All Hands on Deck

By Bill Stoneman

To cope with the unprecedented challenges that lie ahead, banks must learn to harness the full power of their human resources.

Bank of America Corp. in July announced a restructuring plan whose elements both defined banking over the past decade and pointed to where the industry needs to go in the next. Echoing a refrain heard countless times in recent years, the Charlotte, N.C.-based company cited efficiency and earnings imperatives as justification for a sweeping workforce reduction - up to 10,000 people, or roughly 7% of the total.

Though expressing satisfaction with the far-flung empire built through mergers and acquisitions, chairman and chief executive Hugh L. McColl said the banking company's leaders "have not made the degree of progress we would like" in realizing its potential. Among other things, added president and chief operating officer Kenneth D. Lewis, reaching the next performance level will require "organizing around customers."

Bank of America is not alone in facing the dilemma of how to reduce headcount while improving customer responsiveness, and this highlights an enormous challenge facing the industry. In the New Economy driven by information technology and e-commerce, banks must begin viewing their employees as strategic assets - their prime competitive advantage - rather than as expendable cost centers. The institutions that emerge as viable players in a converging financial services industry will be those that harness the full power of their human resources. This demands some major changes in the way banks are organized and managed.

The driving force for this transformation is the ascendancy of the customer, whose choices and expectations are increasing exponentially in a networked world. That phenomenon introduces a severe conflict for traditional organizations. By definition, customer-driven strategy requires a more responsive workforce. But rigid hierarchies put a gulf between decision-makers and clients, limiting the organization's flexibility in dealing with shifts in market demand. "Banks need flatter organizations that are responsive to customer needs, nimble, and that empower frontline people to make decisions," says Greg Wilson, a McKinsey & Co. principal based in Washington, D.C..

The change is reminiscent of the difference between football and soccer, says consultant Seamus McMahon. Banks traditionally have been managed in a hierarchical, football-like fashion, where the CEO (the quarterback) formulates an operations-intensive plan that is then executed by middle managers and their reports. In the future, institutions will need to operate more like soccer teams, where the individual players still follow an overall strategy but constantly exercise their initiative, improvise, and collaborate with each other to respond to the needs of the moment. "The model becomes more of a network than a hierarchy," says McMahon, managing director of Novation Associates in New York.

It all falls to mush, however, if the workforce doesn't adapt to the new model. To unleash the individual initiative, enthusiasm and drive needed to pursue customer-driven strategies, institutions must fundamentally revise the way they treat employees at all levels - from tellers up to top managers - and recognize human resources as a strategic priority. "To survive as an industry, banks need to provide superior earnings growth. But you can't achieve that if you don't have an engaged workforce that can execute the game plan," says Ralph Horn, chairman and CEO of First Tennessee Corp. "Banks have left the people element out of the equation."

This is not to say that consolidation and cost-cutting won't remain powerful forces in the industry. Even after the great mergers of the '90s, the U.S. banking market remains far less consolidated than in Europe or Japan. Now that regulatory reforms have lowered most of the barriers to cross-sector competition in financial services, the current number of federally-insured depository institutions - 10,000 plus - almost certainly needs to shrink further, which foretells more mergers and more layoffs.

It should be obvious by now, however, that mergers and consolidation, though necessary, certainly are not enough to rejuvenate the industry. Nor can institutions solve all of their problems with massive technology spending. The limitations of this strategy can be seen in the fact that many of the high-flying acquirers of the '90s have fallen on hard times.

First Union Corp., Bank One Corp., Bank of America and U.S. Bancorp all began the new decade with sub-par or sluggish earnings growth, despite long strings of deals that were touted as the key to reaching another level of performance. It is difficult, in fact, to identify any large institution that achieved a fundamental improvement in earnings from acquisitions; most got larger but not better. Something seems to be missing from the strategic mix.

Empowering Managers

The banking industry long has struggled to improve revenue growth and profitability, but fresh challenges dramatically ratchet up the pressure.

Consider convergence. Financial services firms are steadily intruding on each other's turf. Now that banks can legally affiliate with insurance firms, investment banking houses and mutual fund companies, cross-sector competition will intensify. This demands new ways of thinking about how to deliver financial services. Citicorp's former CEO John Reed, for example, recently revealed in a speech that he considered doing a deal with AT&T Corp. before joining forces with Travelers Group in 1998.

Internet technology is another disruptive force, allowing nonbank competitors access to the payments system, banking's last bastion of franchise dominance. Whether they're trying to keep up with online banking, wireless banking, e-commerce or e-payments, banks find themselves at every turn having to either compete against or strike alliances with nonbank technology companies. Managers of the future must adapt to a business environment that puts a premium on negotiating skills and strategic insight.

To withstand the onslaught, banks will need to emulate the cultural characteristics of their nonbank competitors by displaying qualities such as entrepreneurial management, technological innovation and speed-to-market. Unfortunately, the industry's hierarchical management model is not well-suited to facilitate that transition. The problem: top-heavy hierarchies estrange decision-makers from customers, diminishing responsiveness.

"You have to break down some of the traditional decision-making roles," says Rex Bennett, principal of Achieving Unlimited Co. in San Rafael, Calif., a consultant on competitive strategies and customer retention in financial services. High on Bennett's wish list is vesting many more frontline personnel with the authority and training needed to satisfy customers right on the spot.

Ultimately, such empowerment requires a change in attitude at the very top. Directors, for a start, must begin holding CEOs accountable for developing a work environment that nurtures initiative and creativity. CEOs, in turn, must relinquish some of the power they've zealously accumulated. "The days are gone when a CEO could run an organization with an iron fist," says consultant Edward E. Furash, chairman of Monument Financial Group, Alexandria, Va.

In Furash's view, modern CEOs need to focus on building a team, although he doesn't advocate team decision-making per se. Someone, after all, needs to be in charge. Rather, Furash says, the CEO's role is to function as a team leader who gives business line managers a major voice in strategy development and then holds them accountable for the decisions they make.

People throughout the organization need to exercise more initiative, so they can solve more problems on their own. They also need to collaborate more, so they can more quickly and fully respond to customers' ever-changing demands. In this way, the organization begins to resemble that soccer team, with both individual enterprise and interplay among team members helping to advance the ball toward the goal.

To be sure, banks can't abandon their traditional emphasis on safety and soundness, which requires powerful risk management controls. With hard-earned deposits at stake, the public would never tolerate the kinds of operational glitches seen at nonbank competitors, such as online brokerage firms. Banks also face a far more restrictive regulatory environment than many competitors. Taking those boundaries into consideration, banks still have some leeway to change the way they manage and organize their employees. Some restructuring is clearly necessary if they are to take advantage of all the opportunities opened up by convergence and e-commerce. "Competition for people is going to be one of the make-or-break issues for banks in the future," says consultant Mary Ann Allison, chairman of New York-based Allison-LoBue Group LLC. "When the competition is human capital against human capital, the people make the difference."

Contest for Talent

Human capital was not a top priority for most acquiring banks in the '90s. Freed from geographic restrictions, these institutions engaged in a frenzy of merger deals that expanded their customer bases while cutting overhead. Unfortunately, heavy-handed layoffs disrupted service to the point of disaffecting countless customers. All too often, cost saves were offset by revenue declines as customers jumped ship.

Banks further pressurized customer relationships by sharply raising fees, driven in part by an urgent need to offset declining net interest margins and cover the cost of new technology. A recent Federal Reserve Board study demonstrated that service fees are "significantly higher" at larger institutions — the primary population of acquirers - than at community banks. The customer response: a 1999 consumer survey by the American Bankers Association found approval of the value provided by banks plummeting to 10%, from 33% five years before.

Taking a different tack, banks now are trying to blend service and sales within a relationship context. More keenly appreciating how difficult it is to win new clients, institutions want to preserve the valuable relationships they already have. With a deeper relationship comes the opportunity to sell a broader range of products and services to each client - a major rationale for the cross-sector combinations seen in recent years. In turn, institutions must learn to market non-traditional products such as mutual funds and insurance while making skillful use of rapidly evolving technology.

That kind of environment requires a new generation of representatives and line managers. These people will be expected to embrace change and use technology to create new businesses, and they must be able to coach others to do the same. That requires individuals who are more dynamic than those traditionally hired by banks. But finding them won't be easy.

Demographics, for example, are working against employers. With the oldest baby boomers nearing early retirement age, the labor force is growing more slowly than the economy. That ensures fierce competition for top talent, barring a major economic downturn. The allure of startup Internet companies makes it particularly difficult to acquire technical talent. "We have a new big dog on the block," says Charles D. Moomaw, senior vice president for organizational effectiveness with National City Corp., Cleveland.

The dotcoms attract both technically proficient employees and managers who are dazzled by the opportunities for entrepreneurship and lucrative stock options, as highlighted in a recent report from Keefe, Bruyette & Woods Inc. "Many financial institutions struggle to attract and retain key IT personnel, given the demand for IT services and the perception that banks are slow and bureaucratic," wrote Clare Ludvigsen, an analyst with the New York-based investment banking firm.

To increase the odds of attracting the types of employees it wants, National City is working to become more flexible. The company is issuing stock options deeper into the organization, and it is more liberal about work rules and telecommuting. Moomaw himself moved to Sedona, Ariz., earlier this year and now works from his home when he's not on the road.

Internal development programs are shifting as well, with more attention given to working with senior managers on coaching and leadership. "When we interview a candidate for a management position these days, we're looking for evidence of strong communications skills," Moomaw says. "We put more value on employee development and coaching abilities, things we didn't look for as often in the past."

Still, Moomaw acknowledges that National City's efforts may fall short. "Frankly, we don't know if this is going to work," he says. "It may just be a Band-Aid. It may be too little, too late."

Cultural Strategy

As National City has discovered, hiring and retaining the best employees is a challenge for which there are no easy answers. Incentive-based compensation is an obvious place to start when thinking about attracting dynamic personnel. But as useful as stock options and bonuses are for spurring selling, they're not sufficient to build a cohesive team. "You need a cultural strategy to support your business strategy," says Steve Geiger, president of the change management group at AON Consulting Worldwide.

A cultural strategy, in Geiger's view, entails creating a common sense of mission among all employees. Executives and managers at every rung on the corporate ladder must sell the company vision to the people a step lower in order to reap the kind of frontline buy-in that ultimately begets customer loyalty.

AON Consulting, based in Eden Prairie, Minn., identifies four main elements in successful management development programs: hiring the right people; training them; creating a common sense of purpose; and motivating the managers who in turn must motivate the rank and file. "Banks do a really good job of hiring the right people and getting them trained," Geiger says. "They also do an okay job with compensation and benefits. But they typically do a lousy job of providing direction and vision. And they do a lousy job of conveying that this is an exciting industry that's going places."

To provide that direction and vision, executives need to understand the factors that drive employee commitment. With some variance by industry and rank, the top drivers typically are: help in balancing work and family demands; opportunities for growth; and confidence that the company really is trying to satisfy customers.

"We've got to have leaders at all levels who understand that job number one is taking care of the people who actually do the work," says James D. Yancey, president and chief operating officer of Synovus Financial Corp., Columbus, Ga. "If you have employees who think they have individual value, they'll come to work in the morning and take care of customers better than somebody who is just coming to a job."

First Tennessee, in the course of internal survey work, discovered that employee satisfaction, service quality and customer retention correlate strongly with employees saying, "I have a supportive leader." As a result, says Sarah Meyerrose, executive vice president and head of human resources, First Tennessee considers leadership skills to be a top requirement for managers, as opposed to traditional technical skills such as credit analysis.

The bank's human resources and business unit executives, for example, recently came up with a new list of competencies they believe essential for effective managers, including judgment, strategic thinking, negotiation skills and employee relations skills. Managers are increasingly evaluated on the basis of these competencies. "We have to develop leaders who can empower employees, who can work in a collaborative environment, and who are flexible," Meyerrose says.

Milwaukee-based Firstar Corp. reached a similar conclusion. "In the old days, you had to come from the job you now are overseeing," says vice chairman Richard Davis. "Now, companies understand that they can place bright people from the outside into leadership positions as long as the newcomers respect the knowledge and skills of the people they're leading. That's a huge paradigm shift for bankers."

Even so, organizations face a serious long-term challenge in maximizing human resources. Particularly frustrating for numbers-oriented bankers is the heavy qualitative aspect of revising management practices and cultural norms. After all, there is no precise formula for constructive organizational change.

Executives can avail themselves of many helpful concepts and suggestions. But finding the right transformational keys within each organization will require much experimentation and sensitivity to the strengths, preferences and personalities of each person on staff. Indeed, Bank of America acknowledged in its July announcement that the procedures for simplifying and expediting banking transactions for customers and delivering financial solutions that lead to profitable relationships "are still being designed."

Without question, committing to organizational transformation, and broaching the uncertainty that accompanies it, is both healthy and necessary. Banks are beginning to modify their approach to hiring and managing people, which can only further their quest to remain viable financial intermediaries.

Mr. Stoneman is a freelance writer based in Albany, N.Y.

Copyright © 2003 by Banking Strategies, published by BAI.

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