The world of bank restructuring

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1 Africa Advisory Services Strategic Direction July 2013 The world of bank restructuring Contents title Contents subjects To restructure or not to restructure? That is the question. Scope of work The strategic direction team at EY was recently approached by a leading bank to provide a point of view on the pros and cons of organisational restructuring and more importantly, the role of the corporate centre. This report covers issues around the trends and external factors that impact operating model decisions, as well as the leading principles that help shape the organisations structure. It also poses questions organisations need to ask themselves before embarking on this transformation and the common misconceptions managers make on the role of the corporate centre. Contributors: Michelle Mfuni michelle.mfuni@za.ey.com Nyain Swe nyain.swe@za.ey.com Tovhowani Tshidada tovhowani.tshidada@ za.ey.com The forces that shape the organisation The reasons behind operating model restructuring can either be influenced by external forces or it can be internally driven. Internally driven restructuring is usually proactive, wherein an organisation chooses to redesign its operating model as a continuous improvement exercise. Externally driven restructuring is more reactive, where organisations restructure in response to changes within the operating environment. Research has shown that most companies restructure in response to an event or crisis. Due to the current complexities and volatility pervading the banking sector, it becomes more and more apparent that banks are restructuring in order to adapt to the new operating environment. In the aftermath of the global economic crisis and the continued negative or low-growth outlook in the developed world, the current operating environment, characterised by regulation surges and uncertainty, has become the new normal for the banking industry. The new normal brings with it a complex and competitive landscape. Customers have lost trust and confidence in the banking industry and, due to technology advancements, their expectations have increased significantly. Success, therefore, lies in the banks ability to satisfy customers, provide convenient access to personalised products and actively maintain customer relationships. Opportunities emerge through advanced technology, decreasing barriers to entry, influencing process efficiencies and enabling product innovation. Restructuring has become the preferred way in which banks can survive, gain competitive advantage and be well positioned to pursue growth opportunities. The re-engineering of the banking industry is not the precursor of a global economic meltdown, but rather a signaling of the start toward a trend in favor of more efficient and effective banking models. Benefits of restructuring include significant cost reduction through innovative products and services, reduced exposure and mitigated impact of risks, and increased revenue through enhanced customer experience. Strategy sets the course for the desired model There are three basic types of options around which an operating model can be constructed. These three options are categorised by the degree of centre involvement and intervention, as well as the level of shared services within the organisation. The choice of model to be implemented is also dictated to an extent by the strategy that the bank is following. As in any case where choices need to be made, there are corresponding trade-offs and benefits for implementing each of the three models. The external and internal environments are also key deciding factors that influence the choice of model. The three types of options available for consideration are the centre managed; the tailored line of business (tailored LOB) and an LOB-hybrid option.

2 Characteristics that make up an optimal operating model Figure 1: Nine principles of the leading practice framework Customer experience Organisation design A framework that can be utilised to assess the current operating model and transform it into a more optimal one is outlined in Table 1. There are key guiding questions for a bank s leadership to consider during their restructuring assessment. Data, systems and processes Strategy and objectives Channel distribution and sales Performance management Governance, legal and risk management Strategic Direction team discussion Products and services Physical location(s) Table 1: Nine characteristics for an optimal operating model framework No. Characteristics Leading practices Key questions 1 Strategy and objectives Organisation strategic objectives direct the operating model The operating environment is aligned with the strategy to provide a superior customer value proposition 2 Organisation design Customer-centric operating model Line-of-sight accountability Business units with decision-making independence 3 Customer experience Customer experience that builds trust and restores confidence Effective use of social networks to interact and strengthen customer relationships 4 Channel distribution Integrated multichannel distribution model and sales Incentives that reinforce strategic objectives 5 Products and services Position the organisation to take advantage of market opportunities Demonstrate well-regarded customer value proposition 6 Governance, legal and risk management Prudent risk management policies and capital requirements control 7 Performance management Resources focused on areas that create higher value for the organisation and growth drivers Right mix of people is more important than optimal model Organisation-wide customer-centric learning culture 8 Data, systems and processes A flexible service-centric IT architecture that can operate in both centralised and decentralised environments Technology that enables cost-efficient data use, management and security 9 Physical location(s) Bank branch as a sales and information centre, after-sales and value-added customer interaction centre as opposed to a hub Is the strategy clearly defined and understood across the organisation? Is the business optimally positioned to serve the right markets and pursue growth opportunities? How does the design ensure that the organisation meets customer needs and exceeds customer expectations? What are the roles of the corporate centre and business units? Does the organisation have fragmented accountability and overlapping operational responsibilities? How is value added to the customer and how is it communicated? How are customer channels influencing retention? What impact do distribution channels have on customer profitability, cross-selling ratios and speed of product launches? How do we measure and incentivise customer acquisition, retention and costs? How is the organisation positioned for future growth opportunities? How do we measure if the operating model is aligned to deliver customer value proposition via its products and services? How can cross-functional collaboration be encouraged while regulating risk and rewards? How quickly can the organisation adapt to new regulations with minimal or no impact on customers? How are the current capabilities enabling the organisation to take opportunities presented by the new normal operating environment? How does the operating model encourage organisation-wide learning culture? To what extent is IT used to add value to the business and enhance customer experience? How exportable and agile are the business systems and processes? What geographical footprint is needed to achieve strategic objectives? What capability do the branches need to deliver sales, acqiure and retain customers? 2 Strategic Direction Africa Advisory Services

3 Restructuring: key issues to consider Size: the move is toward a corporate centre that is leaner and more effective. It is, therefore, important to define the valuecreating activities and allocate these functions to the centre. Talent: closely related to the size is the quality of the talent employed at the centre. A centre with staff that are skilled in both operations and strategy can operate in a leaner and more effective way. Location: the choice of location can also be a reflection of the organisation s priorities. Some banks have been seen to have dual hubs and, in some cases, senior managers have been relocated to growth areas, bringing them closer to future customers and talent. Clarity: effective corporate centres must have clarity of roles and responsibilities, and they must be able to communicate the vision, mission and strategy and provide the organisation with clear direction and guidelines. Strategic Direction team discussion Three types of options for operating models Centre managed In the centre-managed model, the support functions are generally centralised and set up as shared services managed from the corporate centre. This approach is often used when the processes (i.e., activities) across all the product and customer areas are similar in nature. It allows for a large degree of standardisation in most processes and provides commonality across business activities. Organisations that are structured by activity and have limited access to skills and resources benefit most out of this model. Adoption of this model can help organisations realise costefficiencies through economies of scale and standardisation. Succession management can be better enabled, as processes and roles are clearly defined by skill and competencies. It may also be easier to phase out redundant activities as dictated by technology, customer demands or other market forces. Tailored LOB The tailored LOB model allows for the most degree of agility and flexibility within the organisation. In this case, the centre s role is to set financial targets for each LOB. The business-enabling and support functions are contained within each business unit, and responsibility and accountability are held at the business unit level. This type of model provides for the exportability of the operating model to other geographies, as each LOB can be regarded as semi-autonomous, having its own strategy and businessenabling services. This also makes it easier to divest in a redundant or poorly performing LOB while having minimal disruption to the rest of the organisation s operations. However, the risk with this type of model is that the decision-making control lies solely within the business unit, without the operating checks and balances of the corporate centre. In this case, the corporate centre plays more of an investor-type role, leaving operating decisions in the hands of the operators. These characteristics and abilities are beneficial to businesses that operate in volatile environments, diverse locations and markets. Agility, the need for local autonomy and differentiation are beneficial when organisations are faced with diverse customer segments with changing needs. The trade-offs are, however, the overall increase in costs, as support functions may be duplicated and there may be a lower level of standardisation of processes across LOBs within a large bank. LOB-hybrid In this model, the corporate centre will set financial targets for each line of business (LOB), as well as provide the core enabling and support functions as a shared service among the LOBs. Although the centre s control is much stronger than in the tailored LOB model, responsibility and accountability still rest at the individual business unit level, allowing for adaptability and agility. This model is effective for businesses that operate in a dynamic and changing environment with a high degree of competitive pressure. Cost-efficiencies are also realised as resources and services are shared among the units. The corresponding trade-off, however, is the inability to divest seamlessly and quickly, as some functions are still shared across the organisation s units. Due to the relative independence of each LOB in terms of their decision-making and strategies, there is still the potential for exporting LOB-specific models to other geographies in the event of expansion. However, the corporate centre will perform a greater performance and risk management role than the tailored LOB. Strategic Direction Africa Advisory Services 3

4 A brave new world of bank restructuring The only constant is change Change is inevitable, and organisations with diversified portfolios and operations are gradually seeing the value in creating a corporate centre that is adapted to today s environment. As organisations become more global, the economic centre of gravity has also seen a shift. The concept of a one-size-fits-all model is no longer applicable as organisations portfolios become more diverse. It s no longer a question of whether the organisation should centralise or decentralise, but rather a question of defining the key value-creating activities and focusing efforts on organising the corporate centre around them. The operating models of the future need to be flexible and simple in order to drive lean organisations. It has been the norm in the past for corporate centres to provide the strategy, centres of excellence (CoE) and shared services. However, over the past decade, global organisations have been seen to spin off the CoEs and shared services. The mandate of the corporate headquarters has been redefined, favoring the more lean and active model. Many organisations are still at the experimental stage, as they try to grapple with the diversity of markets and ever-increasing portfolios. A major trend in global banks is to manage their retail and commercial banking processes through product and segment global units, enabling cross-fertilisation of leading practices between LOBs. On the other hand, the business, operational and IT operating models are customised to cater to local needs, while global operating CoEs are dedicated support to the vertical LOBs, resulting in a multi-local operating model. Bigger is not always better Traditionally, corporate centres have been structured with functional silos organised around HR, IT, finance, marketing, legal, etc., and has increased in relation to the growth of the organisation, making it bloated and unwieldy. This has given way to a more active and leaner approach, where the role of the centre is that of an enabler of superior performance. This is done by creating a platform for collaboration and communication, and encouraging knowledge sharing at a global level. The centre s role is to be the creator of wealth through strategy formulation, as well as a wealthcreating catalyst by creating capabilities (attracting top talent) and enforcing standards. Effective corporate centres also help organisations achieve their transformation goals, whether it is to improve customer experience, streamline processes or reduce costs. It is the centre s role to assure that company s resources are invested in a way that maximises profitable growth and long-term intrinsic value. Conclusion Under the current macroeconomic environment, bank restructuring is usually externally driven. Before restructuring, the bank must be clear about its desired outcomes for its restructuring, noting an understanding of its current operating model and the strategic objectives the reorganised organisation desires to meet. A framework outlining leading operating model characteristics can be used to assess the gap between the organisation s current status and desired end state. There are three basic types of operating model options that can be considered. These options are based on the organisation s strategic objectives and the external operating environment. The end-state outcome of the restructuring processes and the organisation s strategic direction dictates the extent of bank s corporate centre involvement in its business units. The corporate centre may be required to move away from the traditional role of providing the full inhouse complement of shared services to become an enabler of superior performance. For this reason, corporate centres may become leaner and more focused on value-creating activities. 4 Strategic Direction Africa Advisory Services

5 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organisation and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organisation, please visit ey.com EYGM Limited. All Rights Reserved. EYG/OC/FEA no. AU1739 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.