A recent survey of American businesses found that 85% had instituted some form of corporate redesign to improve profitability. After two years, costs had failed to decline in nearly half those firms, and, in a few cases, they actually had risen.
The Wyatt Co. survey also found that 58% of responding companies had sought to increase productivity through a "restructuring." Yet only a third of those achieved this goal within two years.
While these findings were for a cross-section of American industries, our experience has been that many bank restructuring programs have a similarly limited impact.
Restructuring programs that fail are costly. In addition to the consultant's fees, there is a tremendous organizational cost. There is a huge diversion of organizational time and resources during the program. Even among employees who are not directly involved, much time is spent speculating about the latest rumors concerning potential changes.
Employee morale suffers as continual layoffs occur without any organization revitalization. Productivity declines as workers realize that the corporate loyalty upon which they had depended has become a one-way street. Efforts to truly change the organization are performed halfheartedly, as employees adopt a "restructuring of the month" attitude.
Finally, the bank and its management begin to lose credibility with its outside constituencies. Investment analysts and shareholders begin to doubt the value of the institution, as efforts to change its economics fail to deliver positive, tangible results. In the face of layoffs and closed branches, community leaders and customers begin to question the commitment of the bank to their markets.
Still, banks do have a real and pressing need for change. Most institutions have cost structures and pricing approaches that date back to an era of protection and regulation. A reengineering effort forces the institution to step back and evaluate all of its processes and procedures in terms of their value to the organization.
Take, for example, Star Banc Corp. Since the Cincinnati bank undertook a reengineering program last year, its return on average assets has improved from 1% to 1.3%, its return on average equity has increased from 11% to almost 16%, and its efficiency ratio has declined from 63% to 57%.
Such growth in profitability is worth the organizational tension that reengineering causes. A redesign program that is properly implemented can reduce noninterest expense by between 20% and 25% and increase noninterest income between 15% and 20%.
Reengineering a bank is about organizational revitalization as much as it is about redesigning cost processes, systems, and structures, or about establishing pricing discipline and outward focus. Where many redesign programs fail is in their inability to harness the organization's desire for change and channel it into creative thinking. Establishing the organizational context for reengineering is as important as, if not more important than, providing a structured, managed methodology for change. Three imperatives for successful reengineering must be addressed before the bank is ready to face the redesign challenge:
*Demonstrate a commitment to change.
* Demonstrate a commitment to fairness.
*Demonstrate a commitment to involvement.
Employees are much more likely to see the redesign as a permanent change in the way business is done if management truly demonstrates its commitment of the organization's time and resources.
What might be called a "layered team structure" is valuable in harnessing the efforts of the organization's "best and brightest" senior staff members, as well as employees throughout the organization.
The management committee comprises the bank's senior executives, whose role is to set the tone for the program and lead it within the organization. This involves a considerable time commitment from them, ranging from 20% to 100% of each working day at various points during the program. The working-team leader is generally a member of the management committee, who commits all his working hours to ensuring the success of the effort. A key role of the working-team leader is to set a tone of creative thinking and radical change for the overall effort.
The working team includes 10 to 20 senior managers who are devoted exclusively to the restructuring process and are responsible for guiding it within the organization. Group leaders are responsible for analyzing current processes and tasks, They generate ideas for change within a collection of cost centers or pricing arenas
The third level includes all employees below the group leader level. To involve the whole staff in the reengineering process, each member must be asked to contribute ideas and suggestions.
There are three advantages to this team structure. First, the direct line created between the management committee and supervisory level managers allows for a two-way flow of information and ideas, and thereby overcomes traditional barriers to change that result from a "bulge" of middle management in banks. Second, it takes the "best and brightest" managers away from the safety net of their line or staff positions and challenges them to think. And it shows that senior management is dedicated to changing the way things are done.
The commitment to fairness is twofold: fairness of approach and fairness of implementation.
To be fair, the approach must not be arbitrary. Every area and every process within the bank must be included in the redesign program. If any area is excluded from review, it would be perceived as receiving special treatment no matter how valid the reason for exclusion. A commitment to fairness implies that management holds the belief that every aspect of the bank has the potential to be redesigned in a more efficient manner.
It should also be noted that across-the-board cost reduction targets or so-called benchmarking studies that mandate cost reductions without redesigning the way processes are performed are arbitrary. The true reengineering of an institution requires a thoughtful review of every area of the bank, the establishment of aggressive cost and revenue targets for each, and, most importantly, a recognition of the risk associated with every idea for change. As a result, each area will be affected differently by the ultimate redesign.
In banking, it is a simple fact that staff equals cost, given the high levels of personnel expense. While some layoffs are therefore inevitable, employee anxiety can be controlled - and staff commitment maintained - if it is felt that the reengineering is something that everyone in the bank faces together and that whatever can be done to ease human resources issues will be done. This requires a detailed human resources strategy, as outlined here:
Hiring freeze. At the beginning of the process it is important to suspend hiring in order to provide positions for some of the employees who will be released as a result of the reengineering. The bank also wants to avoid hiring anyone whose skills may not match those required by the redesigned organization.
Promotions and salary freeze. For similar reasons, promotions and salary increases should be put on hold until the process is completed. A job may undergo dramatic change as a result of the redesign and require substantially different skills than those held by the current employee.
Employee selection. The most fair method of selecting which employees remain with the redesigned organization is a "skills-based" assessment. Evaluate individuals against the skills required to perform the redesigned job. This method, while complex, gives the bank the opportunity to upgrade the bank's skill levels and to eliminate lower- level performers, while rewarding those employees with the most attractive sets of skills.
Severance policy. The bank's severance policies must be set in the context of the reengineering effort, local employment levels, and the skills of the individuals involved. While most severance programs create a trade-off between benefits and costs, one relatively inexpensive benefit is active job search assistance by the management committee and other senior managers to whom the individual has reported.
Rerecruitment. Human resources programs do not end with the reengineering implementation. Rather, it is also critical to "re-recruit" those employees who remain with the organization. Because the displacement process may last a full year, the message that the bank is better equipped to meet the challenges of the future needs to be continually reinforced.
One of the primary reasons many restructuring programs fall short of expectations is a failure to involve the whole organization in the reengineering effort.
Structured and continuous communications promote a sense of participation among employees and keep all of the bank's constituencies informed about the progress and development of the reengineering program. Several steps are essential to designing a communications strategy that successfully accomplishes these goals.
Viewing the reengineering program as a team effort. There should be an explicit mission statement which unifies the participants. The statement should convey the underlying economic rationale for undertaking a radical reengineering. Giving a name to the redesign effort also serves as a rallying point for its supporters. The name should be simple, yet describe the project to a larger audience. Throughout the program, bi-weekly updates should keep staff informed in an honest and open fashion. Platitudes and half-truths will fool no one.
Actively directing internal communications. lt is particularly important to inform key senior-level and midlevel managers early in the process and to gain the support of these leaders. Communications directed at all the bank's employees must be broad enough to give each staff member an honest and accurate overview of the program that will be carried out within the organization, while omitting a level of detail that would generate confusion and unnecessary anxiety.
Involving external constituencies. Don't forget about the external constituencies which support the bank - including the shareholders, regulators, investment analysts, the media, the community, and the bank's customers. These constituencies should receive a consistent, coherent, and positive message concerning the redesign effort.
Involving the whole organization in what is perceived as a high priority and fair process helps create an environment in which employees believe in a process of change, participate in the way that their respective processes and activities are redesigned, and possess a sense of ownership of the changes implemented. These factors dramatically improve the ability to achieve a successful reengineering of the bank which produces an annuity, rather than a ephemeral, impact on earnings.
Each of these "softer" elements of redesign is as important as, if not more important than, the specific reengineering methodologies employed. Bank staff members hunger to be able to tell their families with pride how they spend their days - provided the contract is in place to seek their input, keep them informed, and use the reengineering process for a one-time retooling of the bank, rather than as the latest of a series of "restructuring" fire drills.
Paul H. Allen is chairman of Aston Limited Partners, a New York-based bank investment and reengineering firm, and author of "Reengineering the Bank: A Blueprint for Survival and Success" (Probus Publishing). Jacqueline Corbelli is managing director of Aston.
