By Terry Moore, Accenture In light of ongoing economic pressure and the magnitude of non-performing assets in the system, the banking industry's current wave of consolidation is likely to continue and even accelerate in the later part of this year. Several factors will drive this:
• Well-capitalized banks capturing relatively inexpensive deposits, coupled with government protection from bad assets. • More banks placed into receivership and sold by the FDIC. • Strategic moves by select new bank holding companies needing infrastructure to operate and compete as a bank. • Increased foreign bank expansion in the U.S. market. • Reduced organic growth opportunities due to recession.The success of these transactions will depend on the acquirer's ability to 1) drive significant cost out of the business quickly, 2) retain a high percentage of the customer base, and 3) minimize operational and financial integration risks. Information technology is a key catalyst to achieving these goals.
Banks often underestimate how risky and complex these transactions can be, and history is littered with failed attempts. Further, acquirers often argue "we've done this before", "we'll take it slow, going one state or line of business at a time", and "lets treat this as another business-as-usual initiative."
But a decentralized, business-as-usual integration approach is risky. While it appears that lines-of-business function autonomously, the reality is that a myriad of business, product, process, system, operational and communications interdependencies across lines-of-business and operational areas have to be sequenced correctly to avoid serious operational disruptions, customer service problems and financial impacts.
The good news is that there is much to gain in terms of shareholder, institutional, customer and employee value by "getting it right"-and there is a proven model which, if followed, greatly enhances the likelihood of success.
Aligning the various interdependencies must occur while the organization remains highly focused on the continued execution of day-to-day operations and priorities, particularly in today's no-growth and high-default environment.
Successful banks begin with a centralized integration team representing all areas of the organization, a 100-day plan to define a target operating model for the combined institution and implement human resource, process, technology, and financial objectives. This approach is vital-even when the goal is to migrate entirely to the acquirer's technology platform-because it identifies critical gaps in products, fees, processes, risks and operations between the two companies that must be resolved.
The IT leadership team must take a lead role in identifying these gaps and the optimal drivers of cost reduction in the business-which typically begins with systems and operational consolidation. Beyond that, there may be opportunities to establish centers of excellence around key functions such as testing where efficiencies can be gained through the use of state-of-the-art methodologies and tools.
Outsourcing is another path to cost savings. The integration team should explore opportunities to leverage proven providers for non-strategic business processes, infrastructure and applications.
There is also significant and immediate savings to be gained in the consolidation of vendor relationships since typically the merged entity can obtain better pricing than either institution had individually been able to previously. During the 100-day planning period, diagnostics help companies identify areas of opportunity holistically for removing costs by raising key questions such as:
• Can IT enhancement and maintenance expenses be decreased and service levels reduced? • Can processes be automated, reengineered, centralized, simplified and/or outsourced? • Can the number of product families be reduced? Can the efficiency of the product development pipeline be improved through Six Sigma? • Are employee roles aligned to business needs? Are performance and compensation aligned? Is labor sourced from low-cost locations? • Can low-value customers be redirected to cheaper service channels? Can product promotions be more effective? • Is the procurement strategy aligned to the overall business strategy? • Are supplier relationships optimized?
Banking has changed greatly due to the financial crisis and will continue to evolve with the expected increase in regulation. Acquisitions are an opportunity to improve on the underlying banking model as tighter credit standards and the deteriorating economy make non-credit based revenue strategies essential. A well planned integration will enable the combined bank to be better positioned for profitable growth-with new fee sources, better leverage of the online channel, reduced costs and reengineered risk management. In today's uncertain times, mergers and acquisitions are a high-stakes undertaking. IT organizations that help execute the transaction successfully will propel their banks to be industry leaders when favorable market conditions return.
Terry Moore is an Atlanta-based managing director of Accenture's banking practice in North America.