www.rbs.co.uk
In 2007 many saw the Royal Bank of Scotland (RBS) as one of the most innovative and best-performing banks in the United Kingdom. By 2008 it was on the point of collapse, and only survived because the UK govern- ment invested £45.5 billion in the
bank (at about 50 pence a share), in return for an 84 per cent stake in the business. In 2010 it was beginning to recover, and was developing a plan to buy back the government stake, so that it would return to private ownership.
What happened to bring about this change? Before 2007 manage- ment made many internal changes followed by some successful acqui- sitions. The internal changes took place between 1992 and 1997 during what was called Project Columbus.
This made radical changes through- out the retail division, including:
segmenting customers into three new streams – retail, commercial and corporate;
creating new management roles and organisation structures;
new human resource policies to base appointment and promotion on achievement and ability.
This transformed the bank’s business, and provided the base for growth and acquisitions.
An evolving structure
Over the years the bank had become more centralised, as developments in IT during the 1960s enabled it to centralise administrative functions. Control brings more centralised decisions over products, margins and risk management. Against that, the customer relation- ship managers press for more local flexibility to over- ride the system to meet the needs of a valuable customer.
The Manufacturing Division, which deals with rou- tine functions such as clearing cheques, account open-
ing and various other paper processes, is a very mech- anistic structure. The bank created the division in 1999 by transferring most administrative tasks from the branches to a central location. To select staff for the
new division they used personality tests to identify those more comfortable with processes and systems.
Those who were more interested in people remained in the branches.
With many brands, RBS uses different sales and marketing channels to reach its customers. However, it aims to make the underlying processes of banking as uniform as possible, whether for customers of NatWest, the retail bank, or a corporate client.
The branches themselves had been mechanistic, with staff working on strictly defined tasks. Now the branches are more organic, with staff trying to interest customers in other products within a more open physi- cal layout. The bank tries to be organic at the customer- facing areas, with customer relationship managers trying to improve service quality.
The bank was quick to exploit the opportunities that new technology offers. It was an early innovator when it
© The Royal Bank of Scotland Group plc
411 THE ROYAL BANK OF SCOTLAND
launched Direct Line as one of the first examples of de- livering financial services by telephone, and now one of the UK’s largest private motor insurers. An online bank complements the services offered by the bank branches.
The formal structure in early 2010 was that it had six
‘customer-facing’ divisions:
UK Personal (retail and wealth management);
UK Corporate (larger UK companies);
RBS Insurance;
US Retail and Commercial;
Europe and Middle East Retail and Commercial;
Global Banking and Markets.
These were supported by seven Group divisions – Restructuring and Risk, Finance, Manufacturing, Legal, Strategy, Communications and Human Resources.
A culture of acquisition
RBS had developed a reputation for acquiring other fi- nancial institutions and integrating them profitably.
Most notable was the acquisition of NatWest Bank in 2000, not least because NatWest was three times the size of RBS at the time. To win the bank, RBS had to demonstrate its ability to extract major cost savings from the combined operations, and drive greater in- come from the combination of brands, customers, products and skills. The RBS bid promised to deliver a
‘new force in banking’ with the scale and strength to exploit new opportunities in the UK, Europe and the USA. Some industry analysts doubted the ability of RBS to deliver on its bid promises, so the company was under pressure to complete the integration process on time and meet the cost savings and income benefits quoted during the bid.
The Integration Programme was quickly established following the takeover, dividing the task into 154 inte- gration initiatives to be completed in three years. These were expected to yield £1.1 billion in annual cost sav- ings and reduce staff by 18,000. Programme Manage- ment teams were established in each affected business and technology area, and control and reporting proce- dures were set up. The key elements of the integration strategy were agreed and widely communicated:
To use RBS information systems as the single plat- form for operations across the merged bank.
To migrate customer-facing systems such as credit cards, ATMs and internet screens to RBS systems.
To transfer the NatWest customer and accounting data to the RBS systems in a single weekend.
This last was the largest of the integration tasks, in- volving the migration of 18 million customer accounts
worth £158 billion and with huge daily transaction vol- umes. Planning for this took over two years, and paid off when all the accounts were transferred over one weekend in October 2002.
The Integration Programme was completed in early 2003, and was widely seen as a successful strategic move by Fred Goodwin and his team (Kennedy et al., 2006). Having made 23 acquisitions since 2000, and although not ruling out further ones if the opportunity arose, the group claimed to be focusing on growing
‘organically’, by building up existing businesses.
However, Fred Goodwin, the chief executive who had led the bank’s ambitious acquisition programme, completed a deal (in partnership with Fortis, a Belgo- Dutch lender, and Santander of Spain) another deal in late 2008 – which was to prove disastrous. In the biggest deal in banking history the consortium ac- quired ABN AMRO, a Dutch bank. Many had doubted the wisdom of the deal, since RBS would need to raise more capital to complete the purchase. At first Good- win denied this would be necessary, but his reputation suffered when he asked shareholders to contribute
£12 billion in a rights issue. Many believe that RBS picked the wrong time and paid the wrong price for the ABN AMRO business.
A failure of governance?
Worse was to come as, when the 2008 financial crisis developed, the bank found that it was unable to fund its operations. In October 2008 the UK government unveiled an historic bail-out – including a capital injec- tion of state money that amounts to partial nationalis- ation. This led shareholders to press for management changes, and especially for the dismissal of Sir Fred Goodwin. Despite having had to seek a government bail-out, and to the fury of public and politicians alike, Sir Fred insisted that he was entitled to his full pension of over £700,000 a year, due at once, although he is only 50. The bank’s remuneration committee agreed to Sir Fred’s massive payoff as part of the negotiations to get rid of him, and the government did not try to reduce it when it rescued the bank. Sir Fred had a contract.
Others pointed out that bankers’ pay during the bubble was too high, but that it would be a mistake for the state to impose pay limits. Finance relies on individ- uals, and employers compete for their skills. If tax- payers were to get their money back, RBS would need to become profitable, and it was unlikely to do so if it could not attract good staff by paying competitive salaries. This view appeared to prevail, as in early 2010 the bank (with government acquiescence) approved what appeared to many to be a generous bonus
package for its staff – although some senior managers declined to take a salary increase.
A related issue was to reconsider the structure of bank pay, such as awarding more bonuses in shares rather than cash, and paying them over longer periods – so that those which had been earned by taking excessive risks could be clawed back. Rewards should be more tightly dependent on exceptional per- formance, not the rising tide of the markets. But whether such policies worked would depend on how they were applied.
This is a matter of governance. Shareholders suf- fered in the crash, but they had not tried to restrain their Boards during the good times. RBS had all of the for- mal mechanisms of corporate governance in place – independent non-executive directors, audit and risk committees, and a remuneration committee. None of the people on these boards and committees appears to have been able and willing to stand up to the chief executive as he created a culture which encouraged bankers to take great risks (such as investing in the troubled US housing market, and in many new and complex financial instruments) with shareholders money. Whatever misgivings they may have had in pri- vate, they continued to support the management team in public – 90 per cent of shareholders approved the ABN AMRO deal.
Where next?
Stephen Hester replaced Goodwin as chief executive, and has been trying to rebuild the bank. He aims to focus on its traditional strengths such as UK retail banking, wealth management, and global payments and insurance. The investment banking business will be halved in size. It will try to dispose of other parts of the business, such as other foreign retail assets, and weak parts of the investment bank.
In 2009 Mr Hester reached a new pay deal, which was agreed by UK Financial Investments, which man- ages the state’s shareholding in RBS. While the head- line figure of £9.6 million attracted wide criticism, defenders pointed out that most of it depended on the share price rising from 35p to 70p – which would bring big benefits to the taxpayer. Others pointed out that it was such short-term incentives that caused many of the problems at the bank in the first place.
It is also targeting the world’s wealthiest people through the Coutts subsidiary. These are mainly entre- preneurs, media and entertainment stars. It has a joint venture with Bank of China which offers services to the rapidly growing number of Chinese people with more than $1 million to invest.
Sources: Kennedy et al.(2006); Economist, 14 February 2009, Financial Times,6 May 2009, 23 June 2009; company website.
Part case questions
Is RBS becoming more centralised or more decentralised?
What form(s) of structure has the bank used to divide the business? Since it is also necessarily a geo- graphically dispersed organisation, what methods of co-ordination is it likely to use?
Does RBS have a mechanistic or an organic structure?
What are the main issues of an HRM nature that are likely to be topical within RBS?
The issue of bank bonuses was still highly topical and contentious in early 2010. Explain the dilemma that Stephen Hester faces, and comment on any recent developments in this area.
Refer to Chapter 7, Sections 7.6 and 7.7. Use them to analyse possible explanations for the troubles at RBS.
Why do you think the Board was unable to influence Fred Goodwin and the senior team? What sources of power did (a) Goodwin and (b) the board, possess? (See Chapter 14.)
PART 4
SKILLS DEVELOPMENT
Analysing a department or organisation Task 4.1
To help you develop your skills, as well as knowledge, this section includes tasks that relate the key themes covered in the Part to your daily life. Working through these will help you to deepen your understanding of the topic, and develop skills and insights which you can use in many situations.
While every organisation is unique, all are made up of the elements shown in Figure 1.3.
These form the internal context within which managers operate, and shape the demands which the manager faces. A useful skill is that of being able to use this model to identify and analyse significant features of an organisation or business unit. This exercise invites you to analyse just four of the elements – select more if they seem relevant to the situation.
Analyse a department or organisation with which you are familiar, by making a few notes in response to these questions:
What is the main objective or mission of the department or organisation?
What is the structure?
What are the main characteristics of the people?
What technologies (and in what layout) do people use to meet the objectives? This includes all kinds of physical facilities, including computer systems.
Consider a recent large change. What were the direct and indirect effects on each of these components? What difficulties, if any, had to be managed?
Compare your answers with those prepared by another student, to further increase your skills of analysis, and of identifying key organisational features.
Distinguishing mechanistic from organic structures Task 4.2
Chapter 10 distinguished between mechanistic and organic forms. Since these greatly affect how people work, a manager needs to be able to identify each type, and the practices which can, whether intended or not, lead an organisation towards one or the other.
Analyse a department or organisation with which you are familiar by making a few notes in response to the following questions:
Identify a department that is mainly mechanistic, and indicate the features or practices that illustrate it.
Identify a department that is mainly organic, and indicate the features or practices that illustrate that.
Why do you think each takes the form they do?
Is that form the appropriate one for the work being done?
If not, what specific features or practices would you recommend that management change to move towards the form you think most suitable?
Are there any examples of problems in the working relationships between units which may be attributed to their having mechanistic and organic characteristics?
Analysing information systems Task 4.3
Choose an organisation of which you have some direct knowledge – one you work in or in which you are studying. Write a short report analysing the organisation’s main information systems using themes from Chapter 12, and from other relevant chapters in the book, such as:
What types of IS do different people in the organisation use – perhaps locating them on the grid provided in Figure 12.6?
Do the information systems provide users with information which meets the usual criteria of high-quality information? If not, is the problem mainly technical or mainly organisational?
How do the information systems affect the ability of the organisation to compete in terms of innovation, quality, delivery or cost?
Use Figures 12.4 and 12.5 to analyse the organisation’s stage of development in using IS.
Review Sections 12.6 to 12.8. Has the organization used one or more of these systems, and what have been the effects?
To what extent are managers using the internet to help manage the business?
Analysing stakeholders Task 4.4
A valuable skill in managing any kind of organisational change (such as in strategy, structure or technology) is that of managing those with a stake in the project, and who can affect its success. This exercise enables you to practice using a tool which helps to understand and manage stakeholders constructively.
Select a major organisational change project with which you are familiar, or which you can ask someone about. Write the name of the project in a circle at the centre of a sheet of paper. Draw other circles around the sheet, each identifying an individual or group with a stake in the project. Place the most significant nearer the centre, and others around the edge.
Use a scale such as that shown below to assess the ‘present’ (X) and ‘hoped for’ (Y) level of commitment of each stakeholder to the project.
Key
Stakeholder
Vigorous opposition
Some opposition
Indifferent towards it
Will let it happen
Will help it happen
Will make it happen
X Y
X Y
X Y
X Y
X Y
415 PART 4 SKILLS DEVELOPMENT
Rate each of the stakeholders on whether their power to affect the project is high or low.
Use a grid such as that shown below to note your answers to these questions for the main (powerful) stakeholders.
Stakeholder Their goals
Current relationship
What is expected of them?
Positive or negative to them?
Likely reaction?
Ideas for action
What are their priorities, goals and interests?
What is the general tone of our present relationship with them?
What specific behaviour is expected of them, in relation to this project?
Are they likely to see this as positive or negative for them?
What is their likely action to defend their interests?
What actions can we consider to influence them?
Compare your answers with those prepared by another student for his/her project, to further increase your skills of analysis, and of identifying ideas for managing stakeholders.
PART 5