Tackling the 5S in consolidation: Strategy, Synergy, Structure, Staff and Systems
In an attempt to share with the members of the financial sector on certain view points on the on-going consolidation process, MTI Consulting CEO Hilmy Cader at the forum shared ways of ensuring effective integration and synergies in this regard.
Addressing an audience that consisted of senior and professionals of the industry, Cader presented his views on the topics ‘Strategy and Synergy’, and ‘Structure, Staff and Systems’, where he identified pitfalls and best practices that the sector should be mindful of when going forward with the consolidation process which was initiated earlier this year.
Drawing from the experiences from countries in the South Asian region that had undergone while going ahead with the consolidation, Cader pointed out that many markets had seen a drop in management focus due to being occupied with the merger process, thus resulting in the regular operations of the business to be neglected.
With valuation being a key step in the whole consolidation process, Cader noted that a pitfall to guard against in this regard is not adequately looking at the intangible assets. Particularly in emerging markets, hidden knowledge exists in grass root level in areas relating to the entire eco system. Very often in the transfer process some of this knowledge does not get transferred, which results in the assumptions made for the valuation process to get lost. “Looking at some of the intangible aspects when one does the valuation is a pitfall we have seen where the synergy is concerned,” noted Cader.
He added that when looking at the quality of the loan portfolio, particularly in markets where they may not have perfect or near perfect information; soft information not factored into the process is another area to be mindful of.
In terms of best practices that have been observed in previous consolidations is the setting of specific KPIs during the merger process and having people in the organisation who are dedicated and responsible to these KPIs as opposed to it being a part-time responsibility in addition to the regular operations. Such include risk factors, customer satisfaction, shareholders and operational aspects.
Cader opined it will be useful for merged entities to look at a fresh strategic planning exercise and carry out its functions assuming it is a new business instead of working on an average of trying to combine two business plans together.
Areas to be concerned in this regard include customers, channels, the basis of competition, the new value proposition of the merged entity and ways of dealing with competition.
Looking at experiences in different markets it is observed that there is a tendency to continue to combine existing portfolio of customer and products versus considering a greater opportunity to rationalise portfolios.
One of the other pitfalls according to Cader that has clearly come out from different parts of the world is the tendency and reluctance to rationalise channels due to a lot of bottom up pressure. “Rationalising channels become a very important exercise and what is important is to look at the rationalising process as opposed to really giving into a lot of bottom up pressures,” he said.
Previous consolidations have also seen banks giving less focus in brand identity which led to many conflicts. Looking back at the post-merger history of bank around the world, there has been tendencies hurriedly put together acronyms from two banks. “One of the learning that you can take from lot of the banks outside financial institutions is that there is a lot more focus that goes into the new brand identity of the new entity or the merged entity,” noted Cader.
In terms of best practices, Cader opined it is an “excellent time” for institutions to re-strategise and very objectively rationalise customers, channels and products. “With the new entity there will a lot of overlaps of channels and products and customers, and this is a greater opportunity to go ground zero, look at the market and really rationalise customers, channels, and products,” he added.
The first pitfall to guard against when looking at structure is to forfeit one structure to another, which could result in creating additional layers.
Another area that institutions should be cautious about is the designing of structures around key people and personalities. “You need to address the staff issues and need to be unemotional when you look at the structure. Do not let staff aspects dictate what is best for the organisation,” cautioned Cader.
It is also necessary to be mindful of is larger financial institutions dominating the structural thinking. Just because the second entity has a small structure does not mean it is bad. There could be learning from that structure as well, he noted.
One area to keep an eye on is the existence of unwritten informal organisational structures in the midst of formal written structures. These are very often ignored in the merging process and can lead to a situation where there are lots of loopholes, particularly when the transition takes place.
Touching in best practices, Cader opined it is important to go ground zero on the structure instead of trying force fitting them together. “Virtually treat it has two businesses, without two limitations and look at the market and say what would be the best structure to serve this entity as opposed to trying to fit both together. For this to happen it is important to have joint teams from both sides. Successful mergers have seen this,” he pointed out.
Companies should be cautious during the selection process and should look into objectivity and transparency. Hard decisions are to be made and if the objectives and the selection criteria are clear, then it becomes easier.
It is a challenge to fit all staff into the structure, therefore it is important to not force all into the current structure and look at what is best.
One issue that arises when going through mergers is that when senior management are pre occupied with mergers, valuation, and bringing the process together, they tend to focus less on staff issues. “This is where experience shows that the systems implementation falls through the crack when the senior management focus tends to be on the bigger picture and the day-to-day operation gets neglected.
To ensure the process takes place in a seamless manner it will be useful to announce to the staff as to what the new structure is going to be, the selection criteria, selection process, and the VRS, if there will be, need to be clearly laid upfront to reduce ambiguity. However, this has to be done without compromising the transition during integration.
One of the pitfalls in this regard is addressing the systems before the human-ware, particularly the HR aspects. Transition teams are very useful in such situations since integration of the system can lead to a lot of preoccupation and the on-going business tends to get neglected.