Banks, and indeed all financial services companies, are facing a complex, dynamic, and unpredictable environment because of the rapid transformation of key financial sectors into national or even global in scope.

This transformation has been spurred on by the rapid spread of e-commerce and the Gramm-Leach-Bliley Act of 1999, which blurs the distinction between traditional banking and commerce.

To cope with these challenges, banks will need to change their structures. Banks with a functional and operational orientation lack significant knowledge of their customers and their needs. Distribution systems - branches, ATMs, e-mail, telephone, the Web, fax, etc. - are also not rationalized to respond to technology and customer needs.

When the industry environment was stable and predictable, and products were well-developed and mature, success meant occasional adaptations to change. Now customers are less loyal and more sophisticated, and they require a well-integrated set of multiple services and channels for easy access.

The new electronic environment calls for a market- and performance-driven organization, and a management team that is committed and excited to work as a team.

Competition also comes from new economy companies - not just banks, insurance companies, and brokerage firms. Galloping technology advances in e-commerce, with its global interconnectedness, will require banks to adopt a brand new business model, since even small financial firms can become big players. To cope with these new challenges, I recommend five structural changes.

  1. Develop and nurture a more organic structure supported by product and customer relationship management, human resource practices, and a change in the organizational culture.
    The objective is to build a spirit of collaboration and teamwork by empowering people at all levels to work as a team. This can be done by reducing status and rank, building a flat organizational structure with decentralized decision-making that encourages horizontal and lateral communication and interdepartmental cooperation, and rotating managers whenever feasible.
    Attention should also be focused on meeting core customers' needs and the application of expertise to solve customer problems.
    Organic structure development includes setting up task forces to develop new product ideas and identify appropriate niches or customer "touch points," constant assessment of e-commerce strategy, seamless integration of front- and back-office technology, and product and customer relationship pricing.
  2. Transform into a market-driven structure.
    The goal is to make the structure more responsive to core customer and market needs by emphasizing service differentiation and volume growth in targeted markets. Banks should find ways to take a 360-degree view of the customer, such as incorporating customer life cycle planning and pricing.
    Furthermore, relationship management should be institutionalized for all key customer groups, such as business, retail, and asset management.
    In relationship management, all the service needs of core customers are integrated to build lasting bonds. This could also involve developing specialized niches, such as inventory financing, venture funding, and corporate finance. Periodic reassessment of core customers and customer segments is also a must.
  3. Assess profitability by products and core customer relationships.
    The key focus is developing significant financial information for all managers. Budget and performance responsibility should also be placed on those relatively low in the hierarchy, by providing information to all managers in the same format and pictorially. It is critical to note the old maxim: You cannot manage what you cannot measure.
  4. Implement supporting human resource practices.
    New training programs should install collaborative skills, instead of a "we-they" approach. Communication, decision support, and problem-solving skills should be emphasized.
    Skills in creativity and brainstorming are additional tools to be taught, as well as attitude training. You should implement performance appraisal tools, such as merit increases for successful task force performance, special awards and recognition for superior performance, prices for new product ideas, and rewards for customer-centered behavior.
  5. Introduce cultural changes.
    Experience indicates that no organization changes unless absolutely forced to do so. Even then the change becomes a slow and painful process. Some successful changes could include supplanting the paternalistic culture with a more "can-do" culture and rewarding innovation and initiatives. Moreover, organizational changes by themselves are meaningless if they are not coupled with a compelling vision and inspiration to serve them.

Customers and employees should be educated on the changes involved. An infusion of senior management should be brought in from outside the banking industry - from retailers like Wal-Mart, Target, car rental companies, and well-run restaurants - to facilitate the change. Formal reporting relationships should be redesigned to support the process.The goal is to develop a market/customer-driven structure. You must first develop procedures for rapid and flexible responses to market opportunities, competitive actions, channel usage patterns based on need, and technology changes. Authority and responsibility should be assigned based on risk assumed. Awards and incentives should always match corporate goals when implementing planned strategies and structures.
For the proposed organizational structure to work, I recommend developing five core management groups: customer management; area (demographic) management; functional groups; central management; and staff groups. The marketing, product development, and possibly process management groups should overlay the customer, area, and functional groups.

Customer/area groups would be profit centers with less hierarchy and a more flexible organization. Their goals should be long-term, and rewards based on corporate and business strategies.

Functional/central management staff groups should be cost or revenue centers, and experimentation to convert them to profit centers should be tried when feasible. Functional and process groups should be relatively stable organizations whose rewards are based on shorter-term results and on tailored response/support to customer groups.

Mr. Thamara is a principal of FSIC Associates, a bank consulting and research firm in North Andover, Mass., and the author of "Bankers Guide to New Growth."

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