company - a move that not only will speed integration, but that also is politically clever.

"Linkages with Bank of Montreal's family of companies are growing by the hour, and I am not exaggerating," he says.

Redeployment is the buzzword at Harris these days, and it poses perhaps the most serious managerial challenge for Mr. McNally. By combining back offices at Harris and Suburban, he hopes to free up an additional $55 million per year, all of which will be used to fuel Harris' retail expansion.

In practice, more than 10% of the work force will be reassigned and retrained, salaries in the new jobs won't necessarily match those in the old jobs, and not every transition will work out.

"You can see it's going to be hard, not only on management but on the whole organization," said one senior officer. "People will have to make career decisions, go through retraining, and give up comforts."

Mr. McNally aims to make contact with every Harris employee in a series of group meetings this summer. The keys to handling upcoming transitions, he says, are presenting a clear and comprehensive rationale, steadily focusing on goals, and crafting incentives so people are shooting for desired results.

"There can be no conflicting story," says Mr. McNally. "And the story has to be comprehensive. Otherwise, you give employees reason to doubt.

"They need to accept that the goals are rational and reasonable, and that their role in achieving the goals is congruent with their best interests as employees. Most important, they want to know there is a sustaining determination to achieve those goals."

Although Mr. McNally oozes determination, he is not insensitive to the perils of restructuring. Too many disruptions could erode some of the very strengths on which he hopes to build. Indeed, the executive has delayed a company-wide computer systems integration in the name of preserving continuity.

From this perspective, perhaps the saving grace of Mr. McNally's mission is its seemingly generous timetable.

It is not until the fall of 1998 - more than four years from now - that Mr. McNally is committed to begin delivering a consistent return on equity of at least 15% for Harris Bankcorp. That gives him some breathing room in managing the renovation.

"Breakage I don't need," says Mr. McNally. "This has to be a nice, normal transition."

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