Banking cultures – a case study

The situation

A small but well regarded German bank specialized on advisory in mergers and acquisitions situations had decided merge with a larger Italy based investment bank. As in these days the banking crisis was looming already it seemed to be a good idea to join forces with a stronger partner.

However during the merger process problems arose when the German IT had to be integrated into the central Italian IT. The overtaken company’s success unlike the advisory operations in Italy and a smaller outpost in France was deeply rooted in its vast and intensive use of information technology. The German advisory experts had reason to fear to become cut-off from the very roots of their success which gave them the competitive edge in the past. Communication about this issue by some unknown reason had come to a grinding halt. The situation looked troublesome.

We were asked to analyse the situation and come up a recommendation how to solve this uneasy situation which threatened to disturb that otherwise very smooth merger process.

Does Advisory need to run its own IT?

We quickly found out that advisory as an experts driven business has specific requirements to the IT-support. These requirements are different from those of the traditional operational banking business:

• The Advisory operational model is different; hence advisory is best organized as an expert network – not common for a bank.
• Consequently advisory has different requirements to the IT-support: the operational bank IT looks distinctly different from an advisory IT.
• German Advisory’s success was deeply rooted in its IT. The operations of the German advisory were characterized by some basic principles being source of their very specific success.
• Most of the communication flows were contained within Advisory only: by far the most information flows within the advisory group – few outside.

While digging through the IT issues and after visiting the different sites we secondly found out that there was much more about it than just simple IT questions. And indeed the IT people on both sides were brilliant enough to find appropriate answers to any technical questions. But they were inhibited by a kind of culture clash. And as we had found that the local German advisory IT was the straightforward implementation of their business needs, their specific corporate culture mirrored their operational model as well. So in a way IT and culture were siblings.

Find some details in the following table:

Bank IT Regulatory compliance 7 x 24 operation No “service is down” requirement Secure & reliable operation Service release after security audit & formal sign-off Standard processes to support a large corporation Mature IT-systems in place Standard decision cycles Secure & compliant communication Support of paper based processes Supply of secure but rigid standard processes Theory X Management style

Advisory IT Individual business support near-7 x 24 support High but not 100% service is up requirement Releasing new services on demand Due effort & diligence is sufficient. Deep knowledge of specific needs necessary to deliver tailored services. Leading edge IT-environment. Very short decision cycles Barrier free ubiquitous communication Paperless operation Supply of an expert’s tool set for free configurable use. Theory Y Management style

Before coming to any conclusion let’s first dig a bit deeper.

The Advisory operational model is different

To support our finding, that the advisory IT is ‘different’ let’s compare the two models:

Banks are typically organized in a pyramid structure:

• They follow an industrial model known as Taylorism.
• This model is best suited for the mass production of uniform products by unskilled workers for an unsaturated market.
• Value creating processes are split into the operational part and the managerial part creating room for a thick layer of ‘middle managers’.
• The major focus is on compliance and efficiency not on flexibility.
• This model is best adapted to a static environment where its organisational complexity does not come to its disadvantage.

Advisory on the other hand is a specialized financial service:

• It relies on few high volume projects.
• The tasks need highly professional experts.
• The very model requires continuous flexible adaptation to the customers’ specific needs.
• In this case effectiveness outweighs efficiency.
• Core processes are created, adapted & controlled by the experts themselves.
• Only few low level operational activities remain.
• The resulting post-tayloristic organisational structure resembles a diamond.
• It is best organized as an expert network – not very common for a bank.

In my previous post I had already pointed out, that different ways to do business require different organisational structures – which in turn result in different cultures by the time.

German advisory’s success was deeply rooted in IT

The operations of German advisory were characterized by some basic principles:

• Confidentiality
• Dealing with confidential customer information is a key requirement of the advisory business
• Information leaks may cause the loss of a customer and additionally to compensation claims.
• Open information policy
• Internally the working style is characterized by a free flow of information.
• Transparency has only a few limitations.
• Massive use of information technology
• Very specific and possibly critical to the success in the past is the massive use of modern information technology.
• Major focus is on communication support and knowledge management.
• Sophisticated controlling
• IT-based Controlling functions allow for a detailed time tracking and reporting by person and project.
• Project risks can be controlled this way.
• Knowledge management
• The primary work on customer projects relies on IT-functions.
• Hence all information is originally created electronically already.
• To maintain this knowledge for later use the storage of huge amounts of data is taken in to account.
• Paperless office
• Paperless operation is a remarkable speciality of the German advisory.
• To enable this procedure incoming paper mail is scanned immediately and forwarded electronically.
• Even legacy documents have been treated this way after introduction of scanning.
• As a major (even competitive) advantage all documents are accessible electronically for remote users too.

At first glance it becomes obvious, that of the key success factors like ‘Massive use of information technology’ and ‘Paperless office’ are true IT positions. Others like ‘Confidentiality’ and ‘Open information policy’ refer to the special way to cooperate and perform their tasks – hence culture. And in a third group (‘Sophisticated controlling’ and ‘Knowledge management’) finally both factors contributed to the corporation’s success: a special corporate culture and an aggressive yet adequate IT deployment.

Our findings gave some food for thought already to the Italian headquarters. But the question arose how synergies could be gained in this special situation and what would be the optimal degree of integration of the newly acquired German subsidiary into the whole group.

Most of the communication flows within Advisory only

When looking at the internal communication we found out, that by far the most information flows within the advisory group – few outside. From our observations we concluded, that inside the merged Bank …

• communication flows will be strongest within a location,
• less bold lines can be drawn between the locations within the Advisory group, and
• comparatively tiny flows are expected from the advisory group to other areas of the merged bank.

So, there was a strong indication, that communication structure of the advisory group is merely independent within a merged bank’s structure too.

Conclusion

Our final advice finally boiled down to: stay independent but carefully look for synergies! The Advisory group should therefore maintain an independent European IT. But while staying independent both IT groups were encouraged carefully look for synergies. Those were expected most easily to be found in the lower level s of the infrastructure and less probably in the higher application specific levels:

• The Advisory group, especially in Germany, must not cut off its roots of success – where IT plays its part.
• The overall strategic interest is best served by balancing the individual business needs vs. the common group interests.
  
• It seems to be wise to keep the flexible advisory IT apart from the highly regulated traditional bank IT.
• From the position of independence both parties should be encouraged to carefully look for synergies.
• As business models differ, so does the IT support - but there is common ground too: chances for synergies exist in the lower IT levels.

But the most stunning findings for all participants were, that on one hand the way we work (processes) is firmly rooted in the way those processes are technically supported (IT). But on the other hand this way of working is the result of our values, beliefs and behaviour – in short, our culture:

IT follows processes follows culture.

In order to lead to an exceptional success these three components need to be carefully fine tuned to mutually strengthen each others. But this balance can easily be destroyed by taking the wrong decisions – perhaps haven the best intenstions.

Structure follows market – and so does culture

Some of you might remember the American historian, Alfred Chandler’s wise words: “structure follows strategy” which Richard P. Rumelt cynically turned into “structure follows fashion” … well different story.

But I recently came to know, that “culture follows market”. How this? Isn’t this a bit far-fetched? Well, let me explain.

When Henry Ford I had the idea to provide the American people with personal cars he approached an empty market, an unsaturated marked with a huge sales potential. This would have stayed just a potential if not a group of economists at the same time had defined the theory of “scientific management”. The probably most well-know member of this movement, Frederick Winslow Taylor, lent his name to this movement Taylorism. It was about high scale mass production according to pre-defined and pre-optimized efficient processes.

Influenced by these people consequently Henry the Ford T Model cars which left Fords assembly lines were sold in every colour as long as it was black (because black at that time was the colour which dried most quickly).

The model worked fine and Ford thrived. America got motorized. A new age was born. And the “scientific management” model became synonymous with management anyway – and it still is today, more than 100 years later.

These early unsaturated markets demanded high numbers of uniform yet affordable products. Unskilled worked had to be hired from the streets to become productive workers overnight. This a whole organisational layer of middle managers had to define and tailor (no, not taylor) their processes, tasks, assign time-slots, the work place and so on and they had to supervise them and manage them to get the best out of them. In short, they invested high efforts to refine and optimize the business.

And the big bosses at the top were thinking about new market, new technologies, new product lines, in short strategies. The classical three-story pyramidal hierarchy was born. Its organisation is highly adapted to efficient mass production with the tendency to become more and more optimized to be come fit for this special purpose. With optimisation came complexity – but it was worth it because it paid off on the long run. Flexibility, change robustness, adaptability or – to use a word which is en-vogue nowadays – agility were non-issues.

But once the markets were saturated the picture turned completely. Now a standard model no longer was sufficient, having a car per se was not the big achievement like before, for the 2nd one the experienced customer turned out to be more demanding: other colours, different from black, open-tops, pick-ups, sports cars, family cars, station wagons, Pullman limousines, and on top model changes every two to three years.

The environment became much more dynamic. And in a dynamic environment multiple complex decisions have to be made. In the Taylor pyramid with its potential information flow bottlenecks at top level this situation easily leads an information overflow. The demand for increased corporate agility put the whole structure under heavy stress. The increased organisation complexity which delivered so excellent result throughout all the years turned into a heavy burden by the time.The natural organisational response to these new challenges is a less hierarchic, more networked organisation – the expert diamond. It offers higher agility at the cost of lower efficiency.

In the experts diamond peers communicate directly. Management functions merge with operational functions to independent self optimising processes. Experts led by principles follow their own autonomous decisions. They make autonomous but visible decisions.
For leadership the consequences were: the „boss“ becomes a coach rather than the „1st clerk“. Mutual respect of personality and competency replace daily order and detailed rules. The culture has to adapt from “feudal” to “team oriented”.
Lets compare how this organisation changes necessarily influences the corresponding best adapted organisational culture: Taylor Pyramid vs. Experts Diamond.

Pyramid culture Lead by orders and rule Tightly managed departments Remuneration on hours works Penalties on failures Secret knowledge Safe jobs through rigid structures Working for money Vertical communication only External control of work Predefined jobs Operation & control are split Distrust

Diamond culture Lead through principles and values Autonomously acting teams. Remuneration based on success Rewarding success Shared knowledge Confidence through cultural integration Self-confidence through visible contribution to success Direct peer-to-peer communication Self controlled work Evolving (self organising) jobs Self optimizing processes Trust

In large organisations however it can be found that areas of different requirements with respect to the efficiency to agility ratios may well coexist. We found such examples in European banks with a retail-LoB which had to be highly optimised towards efficiency, reliability and compliance with regulatory regulations. Additionally there was a corporate advisory LoB where highly skilled experts had to flexibly solve ever new and differently demanding tasks: two organisations, two cultures, two “hearts” within one large corporation.

This means that whereas in a static environment the best adapted specialist wins. In a dynamic market the adaptable generalist is the winner. Only a few corporations are equally well positioned in both environments.

But in fact successful corporations need the power of the two distinct cultures. Highly efficient processes need an industrial organisation. Market driven substructures need an expert’s network organisation.

For those organisations taking advantage of “the power of the two hearts” obviously is key to success.

Lets remember that market forces determined the organisational structure and the structure in turn led to a specific ‚best suited’ corporate culture. Hence Structure follows market – and so does culture.