Strategy and Organization of Corporate Banking

Strategy and Organization of Corporate Banking

Giacomo De Laurentis (Editor)

Strategy and Organization of Corporate Banking With 12 Figures and 49 Tables

4y Springer

Professor Giacomo De Laurentis Institute of Financial Markets and Institutions Bocconi University Via Sarfatti, 25 20136 Milan Italy [email protected]

This book is based on a research developed in the Center for Financial Innovation of Bocconi University (Newfin-Bocconi) and sponsored by Banksiel spa. Research and experience made by the authors at SDA Bocconi School of Management have also strongly contributed.

Cataloging-in-Publication Data Library of Congress Control Number: 2004112290 ISBN 3-540-22797-0 Springer Berlin Heidelberg New York This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer-Verlag. Violations are liable for prosecution under the German Copyright Law. Springer is a part of Springer Science+Business Media springeronline.com © Springer Berlin • Heidelberg 2005 Printed in Germany The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Hardcover-Design: Erich Kirchner, Heidelberg SPIN 11310839

42/3130-5 4 3 2 1 0 - Printed on acid-free paper

Foreword Reinhard H. Schmidt The impressive development of the finance literature with its emphasis on asset pricing and the formal modeling of incentive systems during the past three decades, has largely relegated the business and operational aspects of banking as an industry from the agenda of academic research. Though this is understandable, it is especially regrettable in view of the dynamic developments in the banking industry which have started about a decade ago and are currently in full swing. Fortunately, there are now signs of a change to the effect that banking is back on the research agenda. The present book by Professor De Laurentis and his co-authors is a highly innovative and interesting manifestation of this reorientation. Banking is an important part of any financial system, and it is especially important in the financial systems of the countries of Continental Europe, such as Italy, France, and Germany, which have been bank-based for decades and which are, in my view, likely to remain bank-based for the foreseeable future. There are many reasons, based on empirical and theoretical considerations, to believe that strong banks are not only important for the banking industry itself, but also for the respective national economies. This situation makes it highly important to deal with the question of how banks of a given country can and do face the competitive pressures which come from the banks of other countries, from truly global banks, from "non-bank banks" and, last but not least, from the capital markets, and adapt to the new structures in the corporate world. In particular in a subfield of banking which one can call corporate banking there is a need for banks to find new and appropriate ways of meeting the demands of their clients. If they fail in this respect, they will lose these clients to their competitors. But banking is more than a part of the respective country's financial system. It is also an industry, and industries under pressure are forced to adapt to changing circumstances. It is the common ground between the fields of industrial organization, strategic management and organization which holds considerable promise to help banks in this situation. Fortunately, industrial organization and strategic management are currently developing in a way which seems to lead to a fruitful synergy. Moreover, there is now a closer relationship than there has ever been between the thinking on strategy and on organization. An established doctrine in the three overlapping

VI

Reinhard H. Schmidt

areas, which goes back to the seminal writings of Raymond Chandler, is that "structure follows strategy". This view suggests a linear or hierarchical relationship of what determines what. It sees strategy in the leading position and suggests an adaptation of the organizational design to strategy, and it assumes that strategy is determined by factors which are beyond the influence of individual organization and that, moreover, it is largely clear what the optimal strategies are. With due respect to Chandler and those like Oliver Williamson who have built on his foundations, one can take issue with this view. Banking is an industry in which the strategic imperatives are anything but clear, and this holds all the more with respect to banking services for business or corporate clients. Therefore, it would be a delicate matter to take bank strategy as the conceptual starting point. As an alternative and more modest view one can argue that, in order to be successful, a number of strategic options are available to large and important banks. But what ever the option may be which is finally selected with strategy selection being a difficult issue in itself, and one which has also not received the attention which it deserves - one thing is imperative to understand: strategy and organizational design are complementary elements of a business system: there is a relationship of mutual determination. In order to be successful, any large economic institution needs to create and maintain consistency between strategy and organization as two core elements of its value-creating system. In simple words, consistency is given if the elements of a system are such that they fit together well in the sense that they mutually reinforce their respective positive effects and mitigate their negative effects. Complementarity is a relationship which has in recent years been "discovered" in a number of fields, including some which are of primary importance to the topic of the present book. These fields include strategy, as emphasized recently by Michael Porter; business systems, as elaborated extensively by Milgrom and Roberts; organizational design, as argued convincingly by Brickley, Smith and Zimmerman; and finally financial systems, as Hackethal, Tyre 11 and myself have tried to show. In all of these areas, complementarity is very important, and consistency seems to be an indispensable requirement for success. To me the present book offers ample support for this "systemic" approach and its main lesson: It may be more important whether strategy and organizational design of a bank are consistent than the choice of strategy itself. In their book, Professor De Laurentis and his co-authors take only a cautious look at the banks' choice of strategy. Though they use strategy as a point of reference, they do not regard it as the overarching determinant of

Foreword

VII

organization, and they take the declared strategic choices of the large Italian and European banks in their sample as given instead of arguing which strategy would seem best to them. Not surprisingly, they find a wide variety of strategic orientations in large Italian banks. Instead of on strategy, their focus is on the macro- and micro-level organization of the banks and the way in which, and the extent to which, strategies and organizational designs are consistent. As the individual chapters demonstrate in great detail and supported by their extensive empirical research, the authors come away with rather sobering results: The banks in their sample seem to agree that in general divisionalization is the right approach to accommodate corporate banking better than in the past, but disagree widely on the specific form and the extent to which lines of business are in fact separated. Even on the normative level, the optimal form and degree of divisionalization is an open issue. After all, there are certainly merits in not going too far in splitting up different functions and business areas and instead maintaining elements of a universal bank not only for the large banking groups as a whole but also on the operational level. Even for various forms and degrees of divisionalization, the authors find again and again that the individual banks which they have investigated at great length do not fully appreciate the importance of properly aligning or creating consistency between - strategies and the way in which the bank as a whole and its subunits and its processes are organized. It is very good to have this documented in a sober academic study, even though I do not think that this critical assessment should be all that surprising. After all, the need to adjust organizations to - possibly new - strategies is a very recent challenge and the strategy-adjusted organization of banks is an area in which neither banking practice nor academic research have yet come up with convincing and general rules and recommendations. In view of this situation, one should not take it as a criticism of the banks that one can observe a great deal of experimentation in the way in which large banks in Italy and many other parts of the world reorganize their structures and processes. It is indeed a highly worthwhile academic undertaking to observe and critically but cautiously comment on these experiments. We can learn a lot from the kind of clinical studies which Professor De Laurentis has summarized in this book, and hopefully this learning will eventually make a contribution to improved business policies.

Reinhard H. Schmidt Professor of International Banking Goethe-Universitat, Frankfurt, Germany Frankfurt, July 2004

Table of Contents

Introduction Giacomo De Laurentis

1

1 Theoretical Drivers of Divisionalisation Ozlem Yildirim

9

2 Corporate Banking Strategies: Products, Markets and Channels ...37 Stefano Caselli 3 Organizational Structures Paola Schwizer

63

4 Corporate Banker's Role and Credit Risk Management Giacomo De Laurentis

107

5 Operating Mechanisms Paola Schwizer

139

6 Information Systems Severino Meregalli

155

7 Conclusions

167

Giacomo De Laurentis

References

183

List of Contributors

191

Introduction

Giacomo De Laurentis

The needs for better "customer orientation" and for distinguishing retail banking from corporate banking activities were already clear to bank managers during the Eighties. However, only in the second half of the Nineties it became apparent, on one side, that in the bank industry real customer orientation could be achieved only by changing the macro and micro, hard and soft profiles of the organization and, on the other side, that corporate banking should not be confined to the small number of very large corporations but should be extended to medium-size customers. On April 2nd 1998 Deutsche Bank announced a new "restructuring to rise revenues substantially" according to the principle of "gear business to customers' expectations"; this led to the creation of 5 market divisions: retail and private clients (with two different business areas), corporate banking and real estate (designed for small/medium-size companies, for which the bank intended to become a sort of 'financial family doctor'), global corporations and institutions (for the specifically aimed control of individual product lines and special important customers which might enable them to reach a top-five position within three years), asset management, transaction banking (for technologically assisted services). The creation of a dedicated organization division nowadays represents the most relevant evolution being carried out by big and medium-size banks in corporate banking. This phenomenon marks a clear shift in organization structures, i.e. from a functional configuration (with a geographically extended distribution network) to a divisional configuration, which is characterized by the presence of more product and/or customer segment specialized divisions. Such evolutionary trend in the organization structures has been long observed in the sector of non-financial firms (mainly in the Sixties), but for the banking sector the phenomenon is far more recent. In the past five years, a relevant number of banks have been pursuing this course of change under the strong pressure of top management and consulting firms. Despite the large number of banks involved in this process, it is not yet clear whether they have embraced a rationalistic approach requiring the analysis and formulation of the strategy and the planning of the organiza-

Giacomo De Laurentis tion in accordance with their "declared strategy" or simply acknowledged the presence of an "emerging strategy" in the diversification of client requirements and product/process solutions due to technological and financial innovation. Undoubtedly the wide range and the frequently renewed formulation of strategies and organization models that are actually implemented in corporate banking by almost all banks highlight four facts: a) the persistent attempt to understand the real nature of the business and to optimize production units and distribution channels, b) the absence of both an established theoretical framework and a dominant model (even within specific territorial contexts), c) the huge risk of misalignment of strategy, market policies, macro/micro and hard/soft organizational profiles, for not a short period of time, d) the increasing pressure that such changes impose on banks' managers and clerks who have to reshape their skills and competencies as well as to accept career patterns that are less clear and less consolidated than in the past. Consequently a lot of questions arise. Causes of the organizational structure evolution. Are bank divisionalization drivers to be identified in the diversification and correlation degree of the different businesses as well as in the implementation of performance valuation and control systems, as is the case for non-financial firms (Williamson 1975)? What are the determinants of divisionalization by geographical area, product, and client segment? Is bank divisionalization driven by verified different customer needs? Take note that when divisions are specialized according to identifiable groups of customers we'll say that they are built around client or market segments. Vision, mission and strategy of corporate banking. Is this business area centered on customization or commoditization philosophies? In terms of the basic competitive strategies (Porter 1980), should banks pursue costleadership or differentiation based on the ability to establish broad, privileged and long-term customer relationships? Will the relationship-oriented offer model prevail on the commoditization trend of the lending business? If the community bank business model that emphasizes personalized service and relationships based on soft information is likely to be viable in the long run (De Young et al. 2003), is bank divisionalization a way for larger banks to penetrate the community banks traditional markets?

Introduction

Segmentation philosophy. What is the fundamental variable in the segmentation model for the banking business? Is it the specialty of products/services, the transactions-based or relationship-based business approach, the dimensions of operations and/or customers? How is corporate banking positioned with respect to investment banking and commercial banking (Holland 2001)? The organization structure of the corporate area. What is the best organization model for the corporate area within the banking group? Is distribution channel specialization sufficient or should divisionalization involve all production, distribution and management structures (in other words is bank divisionalization "true" divisionalization)? Does the highly interrelated production of bank services involve a lower degree of divisionalization than that of non-financial firms? Existence of a dominant organization model. Does there exist an evolutionary cycle of corporate banking strategies and a "dominant" model which, as a result of its ability to generate value, might represent the final stage of the evolutionary cycle? On the contrary, can highly different organizations and strategies co-exist lastingly? Configuration of the specialized corporate banking branches. What kind of organization characterizes the units in contact with corporate clients (e.g. unit structure, extension of reference territory, number of clients, territorial distribution criteria, sector specialization, product range, relation with other commercial/product units, risk-return responsibilities, etc.)? The role of the corporate banker (the client manager). On the basis of which factors is the corporate banker able to generate value for the bank and for the customers (wide-ranging and deep professional competencies, availability of decision supporting systems for customer advisory services, performance valuation and incentive criteria)? Is the corporate banker necessarily relationship oriented? Credit risk management. Is the introduction of credit ratings conditioning the pursuit of consistency between corporate banking vision and mission, sales strategy and credit risk management? Is information production changing in credit relationships due to the increasing use of internal rating systems (Brunner et al. 2000)? Is the corporate banker involved in credit rating issuing, reviewing and control and what is the nature of the rating assignment process? This is a key issue if "the technology of relationship lending is based on the accumulation of information over time through contact with firm, its owner, and its local community on a variety of dimensions. The information is often "soft" data that may be difficult to quantify, verify, and transmit through the layers of management and ownership of a banking organization" (Berger and Udell 2002).

Giacomo De Laurentis

Organization soft aspects: operating mechanisms in the corporate division. What are the specific profiles of the operating mechanisms (delegations, performance valuation systems, incentive schemes), the managerial and professional competencies, the operational and managerial information systems? Given Mintzberg's five coordination mechanisms, which is characterizing the corporate banking area and the corporate banker's role (Mintzberg 1983)? Information technology. How to achieve a virtuous alignment, for a lasting competitive advantage in corporate banking, among strategy, organization model, operating roles configuration, and information systems? The analysis carried out in this book will try to answer these questions and will allow identifying, in the conclusions, the rate of consistency of the choices made by the individual banks in the various surveyed fields as well as the critical aspects which might be responsible for the success or the failure of the pursued strategy. Moreover, it will enable to verify if declared strategies are coherently shaping the organization and if banks' quest of the competitive advantage is inducing them to differentiate their strategy and organization to a greater degree than in the past. In fact, declared strategies are not always followed by the expected decisions on the organizational side and there is indeed a continuum in the "rate of divisionalization" of banks from very low levels to the meta-divisionalization of Unicredito (this leading Italian bank on January, 1 2003 merged its seven commercial banks focused on different regions and created three different banks specialized by customer segments; see Fig. 1). FROM

TO

[

P r i v i .*•

B_a-:

I

J

I

[

Fig. 1. The Unicredito Italiano case

Corporate

Bank

I

|

R etail Bank

Introduction This book is designed for different groups of readers: a) researchers, who need to verify whether general theories of organization apply to business-specific contexts and to find ways to measure the rate of consistency among the numerous (macro and micro, hard and soft) aspects of organization that actually determine the success or failure of many strategies; b) bank managers and bank consultants, who need to identify the most suitable model of divisionalization among the many alternatives and to assist banks in shaping their strategy and organization more consciously and more firmly; c) bank professionals, who need to understand the driving force of changes, the kind of environment they are going to live in, what skills and competencies are expected from them and what their typical career path is going to be; d) students, who often need to bridge theoretical concepts with the actual evolution of firms. The research carried out in this book is primarily focused on the organization rather than the strategy of corporate banking for the following reasons: a) the strategy/organization interaction usually observed in the industrial sector (Chandler 1962) is even stronger in financial intermediaries (Norman 1984): banks, in fact, are service firms and their services and strategies are strongly conditioned by their organization; b) we thought it wiser to start by analyzing the bank organizational choices and then proceed with the strategy so as to compare the "declared strategies" with the "achievable strategies" in such organizational structures; c) the literature on bank strategies and organizations has been developing since the mid-seventies and has privileged the strategic profiles connected with macro-organization structures (e.g. Channon 1977, 1986, 1988); it was only in the nineties that researchers turned their attention to the micro and soft aspects of the organization as well as to their consistency with business specific strategies (Baravelli 1997; Eisendardt and Galunic 1994; Smith and Walter 1997), though their studies were grounded on a quite restricted empirical basis. The new organizational model and the implied strategy have to be evaluated more on the level of the theoretical coherence of the design than

Giacomo De Laurentis on the safer grounds of the empirical analysis of the profitability of their choices because, up to now, no bank seems to have fully accomplished the strategic and organizational change leading to corporate banking divisions for a time long enough to allow a meaningful assessment of the resulting profitability. The research relies on two fundamental methodological and informative grounds: 1. the identification in literature of the long-term drivers leading the processes of organization divisionalization and market specialization in financial institutions; 2. the empirical survey of strategic choices, organization models and operating mechanisms in seven leading Italian banking groups and five large European banks (Table 1). Table 1. Key figures of the banks examined in the research Year-end 2002 BNL

Capitalia Credem Banca Intesa Mps

SanPaolo Unicredito ABN Amro Credit Agricole Deutsche Bank Paribas Santander Central Hispano

Total assets Number of Number of mil€ branches employees 83,033.2 868 20.499 140,916.0 1.954 31.241 545 4.874 18,995.6 277,418.0 4.277 71.501 1.864 128,729.9 27.517 3.222 45.650 203,773.0 213,339.3 4.176 65.555 556,018.0 580,795.0 758,355.0 710,305.0 319,030.4

3.000 7.230 1.711 2.200 9.281

107.416 96.500 77.442 87.685 104.178

ROE

-1,82% -7,99% 13,05% 1,85% 8,82% 8,30% 14,74% 14,39% 7,32% 1,08% 11,99% 11,00%

The decision to include Italian and "other European banks" in our survey results from the need to make reference to an industrial and financial context which, despite the numerous differences, is sufficiently homogeneous in terms of corporate banking management. As for Italy, we have surveyed six leading groups (Banca Nazionale del Lavoro, Capitalia, Banca Intesa, Banca Monte dei Paschi di Siena, SanPaolo-Imi, Unicredito) and Credem, on account of the organization innovations it has already experienced and now consolidated in the corporate segment. As for continental Europe, the survey has involved four large-size banks (ABN Amro,

Introduction

7

Credit Agricole, Paribas, Santander), which propose the model of the universal bank and develop the business area of Corporate & Investment Banking according to a Pan-European selection strategy; Deutsche Bank has also been considered despite its broader global player's strategy as it has been long developing organization innovations in corporate banking, which are comparable to some choices now being made by a large number of banks. The above banks have been interviewed by researchers on one or more occasions, on the basis of a questionnaire which had been prepared and tested during the initial stage of the research. At the same time public information has been collected from the press and the web. Banks are mentioned either explicitly when public information is being provided or by an identification letter - unvaried throughout the book - when the confidential nature of information has to be guaranteed. The survey was carried out in the second half of 2002 and in 2003. Although a number of choices might have been modified or rather implemented by banks since then, the basic features pertaining to the examined trends and to the expressed evaluations represent structural elements that are bound to remain valid in the medium term. The book includes four sections: 1. definition of the research subject and structure (introduction, Giacomo De Laurentis); 2. the analysis of the literature, the foundations of the organization theory and the drivers of divisionalization in industrial firms and banks (chapter 1, Ozlem Yildirim); 3. the empirical survey of bank strategic and (macro and micro) organizational choices as per the following: a) chapter 2: product, market and channel strategies in the corporate area (Stefano Caselli); b) chapter 3: organization structures: in the quest of an integrated model (Paola Schwizer); c) chapter 4: the corporate banker's role and credit risk management (Giacomo De Laurentis); d) chapter 5: operating mechanisms in the corporate area (Paola Schwizer); e) chapter 6: information systems in the corporate area (Severino Meregalli);

8

Giacomo De Laurentis

4. conclusions about divisionalization drivers, implementation choices (market segmentation, re-organization of structures, changes in management roles, innovation of operating mechanisms and information systems), consistency of the overall divisionalization process (chapter 7, Giacomo De Laurentis). Chapters from 2 to 5 are structured in a fairly similar way: they start with an introductory section synthetically describing the objectives of the chapter and conclude by identifying the critical aspects which might be responsible for the success or the failure of corporate strategies. Chapter 6, dedicated to information technology, utilizes previously acquired data and compares the emerging needs with the implemented organizational and technological solutions. The conclusions summarize the main results and provide a unitary interpretation.

1 Theoretical Drivers of Divisionalization

Ozlem Yildirim

1.1 Chapter Outline This chapter aims at analyzing the theoretical drivers of divisionalization according to market segments and its long-term indications for corporate banking from an organizational point of view. Section 2 briefly discusses the main approaches and streams of literature in organizational theory. Section 3 explains the characteristics of Williamson's three basic organizational structures: unitary form, holding form and multidivisional structure with an emphasis on the last one, followed by a comparison of banking groups and universal banks. Section 4 describes the stages in the transition to the pure divisionalized form and goes through some studies on the evolution of divisionalization in industrial segments. Section 5 explains three ways of divisionalizing into units: according to geography, product and market segments. Section 6 elaborates on divisionalization according to market segments. Section 7 makes up the link between interdependency of divisions and performance measurement in divisionalized form. Section 8 concludes by identifying the drivers of divisionalization and future trends in banking organizational change. Various theories - such as neoclassical economics, agency theory, transaction cost theory and the resource-based view of a firm - constitute the foundations of organizational theory to understand a firm and its activities. In addition, a number of researchers have explored the relationship between organizational structure, strategy and performance showing how an appropriate organizational structure correlates with superior profitability in competitive markets. The strategy-structure-performance paradigm is a sub-stream of research on structural contingency theory, which maintains that organizational performance depends on the extent of alignment between organizational structure and various contingency factors such as environmental condition, size, technology and strategy. The better the fit between structural components and these contingency factors, the better the performance of the organization. In the case of banks, the passage from a functional structure to a divisional form recalls the same contingency factors as non-financial firms. Therefore, the contingency approach is essen-

10

Ozlem Yildirim

tial in understanding the link between environmental and strategic evolution of banks (Baravelli 2003). The theorists of the strategy-structure-performance paradigm have emphasized the relationship between strategy and structure and its effect on performance. The paradigm can be categorized in three levels of analysis (Eisendardt and Galunic 1994): corporate context of multidivisional organizations, strategic business unit (SBU) context, intra-corporate context of relations among SBUs themselves and between SBUs & corporate headquarters. The corporate level of analysis studies the fit between the strategy of the corporation as a whole and its organizational structure. The second level of analysis examines the fit at the strategic business unit level. In other words, it focuses on the fit between the strategy of SBUs and internal structures and processes. The third level of analysis examines the "intra-corporate fit" of SBUs within the organization. At the corporate level of analysis the major work is Chandler's (1962) study of the strategy-structure relationship where he argues that structure follows strategy and the correct fit between strategy and structure is what leads to performance. Chandler's (1962) study of organizational change has been an important theme in the organization literature and subsequent researchers (Lawrence and Lorsch 1967, 1969; Wrigley 1970; Rumelt 1974; Galbraith 1973, 1977, 1983) have developed Chandler's work in various respects. The research by Eisenhardt and Galunic (1994) suggests that at all the levels of the analysis, strategy-structure fit tends to improve performance.

1.2 Foundations of Organization Theory - Main Approaches The theory of neoclassical economics was developed on the main assumption that an economic subject is rational and understands the economic transaction perfectly. According to this theory, an individual maximizes its utility and the firm maximizes its profit on the basis of unbounded rationality whereas more recent theories are based on the assumption of bounded rationality and opportunism (Simon 1945; Williamson 1975, 1985). Neoclassical economics views a firm as a mere production function that deals with the relationship between input and output. The issue of dynamism is seen as the problem of finding the equilibrium. The firm itself is treated as a black box where activities inside the firm are of no concern to neoclassical economists.

Theoretical Drivers of Divisionalization

11

The resource-based view of the firm does look inside the firm and sees the firm in terms of the resources it owns. Looking at the firm from this perspective leads to different insights than traditional product perspectives. The aim of the firm is "to create a situation where its own resource position directly or indirectly makes it more difficult for others to catch up" (Wernerfelt 1984). Machine capacity, customer loyalty, production experience and technological leads are, as Wernerfelt regards, the "attractive resources" that can give the firm a competitive edge. Types of resources that lead to high profits can be identified and they can be associated with resource position barriers. Importance of managerial capacity to determine the efficiency of diversification choice can also be seen as one of the results of resource based view. In this respect, the fundamental task of the manager is to transfer the old resources into new combinations of products for competitive advantage so that the process of diversification contributes to the distinctive competencies of the firm. The advantages of related diversification can be explained with the concepts of resource based view of the firm, in particular with the possibility of allocation of fixed costs to different products, transfer of managerial know-how from traditional to new markets and realizing economies in the process of buying raw materials that will be utilized by various products. Recently, the concept of relatedness is associated with sharing intangible resources such as managerial know-how, valuation systems and in more general terms the management of the firm, that all together constitute core competencies that cannot easily be replicated, so "unique" to bring competitive advantage for the company (Schwizer 1996). Agency theory has its origins in the risk-sharing literature, but it focuses on determining the most efficient contract in a relationship where one party (the agent) acts on behalf of the other (the principal). Given the organizational assumptions of the theory (information asymmetry, goal conflict among participants) and the human assumptions (self-interest, risk aversion), the agency problem arises when the goals of the agent and the principal are in conflict and it is costly and/or difficult for the principal to control the actions of the agent. Another problem that can arise within this context is the risk-sharing problem due to different degrees of riskaversion of the principal and the agent. In other words, risk-neutral principal shoulders all the risk by paying a fixed wage to the risk-averse agent. Agency theory has been used in finance (e.g., Fama 1980), organizational behavior (e.g., Eisenhardt 1985) and many other areas such as accounting, economics, marketing, political science and sociology. One of the contributions of the theory is its implications for the information systems in order to control agent opportunism. Another contribution is its extension of the organizational thinking by bringing the concept of uncertainty and im-

12

Ozlem Yildirim

plications for risk. The general consensus is that agency theory is a useful contribution to organizational theory through its ideas on incentives, information systems, risk, and outcome uncertainty. When complemented with other theoretical perspectives the agency theory is supported also by empirical evidence (Eisenhardt 1989). Another stream of literature is the transaction-cost literature where the unit of analysis is the economic transaction and the central paradigm is whether to undertake the transaction via the market or within the firm. When the transaction is undertaken via the market, the transaction difficulties that may appear in the exchange process of negotiating, monitoring and enforcement between two parties cause transaction costs. The six main sources of transaction difficulties are: bounded rationality, opportunism, uncertainty and complexity, small numbers, information asymmetry and asset specificity (Hill and Jones 1988). Corporate strategy is a means to reduce transaction costs by internalizing up to the point where relative benefits of intemalization equal its bureaucratic costs which can be identified using the agency theory. Agency theory points out that transaction costs do not disappear when the firm chooses to internalize completely because the use of hierarchy, delegation of control to lower level employees, causes some loss of control in the system (Leibowitz and Tollison 1980). In the hierarchy context, headquarter (the principal) has to develop a control structure to detect the actions of divisional managers (the agents). Bureaucratic and production controls such as rules and budgets to monitor divisional performance are sources of information that will enable headquarter to detect divisional managers and this kind of information is a bureaucratic cost to the firm. Williamson (1975) sees divisionalization as a response to the problem of transaction costs. Increasing size and diversity create complexities and bring problems of control to the companies that are functionally organized. Divisionalization, reducing the scale and internal complexity of each division, contains transaction costs. However, the effectiveness of such a solution depends on solving the agency problem: ensuring that divisional managers act as specified by headquarters. The strategy-structure literature has focused on three main strategies to realize economic benefits. These are vertical integration, related diversification and unrelated diversification. In each of these strategies, firms must trade-off the economic gains against the bureaucratic costs. According to Thompson's (1967) model, the ease of monitoring decreases when divisions share the resources in order to realize economies because in this case it is difficult to measure each division's marginal product. Given that interdependencies are a function of the linkages between the head office and the divisions as well as the linkages between divisions themselves, higher interdependence increases bureaucratic costs. This analysis implies that,

Theoretical Drivers of Divisionalization

13

everything equal, lower bureaucratic costs are associated with organizational structures where each division functions as a self-contained unit.

1.3 Characteristics of Basic Organizational Structures and the Multidivisional Form According to Williamson's analysis there are three basic organizational structures: the unitary form, the holding form and the multi-divisional form. Other organizational structures are a combination of these three basic structures. The U-form organizations are commonly known as functional organizations and they are organized around business functions such as finance, marketing, and manufacturing. Collaboration is needed across all of these specialized functions of the organization because these functions alone cannot conduct an entire business. The decision-making authority is concerned with both the development of strategy and operating activities. The general manager, who has the access to information from all the functions and has the company-wide point of view, provides coordination among the units. As long as the firm is relatively small and in a relatively narrow business, senior management is able to provide the required direction and coordination. However, the functional organization begins to lose its efficiency when the firm grows in size and complexity (Barney and Ouchi 1986). As Williamson (1970, 1975) points out, radial expansion of the U-form enterprise 1) causes cumulative control effects, which have internal efficiency consequences, and 2) alters the character of the strategic decision making process in ways that favor attending to other-than-profit objectives (operational sub goals). The expanding U-form enterprises face consequences of information impactedness and bounded rationality and therefore require the introduction of additional hierarchical levels. In the flow of information, data are summarized and interpreted as they move up and instructions are operationalized as they move down (Arrow 1974). Both processes can provide control losses and they may occur also in unintentional ways. These bounded rationality consequences occur even if the management acts in a stewardship manner. If managers are given to behave opportunistically, bounded rationality causes further consequences. The difficulties experienced by an expanding functionally organized enterprise can be summarized as "indecomposability, incommensurably, nonoperational goal specification and the confounding of strategic and operating decisions" (Armour and Teece 1978).

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In financial intermediation, the functional form creates similar problems as dimensions, competitive pressure and diversification increase. As the bank grows in size and complexity (it diversifies its geographical presence and range of products), the efficiency of the functional form decreases and the general management busy with operating burdens can loose its focus on strategic decisions. At this point, the bank demonstrates more uncertainty, resistance and delay for change than industrial sectors do and this delay affects innovation and in turn brings weakness in economic performance (Baravelli 2003). Gardener (1994) views that organizational structures may be changed to help induce innovation and respond to external innovation demands, however he also mentions the cautions (Mottura 1986) about "misguided attempts" to "force" an operating organization to generate innovation. The functional model in banking has become problematic due to the growth and diversification strategy that undervalued the importance of coherence between structural model, dimension and diversification. In the banking field - as in industrial sectors - it is necessary to meet the increased competition and diversification of activities with the appropriate structure and the prospect of passage is the one to the multidivisional form that demonstrates more adequacy to manage the process of diversification (Baravelli 2003). The H-form (holding form) company typically diversifies into a large number of unrelated businesses. Each business is a profit center and a general manager is given profit responsibility of that center. Each profit center may be a U-form organization and the divisions are often affiliated with the parent company through a subsidiary relationship. The role of the corporate staff is usually limited to allocating corporate capital, balancing the portfolio of businesses and evaluating financial performance (Barney and Ouchi 1986). Williamson's last primary structure is the M-form, multidivisional structure. It consists of a set of partially diversified business divisions. The degree of diversification in M-form organizations is between functional form and holding form. As in the H-form, also M-form divisional managers are given profit responsibility. However, unlike H-form case, in a typical Mform organization there are many interdependencies and synergies between divisions. Therefore, the profit and loss statement of each division is not perfectly unambiguous (see Sect. 1.7). This interdependence necessitates that the corporate manager should carefully balance the intradepartmental competition (for capital gain and recognition) and cooperation (to benefit from the synergies and realize economies of scope). According to Barney and Ouchi (1986), M-forms that are able to find this balance will outperform both large functional structures and all H-forms.

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Mintzberg (1983) observes that the corporate office in related diversified firms has to detain some control over the common functions of divisions in order to ensure coordination. Coordination between divisions requires some degree of centralization and integrating mechanisms to achieve communication between divisions (Hill 1988). The M-form structure is the one that combines the internal control and strategic decisionmaking capability with the divisionalization concept. The research by Eisenhardt and Galunic (1994) suggests that at the intra-corporate level SBUs should be custom-managed according to their individual strategies and positions within the firm. More innovative and important SBUs should be managed with more openness, socialization and greater autonomy. It is notable that the general management of the M-form usually requires the support of a specialized staff in order to discharge its functions effectively. Whittington and Mayer (2000) summarize the essential differences of the multidivisional form in a strategy-operation dimension as shown below.

OPERATIONS

Decentralised

Centralised

Decentralised

Fig. 1.1. Harvard types of organizational structures From an organizational point of view, the divisional structure resolves the complexity of the large, diversified corporation by dividing it into analyzable and manageable chunks (Whittington and Mayer 2000). Characteristics and advantages of the M-form can be formalized as follows (Williamson 1970, p. 120-121):

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1. The responsibility for operating decisions is assigned (essentially selfcontained) to operating divisions. 2. The staff attached to the general office performs both advisory and auditing functions. Both activities have the effect of securing greater control over operating division behavior. 3. The general office is principally concerned with strategic decisions involving planning, appraisal, and control, including the allocation of resources among the (competing) operating divisions. 4. The separation of the general office from operations provides general office executives with the psychological commitment to be concerned with the overall performance of the organization rather than to become absorbed in the affairs of the functional parts. 5. The resulting structure displays both rationality and synergy: the whole is greater than the sum of the parts. In addition, Scott (1971) pointed out that multidivisional organizations act as a "built-in school of management, training middle level general managers in the problems and opportunities associated with economic responsibility. As a result, this form of organization provides a pool of trained talent from which to draw, a pool from which a new group may be formed in a few days or weeks to take over and manage a new activity". "In September, 1921, the Du Pont Company put into effect this new structure of autonomous, multi-departmental divisions and a general office with staff specialists and general executives. Each division had its functional departments and its own central office to administer the central departments. Unencumbered by operating duties, the senior executives at the general office now had the time, information, and more of a psychological commitment to carry on the entrepreneurial activities and make the strategic decisions necessary to keep the over-all enterprise alive and growing and to coordinate, appraise, and plan for the work of the divisions" (Chandler 1962, p.l 11). Divisionalized banking groups demonstrate allocation of tasks and responsibilities (at headquarter and division level) in parallel with Williamson's formalization of characteristics of the M-form for industrial sectors. In divisional structures, the general management of the banking group has the function of defining the overall strategy of the bank, allocating portfolio of investments, coordinating single divisions through planning and controlling, acquiring financial resources and allocating them on the basis of divisional performances. At senior management levels, there may be supporting functions for the management of common divisional processes -

Theoretical Drivers of Divisionalization

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such as strategic planning - or for the coordination of activities managed by the divisions (e.g. personnel management). The higher the interdependencies between divisions, the more numerous the central unit is. Each division, then, can be considered as a separate firm that can manage its own product/market/client combination and represents an autonomous profit center (Schwizer 2000). Banking groups and universal banks can be compared in terms of width of diversification and level of control (Fig. 1. 2.). Width of diversification Min

Max

Min

Network

ol Level of control Max

Universal Bank

Banking group

Commercial Bank

Fig.l. 2. Width of diversification and level of control on activities In economic terms, the main advantages of the banking group with respect to the universal bank are the following (Schwizer 2000): • it eases the task of general management and production distribution process due to independent internal units with single homogenous combinations of product/market/technology. Advantage of speed in possible entrance or exit decisions, acquisition or closing of the unit respectively; • the possibility of finding specific equity or non equity partners for single business units; • professional development and motivation at managerial levels due to empowerment of functional managers to quasi-autonomous units with higher responsibilities. Diffusion of culture and entrepreneurship; • more effective competitiveness as products and services are focused on single markets; • limitation of eventual conflicts that emerge in the process of industrial re-conversion; • no effect on organizational units that are not directly involved.

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At the organizational level, however, the efficiency of the group with respect to the universal bank is limited by certain elements and these can be summarized as coordination cost, integration cost between production and distribution functions, controlling cost, fewer opportunities of economies of scale from production, difficulty to realize cross-subsidization. The picture emerging from the comparison of the banking group and the universal bank in various aspects reveals that diversification can be achieved more conveniently by the group structure. In terms of strategic profile, the group is the optimal form to realize diversification choices in the short-term and on a large scale. The production cost, however, is higher for the group than for the universal bank which can eliminate possible cost duplication for the structure and the management of single units.

1.4 Divisionalization and its Evolution in Industrial Segments Stages in the transition to the divisionalized form are defined by Mintzberg (1979) as: the integrated form (pure functional), by-product form, relatedproduct form and the conglomerate form (pure divisional). The firm passes through these stages as the integration of its product chain breaks down and the intermediate products throughout the process gains more importance. As can be seen from Fig 1.3, when the production process of the firm relies on one integrated product chain, it has a pure functional structure. As it begins to market some intermediate products, it makes the first shift to the divisional form and its structure is called, by-product form. In the following stage, by-products become more important than the end product, the structure comes closer to a divisional one and it is called related-product form. Finally in the last stage related products have no relation with each other due to the complete breakdown in the production chain and the structure of the firm becomes pure divisional. Divisionalized form is typically found in industrial sectors and from Mintzberg's five ideal types of organizations, it fits best with Machine Bureaucracy Configuration, whose major characteristic is the routine operating work with the greatest part of it rather simple and repetitive. This leads to sharp division of labor in the operating core that is specialized both horizontally and vertically. The divisional form results from "centralization" of independent organizations that operate in different markets (Mintzberg, 1979).

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Integrated form (pure functional)

By-product Form

V

I

Related Product Form

Conglomerate Form (pure divisional)

Fig.l. 3. From pure functional to pure divisional forms (Source: Mintzberg 1979)

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The extension of standardization beyond the operating core was mentioned by Worthy (1959, pp. 75-76) as "to organize the work of the shop, but no sooner was everything under control there than influences from outside the shop, from other segments of the enterprise (e.g., sales, finance), began to impinge upon and upset their neatly contrived arrangements. Thus the scientific managers soon began to be concerned with the necessity for extending their control to the entire enterprise". Similarly, Whittington and Mayer (2000) makes a similarity between Taylorism and divisionalization as the former partitioned the tasks of the blue-collar workers in the first of part of the century, the latter partitioned the roles of the management. Organizational structure of the firm would not matter unless the activities performed by the local units generated positive spillover (Baron and Basenko 2001). The fact that the shift from unitary form to "multidivisional structure" creates problems illustrates the proposition that "the system cannot be derived from the parts, the system is an independent framework in which the parts are placed" (Angyal 1969, p.29). Optimum divisionalization involves (Williamson 1975): (1) identifying separable economic activities within the firm, (2) assigning each of them quasi-autonomous standing (usually that of a profit center), (3) monitoring the efficiency performance of each division, (4) awarding incentives, (5) allocating cash flows to high yield uses, and (6) performing strategic planning (diversification, acquisition and related activities) in other respects. Change is a normal condition of organizational life because the organization is a pattern made of, shaped by and emerging from change (Tsoukas and Chia 2002). In the body of literature that focuses on the structural changes that accompanied diversification, it is shown that firms evolve in a fairly predictable fashion from a functional to a multi-divisional form of organization as they grow from single-business to multi-business. Scott (1971) has developed a model of stages of corporate development, viewing the corporation as moving from a small functionally organized company to the multidivisional structure as its product-market complexity increases (Table 1.1). "The strategy of an enterprise evolves in response to and in anticipation of trends in its environment" (Channon 1973). In the case of the British industrial environment in the postwar era, the forces that have guided the emerging patterns of the corporate strategy are: the changing pattern of demand, the growth in competition, the rise in U.S. investment, the growth in international competition, changes in market institutions, the impact of technology and the changing pattern of supply.

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Table 1.1. Three stages of organizational development Stages Company Characteristics

2

1. Product line

1. Single product or single line

1. Single product line

1. Multiple product lines

2.Distribution

2. One channel or set of channels

2. One set of channels

2. Multiple channels

3. Organizational Structure

3. Little or no formal structure

3. Specialization based on function

3. Specialization based on productmarket

4.Productservice transactions

4.N/A

4. Integrated pattern of transactions

4. Not integrated

I

LJ

L—M

L»J

U

r*1___h

A

B

C

7TT

Market

Markets

5. Performance measures

5. By personal contact and subjective criteria

5. Increasingly impersonal using technical and/or cost criteria

5. Increasingly impersonal using market criteria

6.Control System

6.Personal control of both strategic and operating decisions

6. Personal control of strategic decisions, with increasing delegation of operating decisions based on policy

6. Delegation of product-market decisions within existing businesses with indirect control based on analysis of "result"

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Certain influences were more important than others, but the major cause of strategic change was clearly from the marketplace, which transformed the pattern of the competitive advantage. In turn, strategic changes brought about structural transformations (Channon 1973). Channon examined the evolution of the population of the largest 100 British manufacturing companies over the 20 year-period 1950-1970. Analysis of the evolutionary trends revealed a significant growth in strategies of diversification within the population. Adoption of the diversification strategy was associated with a change in the structure of a firm from a traditional functional form of organization to either a holding company or multidivisional structure. The holding-company structure was found to be initially the prevalent form of organization probably because the companies were not able to innovate the more sophisticated control and planning mechanisms that the multidivisional system necessitates. However, especially during the 1960s, the multidivisional structure was rapidly adopted and superseded many of the holding company structures. Organizational homogeneity theory predicts large organizations to resemble each other due to three kinds of pressures from their environments (DiMaggio and Powell, 1983). These are cultural expectation of competitors, suppliers, or the state to conform structurally, uncertainty in the environment that would cause the firms self-consciously mimic other successful organizations and finally promotion of multidivisional form by leading business schools as an important organizational tool. In fact, some studies associate the spread of M-form to American political and economic hegemony (Djelic, 1998), promotion of leading American business schools and consulting firms (Servan-Schreiber, 1967; Channon, 1973) and politically motivated program of "Americanization" of European management (Guillen, 1994; Djelic, 1998). Williamson (1970) has regarded the decentralized multidivisional form as "American capitalism's most important single innovation of the twentieth century". The Harvard group regarded it as "eminently exportable" and as the multidivisional form spread around the world, its evident superiority would soon drive the other organizational forms out of existence. While Rumelt (1974) had found advanced level of divisionalization in the U.S., Scott (1973) predicted that Western Europe would steadily catch up. In Scale and Scope (1990) Chandler attempts to measure the responses to the challenges of large-scale business. He found that USA and Germany responded through related diversification and by building administrative hierarchies as efficient organizational structures. Chandler (1990) suggested that there might be country-specific factors within Europe since the conglomerate has been predominantly an Anglo-Saxon phenomenon. This argument suggests that Germany and UK are likely to be at opposite sides.

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However, the study of Mayer and Whittington (2000) - where they examine the original Chandlerian model of corporate development in the light of the recent experience of large French, German and British firms - reveals that despite the broadly stable and distinctive institutional backgrounds, European corporations have been transforming their strategies and structures steadily and in very similar ways during the whole post-war period. They extend existing studies of the post-war period to the 1990s and provide an opportunity for longitudinal and international comparison. The emerging picture suggests that throughout the post-war period French, German and British corporations have steadily converged on the divisionalized model of the U.S. (Table 1.2.). Table 1.2. Structures of large industrialfirmsin post-war Europe (%) 1950

1960

1970

1983

1993

Functional Functional-holding Holding Divisional Germany

56 20 24 0

40 30 24 5

18 24 16 42

5.4 8.1 17.6 68.9

1.5 9.1 13.6 75.8

Functional Functional-holding Holding Divisional UK

45 40 14 0

29 53 14 4

27 19 14 40

10.0 23.3 10.0 56.7

3.2 14.3 12.7 69.8

_ _ Functional Functional-holding Holding 22 Divisional 6 Source: Mayer and Whittington 2000

8 1 18 74

4.0 1.3 5.3 89.3

1.5 0 9.0 89.5

France

Table 1.2 shows that in France, Germany and UK the trend of organizational structure in the post-war period is steadily towards increasing divisionalization. In Germany and France, there is a substantial increase in the proportion of firms with divisional organizational structures in both periods 1970-1983 and 1983-1993. In the UK, in the second period there is a very high level of divisionalization, with a rate which is even higher than that of American business at the end of the 60s in the US (Table 1.3 and Table 1.4).

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Table 1.3 and Table 1.4 show that in both of the time periods, divisional structure emerges as the most stable organizational structure. This implies that the divisional form did not emerge only as a result of American postwar economic and political domination, but it has been steadily absorbed by European mainstream also after the 1970s. As the population-ecology theory sees it, the divisionalized company is the survivor of an evolutionary struggle between competing organizational forms. Table 1.3. Structural stability for the period 1970-1983 - all of the three countries Count (% of structure) Holding Functionalholding 81.8 Not stable 72.0 89.3 28.0 18.2 10.7 Stable Source: Mayer and Whittington 2000 Functional

Multidivisional 15.5 84.5

Table 1.4. Structural stability for the period 1983-1993, all of the three countries Count (% of structure) FunctionalHolding holding Not stable 57.1 62.5 53.3 Stable 42.9 37.5 __ 46.7 n r r _ Source: Mayer and Whittington 2000 Functional

Multidivisional 9 98

1.5 Types of Divisionalization The key organizational choice faced by the firm in the process of divisionalization is how to re-organize units into divisions (Baron and Basenko 2001). A firm or a bank can divisionalize with respect to its geographical presence, its product lines or market segments. In geographical divisionalization, functions with a common geography constitute a separate unit reducing bank structural costs through managerial synergies. Channon (1986) points out that the geography variable plays a major role in branch based banking systems and in international banking, where time zone, language, currency and national boundaries all influence structure. In geographically divisionalized banks, area managers are in charge of the production and administrative functions of their decentralized peripheral unit. Apart from improving the relation between distribution channels and central unit, area managers' task consists in strengthening market ori-

Theoretical Drivers of Divisionalization

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entation and bank differentiation consistently with territorial diversity (Baravelli 2003). Regional areas can function as profit centers where area managers have the task of direction, coordination and control of the distribution channels of their zones. In geographical divisionalization, the administrative structure of the bank becomes differentiated: • branch managers focus on their specific market and specific short-term objectives; • area managers deal with operational coordination and can contribute to the development of competencies such as identification of opportunities; • general management can concentrate on strategy making. In product divisionalization each product line constitutes a separate division. The product-division implies the existence of at least two levels of management and a higher number of management roles than that of a function-organization. Strategic decisions and responsibilities at the product market level are assigned to division managers, who have the information pertinent to those strategic decisions. In long vertical product chains, various elements in the sequence become separate business units and each of these businesses or divisions in a decentralized organization becomes a profit center. The companies that face product classes that require high degree of sensitivity to changing market conditions tend to divisionalize and rely on product and brand managers. In these cases a divisional organization is typically the most effective way to assign the required authority and associated profit responsibility. In banking industry, the introduction of new services may necessitate differentiated production functions (centralized or decentralized). The bank production is characterized by technical diversity (with respect to production, distribution and managerial competency profile), which leads divisionalization according to the activity of intermediation and its specific components. High heterogeneity of new services may require internal differentiation of production-distribution processes and this can give way to a multidivisional model for products. If the introduction of a new product/service requires a specific resource, the functional form needs additional managerial or operational competency that does not contain economies of scope. In this case, the functional structure can be maintained by integrating only the introduction of product manager roles into the model (Baravelli 2003).

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A third possible choice is market segment divisionalization. PIMS'definition of business unit emphasizes that each division is a profit center within the corporate organization, which sells services or products to distinct market segments where it could compete effectively (Ceccarelli and Roberts 2002). In fact, what happened in the most famous example of divisionalization - Alfred P. Sloan's restructuring of General Motors in the 1920s - was the centralization of a set of independent organizations in different markets. In this typical case of General Motors, the product market was increasingly segmented into well-defined price classes and this development created two major problems: monitoring (figuring out how the company was performing in each segment) and appropriate allocation of company resources with respect to this divisional performance. The adopted solution was the re-organization of the company into divisions corresponding to each market segment (Chandler 1977).

1.6 Role of Divisionalization by Market Segments Segmentation rests on the assumption that differences among buyers are related to meaningful differences in market behavior. What makes a segment meaningful depends on certain characteristics (D'Amico and Zikmund 1993): (1) the market segment has characteristics that distinguish it from the overall market; (2) the market segment has a market potential of significant size, that is large enough to be profitable; (3) the market is accessible through distribution efforts or reachable through promotional efforts; (4) the market segment has a unique market need and the likelihood that the market segment will favorably respond to a marketing mix tailored to this specialized need is high; (5) the segment's market potential should be measurable. Ease of measurement is desirable because it facilitates effective target marketing by helping to identify and quantify group purchasing power and to indicate the differences among market segments. In planning the target market strategy, a firm decides on the target market approach to pursue (Berman and Evans 1992). This can be a mass marketing approach (aims at a large, broad consumer market), a concentrated marketing approach (concentrates on one group of consumers with a distinct set of needs, differentiated marketing approach) or a multiple segmentation approach (aim1

PIMS: Profit Impact of Marketing Strategy; a study of business strategy initially sponsored by the Marketing Science Institute.

Theoretical Drivers of Divisionalization

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ing at two or more different market segments, each of which has a distinct set of needs). In the banking system there has been a general trend towards a more marketing-oriented (demand-determined) strategy and supply-led banking has been increasingly replaced by much more pro-active banking (Gardener 1994). In this respect, Gardener mentions the relevant research: a case study (Clarke at al. 1988) on the strategic marketing orientation and respective changes in the organizational design of a large UK bank demonstrates the marketing-induced organizational changes and the commitment of the very senior management towards a marketing orientation. The research by Feeney (1989) - which employed case study, participant observation and survey methods - emphasized the market (demand) orientation of modern corporate banking. Penrose (1959) and Abraham and Lierman (1991), however, point out that while changing the organizational design, too much focus on being demand-oriented may also cause negative outcomes. Main factors that lead banks to re-structure themselves into well-defined segments can be summarized as: competition, more and more segment based investor analysis, sustainability of performance and growth options, demand for dedicated services at a good price, increased importance of service quality in customers' choice, critical mass in all market segments, accountability and higher visibility of each business line, potential to streamline holding structures. Segmentation in financial intermediation is an important part of strategy formulation and it develops onto two fundamental levels. In the scope of individual (personal) banking, private banking - which targets high net worth individuals - is distinguished from corporate banking, which aims at corporate clients. On the second level (SBU level), both of them have their customer base subject to further segmentation in order to gain competitive advantage by building comprehensive product offer and specific services. In private banking, the main challenge is to precisely segment high-networth individuals and affluent market clients and understand their differences in profiles and needs. In order to develop customized products and services, private banks - apart from using criteria such as age group, social background and lifestyle - are enhancing their client segmentation with a behavioral approach by using criteria such as risk profile, investment involvement, loyalty, usage of special services. Due to the dynamic nature of well-structured information about the client (e.g. history of transactions in client portfolio), customer segmentation itself is dynamic and requires a pro-active approach. In corporate banking, the segmentation of small and medium size firms is strictly linked to the definition of the business area of the bank and to the

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system of offered products and services. It means that segmentation is directly related with the range of services offered to small and medium size corporates, the level of coordination of services with respect to client needs, the level of continuity of the exchange process between the bank and the client firm through time (Caselli 2001). The selection of segmentation criteria is not easy as it seeks for variables that maximize the homogeneity of the segment within itself and heterogeneity among segments. The segmentation model approach can offer management an effective support in terms of accessibility, measurability and importance of each segment and requires the identification of the objectives and pursued benefits of the segmentation process followed by analyses for served client portfolios. In this sense, market segmentation is more difficult and complicated for corporate than for private clients due to overlapping and interdependent determinants of firms, such as the characteristics of management, structure and financial characteristics of the firm (Caselli 2001). The evolution of segmentation models for small-medium size corporate clients can be divided into four categories (Caselli 2001): 1) poor segmentation, 2) defensive segmentation, 3) complex segmentation, and 4) proactive segmentation. In a two dimensional model (level of market analysis of client firms and level of market analysis of offered services), the evolution of above models shows a diagonal movement from low to high with respect to both dimensions. Therefore proactive or competitive segmentation models are superior in terms of innovation and completeness compared to rich and defensive segmentation models. The analysis reveals that proactive segmentation fulfills the product-market matrix by focusing on the descriptive aspects of the target market and on the characteristics of the companies with which the bank is developing a relationship. The application of proactive segmentation recognizes a source of competitive advantage in environmental diversity as the significantly different corporate segment enables the bank to differentiate itself by meeting the specific needs of the segment with its system of services and defends its market position against competitive forces. The construction of a proactive segmentation model requires a strong focus on the concepts of offered service and target market. In this approach any segmentation process starts by identifying a range of offered products and a possible group of companies that represent the target market of the bank (Caselli 2001).

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1.7 Performance Measurement in Divisionalized Form The divisionalized form configuration focuses on the structural relationship between headquarters and divisions. The delegation of decision making in divisionalized companies is accompanied by changes in monitoring and control mechanisms. As Mintzberg (1979) suggests, the only way that headquarters can detain control and protect divisional autonomy is by monitoring divisional performance. Each division must function as a single integrated system so that a set of quantitative measures of control can be imposed. The division manager, to whom power is delegated by headquarters, must be able to impose the measures on his division. The system should be a top-down regulated one where headquarters manage the strategic portfolio, allocate the overall financial resources, design the performance control system, replace and appoint division managers. As Ezzamel (1992) points out, the divisional organizational structure creates an atmosphere that is intrinsically less oriented to calculations that are created by the market. Quantitative measures of the divisional performance are return on investment, net income and discounted cash flow. Apart from the limitations of these measures such as being short term and past-oriented (except DCF), difficulties arise mostly due to interdependencies between divisions and overheads to calculate the divisional performance. An important observation that emerges from his analysis is that there is a wide range of controls that can be adapted to divisional organizations and financial control is only one of them. Control mechanisms that are not only financial in nature but also structural, contain non-financial quantitative indicators and qualitative elements as well. These diverse types of controls should not be seen as competitive, but as complementary mechanisms. The control of divisionalized companies should be considered in terms of organizational rather than management control, taking into consideration also organizational coherence and structural design. There are various structured control mechanisms to monitor divisional performance and these mechanisms include factors such as the environmental dimensions of the division, the characteristics of information and information flow, divisional interdependencies, divisional autonomy in the process of decision making and internal audit. In Vancil and Buddrus' model, it is possible to see business diversity as the independent variable and the character of profit measurement as a continuum from partial fictional to comprehensive realistic. They expect to have variations in the character of profit measurement from realistic (including all costs and revenues in the income statement of the independent corporation) to fictional (either because it includes only part of the costs

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attributable to the business or the costs are assigned in an arbitrary fashion). In their model, as business diversification increases so does the autonomy of the profit center manager and the character of profit measurement is closer to "comprehensive realistic" (Vancil 1979). Rumelt's (1974) assessment of separability of a particular business consists in evaluating the extent to which its basic nature and scope could be changed without constraints from the firm's other businesses and without materially affecting the operation and strategic direction of other activities. Solomons' (1978) "genuine division" is independent from the other divisions and its general manager has substantial autonomy from the headquarters, so that the measurement of profit responsibility is "realistic". Recognizing the fact that the condition of "genuine divisions" does not always hold, Solomons highlights that "The more difficult it is, in a particular situation, effectively to measure divisional performance by the profit test, the more circumscribed divisional freedom of decision-making is likely to be. The difficulty is likely to arise whenever a division's affairs cannot be sufficient disentangled from other parts of the business. Ultimately, a point is reached when the division loses the right to be regarded as a genuine division at all." The study of organizational models of intermediation activities has shown that in order to define sector contingencies better, a key aspect to understand is the interdependence/interrelation phenomenon between the activities. These studies confirm that the division of work into phases in financial intermediaries, i.e. in the service industry, is not so efficient and effective as it is in manufacturing companies. The existence of interdependencies has implications not only for the microstructure, but also for the administrative design (macro-structure) and creates coordination problems between interdependent activities. In the model of diversification for universal banks, the phenomenon of interdependencies leaves its place to the problem of whether to manage the problem and, if so, how to manage it. The management of interdependencies implies the identification of horizontal strategies and introduction of horizontal organizational models. Interdependencies between clients, for example, indicate the definition of segment strategy and divisionalization by segments. Morison (1994) points out the pervasive nature of the interdependencies between the bank different units. In the case of banking, managing the necessary flows of information between the resulting units is a more acute challenge than grouping activities since different units have complex reciprocal relationships and make significant use of pooled resources such as customer information, financial capital and computer systems. Thus, a bank that chooses to emphasize one of its organizational dimensions products, customers, geographical markets - is almost inevitably bound to

Theoretical Drivers of Divisionalization

31

face significant and complex interdependencies along one or more of these dimensions.

1.8 Drivers of Divisionalization and Future Trends in Banking Organizational Change As hypothesized by Chandler, "structure follows strategy" and the correct "fit" between strategy and structure is what leads to performance. His original argument was that when large industrial firms grow by extending their resources, they manage this by decentralizing operations within divisional structures. Chandler's argument suggests that multidivisional structure is a natural outcome of the diversification process in growing firms. For the administrative coordination to be more efficient and more profitable than market co-ordination, the business volume had to be sufficiently large and what increased the business volume was the new technology and expanding markets. New technology produced much bigger amounts of output, sustained movement of goods whereas enlarged markets were essential to absorb such volume of output. Therefore multidivisional enterprises appeared, grew and continued to flourish in the sectors that were characterized by new, advanced technology and expanding markets. In these new enterprises, administrative hierarchies required specialized skills and the managers who directed these hierarchies became increasingly technical and professional (Chandler 1977). "Organization not only must fit with the strategy, but it must evolve in response to changes in strategy. Consequently, if the strategy is based on certain drivers, organization also must be a function of the same drivers" (Baron and Besanko 2001). The major contingency factors (organizational states or conditions that are associated with the use of certain design parameters) that Mintzberg (1979) associates with the divisionalized form are: market diversity, the technical system used by the firm in its operating core, various aspects of environment (notably stability, complexity, diversity, hostility and some of its power relationships), age and size. Contingency theorists argue that as the firm increasingly operates in diverse markets, it grows larger, older and employs divisible technologies and, thus, the M-form becomes the optimal organizational structure. Chandler (1962) argued that the M-form emerged in response to increased organizational complexity, which is caused not only by growth in firm size, but also by greater diversification into new lines of business and increased vertical integration across widely separated geographical areas. Large size creates problems related to increased volume, but this can be

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dealt with in one way or another for example within centralized structures by the use of standard operating rules. Diversity, however, is much more problematic. As diversity increases, technical expertise becomes more localized, as in the case of geographical diversity, and thus it becomes more difficult for central management to make informed decisions. In a divisionalized structure these problems can be dealt with efficiently, as central management needs to focus only on strategic decisions. Similarly, according to Mintzberg, what particularly drives the organization to use the divisionalized form is market diversity. While an organization with a single integrated market cannot split itself into autonomous divisions, the one with distinct markets has an incentive to create units to deal with each of them. In this way, it can manage its strategic portfolio centrally, while giving each component of that portfolio the "undivided attention" of one unit. Technical system - besides market diversity - is another contingency factor of divisionalized form. Divisionalization is possible only when the organization's technical system can be efficiently separated into segments (Mintzberg 1979). Organizations that would incur a very high fixed cost for technical systems tend not to diversify their product lines in the first place, and so do not divisionalize (Rumelt 1974). Penrose (1959), when stressing the importance of technological competence of a firm, argues that when the firm's strength is not closely related with its technological strength but rests primarily on a dominant position in important markets, it is more difficult for the firm to enter into new areas of specialization. In a competitive and technologically progressive industry, a firm specializing in some products can maintain its position with respect to those products only if it is able to develop an expertise in technology and marketing sufficient enough to introduce innovations that affect those products. In terms of environment, the divisionalized structure differs from the other configurations in the sense that it has a more restricted environmental dimension that is market and product diversity (as discussed in Sect. 5). The empirical test on a survey of large UK companies (Armstrong at al. 1998) suggests that there is no finding that divisionalized companies tend to be larger than the rest. However, they have found size effects on some aspects of divisionalization. Companies with intermediate levels of organization between their business units and headquarters tend to be larger than those that are not. It is remarkable to note that, in addition to Chandler's argument that structure follows strategy and divisionalization is the result of strategic diversification, Rumelt (1974) argues that the opposite relationship holds as well. That is, divisionalization encourages further diversification because of the ease with which headquarters can add new divisions in this structure. Similarly, in the banking industry activation of new developments is

Theoretical Drivers of Divisionalization

33

not independent from the structure, operating mechanisms, management style and human resources. As Gardener (1994) views, the bank organizational structure may be seen as a kind of interchange system between the external environment and internal resources of the bank. In particular, the structure strongly conditions the interpretation of the environmental change and therefore the capacity to comprehend the environment and formulate strategy. "Mechanic structures" are strongly concentrated and bureaucratized and this limits the personal development of employees and their decision-making capabilities. On the other hand, in "organic structures" employees actively participates in decision making and develop their individual capacities. The latter maintain an efficiency and innovation oriented mentality that in turn enhances corporate strategy. Similarly, according to Porter (1987), main organizational prerequisites of restructuring in corporate strategy are autonomous business units, a corporate organization with the talent and resources to oversee the turnarounds and strategic repositioning of each unit. Corporate restructuring reinforces segmentation strategy and allows the bank to focus on the specific needs of each client segment and offer differentiated customized services. The competitive advantage created by this corporate restructuring can be synthesized as follows: • greater growth options by means of diversified (domestic and international) growth paths for each bank and potential specific partners by bank; • new growth opportunities for each business, thus facilitating ad hoc "strategic moves" per business line (e.g. on a dimensional and geographic scale); • better quality of service by means of more comprehensive knowledge of market, focused offer of products and services and thus higher customer satisfaction and increased market share; • greater effectiveness by time-to-market and increased penetration in specific geographical areas, management focus, and higher brand recognition; • better efficiency by improved capital allocation, risk control, accountability; • better Human Resources management. The Environment-Strategy-Structure model presents interesting applications in the banking industry. In an environmental condition that is charac-

34

Ozlem Yildirim

terized by high level of instability, uncertainty and dynamism, banks always had to modify and adapt their strategies in order to face the changes in demand and dynamics of competition. The starting point for changing organizational structures in the banking industry must therefore be the changing environment. The main change factors are (Morison 1994): regulatory environment, in particular the elimination of previous barriers to diversification by banks, non-bank institutions and other new participants in the financial services industry; radical changes in the technology of the industry; the end of the wide range of restrictive practices and the general heightening of the competitive "animal spirits" of the industry, changes in pattern of final demand for financial services, reflected in a general increase in customer sophistication and a shift in demand from traditional forms of financial intermediation to new services, often technology driven, with higher value-added content. The dominant trend has been diversification of banks into new markets and products. Strategic options of the bank are several and depend on the segment choice, specific needs to satisfy, lines of product/service to offer, characteristics of technological investments and structure of distribution process. The bank, with all its organs (central and peripheral) needs to be proactive in responding and even anticipating the environmental changes and dynamics. Therefore, the organizational structure needs to meet two important characteristics: flexibility and efficiency. Flexibility is an important point of reference in the evolution of organizational structure of banks in cases that are characterized by increasing uncertainty, instability and dynamism. Flexibility requires decentralization in decision making and operating activities as well as coordination of administrative staff and production units. Efficiency, on the other hand, due to the increase in competition and the maturity of the industry necessitates technological investments and organizational changes that will reduce operating costs, enhance productivity and realize potential synergies in production, sales and distribution functions. In short, whereas flexibility asks for decentralized structures, efficiency necessitates avoiding duplications and asks for centralization of activities and common functions to gain economies of scale. Therefore the choice of centralization/decentralization level is a delicate one and an appropriate mix should be sustained depending on the bank's strategic area of activity. Mainstream orientation of the bank's structure to the market and to the evolution of the demand is towards the empowerment of strategic management units and the constitution of units responsible for products/services/customer segments/geographical areas and strategic business areas (Baravelli 2003). Management of single businesses in divisional structures has a high level of flexibility and they can be organized accord-

Theoretical Drivers of Divisionalization

35

ing to organizational models that enable each business unit to compete more effectively in its specific sector. Environmental specificity of each single activity therefore corresponds to differentiation in structure and operating mechanisms, attributing flexibility also to big size structures characterized by high level of productive diversification. The capacity of defining and introducing differentiated systems and structures depends on the flexibility of the internal organization of the firm (Schwizer 2000). Adaptive capabilities of the divisional form will be a central theme in the evolutionary pattern of banks as they try to adapt their fast changing environments. Taking into consideration factors such as top management commitment, adjustment of corporate culture, adding specialist skills (Channon 1986) and striking the balance between long-term growth and the imperative of short-term profitability (Abraham and Lierman 1991) will be crucial in the success of their organizational modifications.

2 Corporate Banking Strategies: Products, Markets and Channels

Stefano Caselli

2.1 Chapter Outline This chapter intends to investigate corporate banking strategies in terms of products, markets and channels so as to verify the features and the nature of the relationships existing between the bank's overall market choices and the decisions concerning the organization. The research aims not only at analyzing the "state of the art" of the main strategic approaches but above all at investigating the degree of consistency between banks' market choices and their production and distribution systems, which connect their offer model with their target enterprises1. To understand product, market and channel strategies in the corporate area we shall try to answer four basic questions, which have guided the collection of information from the banks: 1. What is the overall mission of the corporate area? 2. What are the main features and the role of the segmentation process? 3. What are the organization and the products/services provided? 4. What are the critical aspects of market choices? Each inquiry includes a series of issues, which represent the key points for the thorough comprehension of product, market and channel strategies in the corporate area. The above stated issues are structured as follows. 1. Overall mission of the corporate area: • objectives, basic organizational structure and extension of the corporate area; • commoditization and customization in corporate banking;

1

On this topic, resulting (according to Mintzberg) from the relationship between environment, strategy and structure, see Ennew et al. (1991).

38

Stefano Caselli • comparative analysis by country and bank size.

2. Market segmentation in the corporate area: • type and "complexity" of the adopted segmentation models; • structure of the information sources of the segmentation models; • purpose and maintenance of segmentation models. 3. Products designed for corporate customers: • association between corporate lending and corporate banking; • association between SMEs and the corporate banking area; • current features and expected evolution of products and services designed for corporate customers. 4. Emerging needs: • information technology emerging needs; • training emerging needs. Therefore, the objective of the research consists in answering the above stated inquiries by analyzing the evidence provided by the questionnaires. This will enable us to obtain a precise picture of the existing phenomena and thus to interpret them correctly at the end of this work.

2.2 Mission of the Corporate Banking Area

2.2.1 Objectives, Basic Organizational Structure and Extension of the Corporate Banking Area The objectives of the corporate banking area appear to be diversified as to the number of the replies per item and to the relative degree of importance associated to the replies. However, strong density characterizes three recurrent needs in the seven Italian panel banks: 1. increase business volume in the corporate area, with reference to new and potential clients; 2. increase corporate customer satisfaction; 3. increase the value produced by the corporate area.

Corporate Banking Strategies: Products, Markets and Channels

39

The first objective is considered priority in all of the seven banks, the second in six and the third in five of the Italian banks interviewed. Other aspects, such as the increase in the number of clients, the cut in operational costs and the reduction of client turnover, are considered of secondary or no importance. The reduction of loss loan and nonperforming loans seems to have some importance. The objectives of the corporate area seem to be diversified as to the number of the replies and to the relative degree of importance associated to the replies even in the case of the other European panel banks. The same density has been observed for the three basic needs identified by the Italian banks and a similar behavior has been observed for the secondary or marginal objectives 2. Compared with the Italian banks, two differentiation objectives have been given medium or high importance in the five other European banks under observation: 1. increase EVA in the corporate area; 2. increase penetration in the area of international relationships. Moreover, two Italian banks have opted for the registration of a specific brand for the corporate area. Bank A has given the corporate area the form of an independent company and Bank F has opted for commercial divisionalization. In the remaining five banks no brand registration has been chosen. With reference to the international banks, both the 18 banks surveyed through public documentation and the five ones directly interviewed, no brand registrations or specific strategies leading to that direction have been observed. On the other hand, Santander has adopted a brand differentiation policy according to the different geographical areas in the market in order to answer the community or the ethnic group more effectively in terms of communication. The extension of the corporate area is a function of the basic criterion that identifies target companies (Bloch 1989; Geisst 1995). In all of the Italian panel banks - except for subsequent segmentation criteria - company turnover is the primary and indispensable factor for setting the borders of the corporate area. In six banks the broad definition of the corporate area is undoubtedly the prevailing identification mode. On the 2

With reference to the other European panel banks, apart from bank V where the objectives of the corporate area were prioritized to the reduction of lending defined as "non strategic", reduction of absorbed capital and reduction of non performing loans.

40

Stefano Caselli

average, the range identifying corporate companies goes from €1.5 to 250m turnover. Bank D expects to raise the limit to €500-600m. Bank F has set the floor at €15m turnover, which has reduced significantly the number of enterprises in the corporate area. More specifically, the total population of the area was of 7,000 enterprises against the 80,000255,000 range characterizing the other six banks (Table 2.1). Table 2.1. Criteriaforfc A B Minimum (turnover 1.5 2.5 €m) Maximum (turnover 250 100 €m) Number ofcorporate companies

8Q

200,000

C

D

E

F

H

2.5

1.5

15

1.5

500

300

150

None

250

90,000

255,000

170,000

7,000

120,000

^_^_TT_^,._m^m__r,

In two banks (B and E), corporate customers have been distinguished into two different groups: "corporates" and "mid corporates" for Bank B; "small business enterprises" and "SMEs" for Bank E. In six banks (A, B, C, D, E, H) there is a further segment of "large corporates" or "large groups". Even in the case of the five other European banks, company turnover is the primary factor for setting the borders of the corporate area (Table 2.2). Table 2.2. Criteria for the corporate area identification in other European panel banks V Minimum (turnover €m)

200

Maximum (turnover €m)

Nominative choices relative to large groups

W 30 foreign 10 domestic Nominative choices

X

Y

Z

None

20

1.5

None

Nominative choices

75

Number of 255,000 800,000 62,000 47,000 n/a a corporate companies a In the case of Bank V, the number of corporate companies was not revealed.

Corporate Banking Strategies: Products, Markets and Channels

41

However the emerging picture seems to be quite varied as three banks (V, W, Y) opt for a restricting definition of the corporate area by fixing a high minimum turnover for access. One bank (W) makes a distinction between companies on the domestic market and companies on the international market and sets lower access conditions for the former group. One bank (X) identifies the corporate market as a whole and successively proceeds to a more subtle second-stage differentiation. In two banks (V, X) enterprises fall into three different groups: "small business", "corporate" and "large corporate". In three banks (W, Y, Z) large corporations, which are identified on the basis of subjective criteria in two cases (W, Y), must refer to head office or to specific structures of head office. 2.2.2 Commoditization and Customization in Corporate Banking The issue of commoditization versus customization within the context of the overall management of the bank-enterprise relationships is seen in a completely different way within the Italian panel banks. Four banks (B, C, E, H) have strongly declared the need for progressive commoditization of the supply system, above all by gradually raising the range and the quality of the products provided to corporate clients. On the other hand, three banks (A, D, F) have strongly declared the need to pursue clear customization of the supply system, by providing tailor-made solutions. The contrast between the two groups of banks allows us to formulate three different interpretation hypotheses: transitoriness, dichotomy and complementariness. 1. First interpretation hypothesis: transitoriness. According to this first hypothesis, the opposition between commoditization and customization reflects a temporary condition, as the system as a whole tends to evolve toward only one of the two choices, which has not been clearly identified so far. This means that in general the excluded choice bears an auxiliary function and merely supports the dominant choice. It seems the tendency towards commoditization rather than customization is a component of a more complex strategic path, which aims at finally identifying a consistent model as to the organizational structure, market relations, production processes and value creation logic. 2. Second interpretation hypothesis: dichotomy. Here the opposition between commoditization and customization reflects a long-term structural situation, as the system as a whole tends to evolve toward the two direc-

42

Stefano Caselli tions according to the choices made by banks. This means that neither of the choices bears an auxiliary function or merely supports the other one; both of the choices have the same strategic relevance. As a result, the tendency towards commoditization rather than customization represents a relevant factor for the creation of the competitive advantage and, thus, for the radical differentiation of the competitive models chosen by individual banks. In other words, it is not the system that evolves toward a particular direction, but within the system there coexist different and contrasting propositions which will be rewarded by the market in a different and original way.

3. Third interpretation hypothesis: complementariness. Here the opposition between commoditization and customization is more apparent than substantial because it reflects the different stage of development attained by banks on their way to the implementation of the corporate "project". Banks that opted for customization are in fact concentrating their efforts on the soft variables of the process or on the figure of the corporate banker as crucial factor in the differentiation of services. Most probably they have already started an intensive phase of "industrialization" of production centers. Vice versa, banks that opted for commoditization are in the investment phase and are concentrating on the hard variables of the process, primarily related to the definition of the structure of the production centers and secondarily to the identification of efficient standards regarding product development, underwriting and positioning on the market. As a result, the two tendencies are complementary and related to different contexts within the entire production process. If we consider the three above hypotheses, the issue of commoditization versus customization presents similar contrasts in the case of the other European panel banks.3 In particular, two banks (Z, Y) have declared the primary need to standardize their supply system, above all by raising the range and the standards of the products supplied to corporate clients. Vice versa, three banks (V, X, W) have confirmed the need to pursue clear customization of the supply system by providing tailor-made solutions. Anyway all of the five banks (V, X, Y, W, Z) show the need to standardize their fundamental production processes. Those aiming at differentiation focus on the corporate banker.

3

For analysis on the international level, with reference to the corporate and investment banking services, see Hunt (1995) and Medonca and Nakachem (1996).

Corporate Banking Strategies: Products, Markets and Channels

43

2.2.3 Comparative Analysis by Country and by Bank Size The different elements contributing to the identification of the mission of the corporate area tend to highlight a certain correlation with the size of the bank and above all with the geographical scale of that bank's operation (Cairns et al. 2002). The comparisons between Italian and non-Italian banks reveal many differentiation factors (Cairns et al. 2002). On one side, the uniqueness of the divisionalization model of the sole Italian bank that has adopted it; on the other, non-Italian banks with the following: - strong and declared orientation toward the concept of customer satisfaction as a key element in the mission of the corporate area (mentioned by 16 banks surveyed through public documentation and 4 panel banks); - strong and declared orientation toward the support of enterprises' internationalization processes (mentioned by 18 banks surveyed through public documentation and 5 panel banks); - strategic orientation toward the development of activities on international level (indicated by 18 banks surveyed through public documentation and 5 panel banks); - minimum criterion for access to the corporate area significantly higher than in Italian banks. The former tend to define the corporate area as a wholesale segment (in 9 banks surveyed through public documentation reference is made to over $500m sales and in seven banks surveyed through public documentation reference is made to over $10m deals); - general orientation (in 18 banks surveyed through public documentation) specifically characterized by a comprehensive offer extended to the entire system of corporate finance, corporate lending and asset management products; - concentration of Corporate & Investment Banking (thus excluding commercial lending) into product companies of clear reputation and visibility frequently purchased on the market; - focus on strategic business areas, that is in terms of such combinations as "served clients/provided services/managed geographical areas"; there is the symbolic case of one of the "other European panel banks" that has re-configured its own division model as a matrix; - presence of a strategy of a more extended corporate area at the international level than in the domestic area of origin (in this sense banks X and W are very significant).

44

Stefano Caselli

The following differentiation elements can be observed within these banks: - orientation toward (or "consideration o f ) SME target exclusively by continental Europe banks (France, Germany, Spain); vice versa AngloSaxon banks (USA and UK) delegate SME services to the sector of commercial banks (Smith and Walter 1997); - orientation toward corporate lending in continental Europe banks, mostly in the original domestic market and in relation to target SMEs; - corporate area basically oriented to capital markets and corporate finance in Anglo-Saxon banks; - corporate area basically oriented to capital markets and asset management in Swiss banks. In conclusion, the overall analysis of banks reveals radically different positioning models in the market of corporate banking according to the choice of the business areas to be managed, that is of the combinations "served clients/provided services/managed geographical areas". In this sense it is possible to distinguish 5 relevant strategic groups4: 1. Global Corporate and Investment Banks; 2. Universal European and Japanese Banks with global players' ambitions; 3. Universal banks with Pan-European selective strategy; 4. Universal banks with strong national presence; 5. Universal banks with strong regional presence. Global Corporate and Investment banks are characterized by the fact that they are able to operate in a dominant position in all market dimensions: products provided, clients and sectors served, related geographical areas. This group includes a restricted number of American banks, which are defined as "bulge bracket firms" (Merril Lynch, Morgan Stanley DW, Goldman Sachs). Their global dimension is coordinated with the local one (global strategy) through regional/country bankers. European and Japanese banks with global players' ambitions are characterized by the fact that they have a consolidated domestic matrix through which they have developed the possibility to operate in a dominant position throughout all market dimensions: provided products, served clients and sectors, related geographical areas. This group includes a number of 4

Forestieri (2003).

Corporate Banking Strategies: Products, Markets and Channels

45

European banks (see Hackethal 2004 for the German ones) and Japanese banks that have made important acquisitions of big global players in order to speed up their growth on the global scale. Examples are Deutsche Bank, UBS, Credit Suisse, Nomura and Mitsubishi (Table 2.3). Table 2.3. Development of complex groups and financial conglomerates for the extra lending area: empirical evidence emerging on the international level Citigroup

Credit Suisse Group

Deutsche Bank Group

JP Morgan Group

UBS Group

Citibank Solomon Brothers Smith Barney Schroeders

Credit Suisse First Boston Donaldson & Co

Deutsche Bank Morgan Grenfell Alex Brown Bankers Trust

Manufactures Hanover Chemical Chase Manhattan Hambrecht & Quist Robert Fleming Beacon Group JP Morgan

Swiss Bank UBS Philips & Drew S. G. Warburg 0' Connor Dillon Read Paine Webber

Universal banks with Pan-European selective strategy include differently-sized banks from continental Europe that develop the area of Corporate and Investment banking with high ambitions but not comparable with those of global players. A large number of these banks associate their strong and consolidated domestic position with a selective strategy for to the type of product or the target geographical area. Examples include ABN Amro, Santander, BNP Paribas, Unicredito, Credit Agricole. Universal banks with strong national presence include large-size banks that operate in domestic markets with consolidated leadership positions. However, the scope of action does not develop along the direction of the geographical areas and that is why their international presence is relatively limited rather than episodic. Their concentrated geographical presence inevitably conditions their product choices because: a) it makes them responsive to the specific features of the industrial system; b) it reduces potential business volumes related to corporate finance services. Examples include Banca Intesa, Commerzbank, Capitalia, San Paolo IMI, Montepaschi Siena, Banca Nazionale del Lavoro. Universal banks with strong regional presence include medium to largesize banks that operate in domestic markets with consolidated leadership positions above all on the regional level. The scope of action does not develop along the direction of the geographical areas and that is why their in-

46

Stefano Caselli

ternational presence is non-existent and their national presence is not complete. Services provided are essentially concentrated on lending and the diversification of the offer is developed through commercial or equity agreements with specialized merchant banks. Examples include Credem and Antonveneta.

2.3 Market Segmentation of Corporate Banking Area

2.3.1 Segmentation Models As for the issue of market segmentation, banks' choices have been analyzed at a macro decision level (i.e. first level segmentation) and at a micro or more sophisticated decision level (i.e. second level segmentation) in order to evaluate the identification criteria of the corporate area as well as possible internal subdivisions for specific objectives (product positioning, organization structure of the corporate area, assignment of responsibilities, etc.).5 With reference to first level segmentation, enterprise turnover is undoubtedly the prevailing criterion (six cases in Italy) followed by subjective choices on specific items (four cases in Italy). The same applies to other European banks (see Table 2.4 and Table 2.5). In terms of expected evolution over the next three years, no relevant changing factors and no new criteria will be introduced for customer identification purposes. The overall evaluation of first level segmentation seems to be consistent with the elements of the mission of the corporate area. The usage of an extended definition of corporate clients does not need any refined target selection tools but simply the pragmatic use of the dimensional criteria, which are further refined by registry criteria and by subjective criteria for entering/removing enterprises from the target itself. This evaluation is confirmed by the fact that in seven Italian banks the main advantage of the first level segmentation model consists in its being "simple to use" or "objective and simple" or in its "useful contribution to a correct composition of the corporate portfolio".

1

Caselli (2001a); Eiglier and Langerad (1991); Santomero and Babbel (1997).

Corporate Banking Strategies: Products, Markets and Channels

47

Table 2.4. First level segmentation criteria adopted by the Italian panel banks

First level segmentation criteria Enterprise turnover Given amount of lines of credit Used amount of lines of credit Turnover growth rate Total business volume Bank's share of overall lines of credit extended by banks Commodities sector Legal typology of customer Subjective choice of specific enterprises Other (EVA)

Number of banks today

Number of banks Next 3 years

7 2 0 0 1

7 2 0 1 2

0

1

0 1

0 1

4

5

0

1

1

Table 2.5. First level segmentation criteria adopted by the other European panel banks _. , , .. . First level segmentation criteria °

Number of banks . , today

Number of banks . next 3 years

Enterprise turnover Given amount of lines of credit Used amount of lines of credit Turnover growth rate Total business volume Bank's share of overall lines of credit extended by banks Commodities sector Legal typology of customer Subjective choice of specific enterprises Other (customer original geographical area) Other (cross selling ability)

5 0 0 1 2 .

5 0 0 1 2 „

1 1 .

1 1

_ !

,W_T-Trrm,

j,

With reference to second level segmentation, only two Italian banks (B and E) divide the corporate area into two sub-segments. This distinction is made with the same criteria as previously described for first level segmentation. The situation is similar for the other European banks.

48

Stefano Caselli

However, three Italian banks have stated that they need and have planned a specific activity in such direction in the medium run. This last observation becomes even more important if associated with the comments regarding the major defects in first level segmentation. Here follow the most frequent: - low efficiency in distinguishing customer needs and/or business potential (five Italian panel banks); - limited support to the positioning of products provided. In other words, on the whole we can assume that so far segmentation has had a strategic role (macro-segmentation) that is going to be perfected in the medium term both at the strategic and operational level in order to achieve a better planning of the corporate business and the commercial activities directed to clients. 2.3.2 Information Sources for Segmentation Models In the Italian banks the first-level segmentation model is not provided with an ad hoc information system within the marketing function. The source of information is the customer credit information file from the credit function as the prevailing criteria for segmentation are turnover and the subjective choices made for specific companies. In the second case, the subjectivity of the choice is closely connected with credit information and evaluations. However, the three banks (A, E, F) that have declared the need to adopt a second-level segmentation model have also pointed out the still generic necessity to design a more accurate information system able to merge the credit and the commercial components. As for the other European banks examined: - the first-level segmentation model is not provided with an ad hoc information system - there is no connection with the commercial information system within the marketing function, just like the case of Italian banks. However, all of the five banks (V, W, X, Y, Z) have a Customer Relationship Management System specifically dedicated to the corporate area and in one bank (Y) there are client files gathering commercial, credit related and personal information on the relative corporate customers.

Corporate Banking Strategies: Products, Markets and Channels

49

2.3.3 Segmentation Models Usage and Maintenance This issue is directly connected with the complexity of the model and the underlying information system. As a result, the adopted maintenance logics seem to be simple and mainly related to the updating timing of the credit system information file. This means that companies enter or exit from the corporate area when: - changes are made in customer information files; - ad hoc corrections are made on an individual basis. The usage of the segmentation model is still "limited" or "basic", as it simply meets the necessity to distinguish the corporate area from the other groups of clients; the purpose of utilization is neither more complex nor more refined; the model is not used for a proactive approach in the process of product buying or in the choices of product positioning (Fig.2.1). Degree of in-depth analysis of the corporate customer

1

HIGH: analysis of behavioural models

PROACTIVE MODEL

COMPLEX MODEL

y DEFENSIVE MODEL

LOW: analysis of company data

POOR MODEL Degree of indepth analysis of services LOW: analysis of purchase and non purchase reasons

HIGH: analysis of competitive strengths in each markets

Fig. 2.1. Evolution of segmentation models It is possible to distinguish four stages of development in relation to the "degree of in-depth analysis of the corporate customers" and the "degree of in-depth analysis of services". The four stages can be defined as "poor", "defensive", "complex" and "proactive" segmentation models (Caselli 2003a).

50

Stefano Caselli

The Italian banks in our panel are still at the first stage of development as they meet the primary need of segmentation, that is distinguish the corporate area from the other bank customers. The implementation of divisional structures will require more intensive and complex applications of the segmentation models, thus triggering the evolution of the underlying information system and the development of the multiple purposes of utilization.

2.4 Products and Services Designed for Corporate Customer

2.4.1 Association Between Corporate Lending and Corporate Banking Activity The supply system of corporate banking is closely connected with the specific features of the products provided to corporate customers. Before analyzing the individual services, it is important to answer two relevant questions: the first one is related to the weight of corporate lending within the bank overall offer; the second one is concerned with the role played by advisory services within the bank overall commercial offer to corporate companies. The two questions are of crucial importance as they enable us to understand whether corporate banking represents a simple evolution of the lending area toward the divisionalization of structures or, quite the opposite, a radical re-definition of the bank supply system in terms of product areas and value creation processes. The answers to these questions reveal a significant difference between the Italian and the other European banks in our panel. With reference to the seven Italian banks, there is clear and strong overlapping (in two cases referred to as "total") between corporate lending and corporate banking, while advisory services play just a marginal role6 (from Table 2.6 to table 2.9). The following fundamental indicators have been analyzed: - corporate lending has been so far assigned maximum priority by the seven panel banks and only in one case also corporate finance has been considered as priority; 6

Similar evidence arisesfromCaselli (2001b).

Corporate Banking Strategies: Products, Markets and Channels

51

- as for volume distribution over the different product areas, corporate lending takes up 50% of the services purchased by corporates and in some cases it goes up to 80% and 90%; - even in the 50% instance, remaining volumes are never taken by the area of corporate finance; - in none of the banks (legal, fiscal, organizational/strategic) advisory services have a relevant weight or are assigned distinctive priority in the customer supply process. The clear-cut resulting judgment becomes far more complex if we see it from a dynamic and evolutionary point of view as the choices being made by the Italian banks seem to differ from one another or in relation to the starting data. The critical elements can be summarized as follows: - over the 3-year horizon there is a certain interest in the growing importance of corporate finance in the supply priority scale; - two banks have clearly indicated the need to emphasize the importance of corporate finance and one of them urges for less important corporate lending; - there is a growing interest in advisory, which has difficulties in becoming a "product" that sells at a definite and explicit price; only one bank expects to develop strategic-organizational advisory with established performance in the medium term; - the development of advisory is prevailingly considered as a necessary complementary and interactive tool for the development of corporate finance; - a strong correlation is expected to grow in the future between the availability of a product company dedicated to corporate finance within the group, the development of corporate finance services and the basic orientation of the supply of advisory services; such correlation seems to be weaker when the bank does not have a dedicated product company.

52

Stefano Caselli

Table 2.6. Priority assigned to major product areas by the Italian panel banks A Corporate lending 1 Corporate finance 5 Advisory 5 1 = highest priority 5 = lowest

B 1 4 4

c1 1 5

Banks D 1 2 4

F 1 3 5

E 1 4 4

H 1 4 5

priority

Table 2.7. Main product areas in the Italian panel banks (activity level)

Payment system Cash management Lending

A 15%

B 0%

C 0%

Banks D 0%

E 10%

F 15%

H 0%

0%

0%

30%

0%

10%

10%

0%

50%

70%

50%

80%

60%

60%

70%

Financial risk management Business risk management Asset management Corporate finance Market place services Internationalization services

15%

5%

2,5%

0%

0%

0%

15%

5%

0%

5%

2,5%

0%

0%

0%

0%

5%

10%

Total

100%

100%

100%

5%

30%

100%

20%

100%

20%

100%

30%

100%

Table 2.8. Priority assigned to major product areas by the other European panel banks V Corporate lending 3 Corporate finance 2 Advisory 5 1 = highest priority 5 = lowest priority

W 1 1 2

Banks X 1 3 2

Y 1 1 3

Z 1 1 3

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53

Table 2.9. Main product areas in the other European panel banks W

V d

i

15%

15%

Banks X d i 10% 10%

Y

Z

5%

6%

5%

10%

5%

0%

Payment system Cash Management

19%

Lending

29%

35%

20%

45%

50%

30%

70%

Financial risk management Business risk management Asset management Corporate finance Market place services Internationalization services

29%

10%

10%

10%

5%

8%

1%

0%

5%

5%

5%

0%

5%

2%

0%

10%

15%

5%

0%

8%

5%

19%

15%

25%

10%

15%

30%

5%

0%

5%

0%

0%

0%

0%

0%

0%

5%

10%

10%

10%

10%

6%

Total 100% 100% 100% 100% 100% d = domestic market, i = international market

100%

100%

5%

If we look at the other European banks, the elements of the analysis reveal significant differences in comparison to Italian banks. This can be observed with reference to different aspects that have already been examined within the overall evaluation of the mission of the corporate area. The 18 banks surveyed through public documentation show in fact a clear distinction between corporate lending and corporate banking as well as a clear definition of all the product areas that characterize the bankborrower relationship. This distinction results not only from the different legislation and country system, but also from the fact that banks' target clients are large and international companies. This provides the necessary bases for the creation of sufficient volumes for the diversification process by industry. In this context, there is the exception of Bank V, where the strategic model envisages two qualification elements: the need to reduce the overall exposure in the area of corporate lending and the awareness that advisory is not managed by the bank.

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Stefano Caselli

2.4.2 Association Between SMEs and the Corporate Banking Area With reference to the Italian banks in our panel and considering what has already been observed in relation to the mission of the corporate area and the segmentation models, there is total overlapping of SMEs clients and corporate area. It is inevitable that the specific features of our industrial system reflect on the way the market is being seen by financial intermediaries as well as on their organizational structures. As a result, three client groups are clearly identified: small business (micro enterprises, individual firms, etc.), corporate clients (small and medium enterprises) and large corporate clients (big companies and big groups). The larger size and the international extension of the banks surveyed through public documentation inevitably moves the concept of corporate area to larger-size enterprises, thus considering SMEs as "small" clients, who sometimes become marginal clients and sometimes are even excluded. 2.4.3 Current Features and Expected Evolution of Products and Services for Corporates The examination of the services provided to corporate customers by Italian banks highlights some basic aspects and some contradictions (see Table 2.10). The most important aspects can be summarized as follows: - stability of the offer over time, as no substantial differences seem to characterize future product portfolios; - concentration of the offer on corporate lending areas and on some products of larger distribution (payment and asset management services); - presence of entire product areas (industrial risk and social security management services, market place services) considered as marginal; - presence of specific products (international payment services, loans programs, corporate governance services) considered as marginal; - weak cross management of services connected with internationalization processes and with international activities of enterprises.

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55

Table 2.10. Current and expected products and services designed for corporates in the seven Italian panel banks (number of banks) Product areas priority in corporate banking 1. Payment System Electronic funds transfer (e.g. Riba, Rid and Mav) Company credit and debit cards CBI standard CBI advanced Cash Management Overseas 2. Lending Loans program for employees Short term lending Medium and long term lending Subsidized loans 3. Financial risk management Exchange risk management services Interest-rate risk management services Price risk management services Commodities risk management services Asset/liability management services 4. Business risk management services Corporate insurance risk Individual insurance risk Wealth transfer management Social security plan management 5. Asset management Trading Personal properties management Corporate asset management Corporate governance services (family officing ...) 6. Corporate finance Advisory on securities management Strategic, organizational, legal, fiscal consulting M&A, LBO, MBO Private equity and venture capital Listing admission Company restructuring and crisis management Real estate financing Project financing 7. Market place services Market place creation and management services 8. Internationalization services Co-operation agreements with foreign banks Subsidiaries or branches abroad

Now 7 7 7 5 4 4

7 7 7 7 5 4

1 7 7 7

1 7 7 7

7 7 7 5 4

7 7 7 5 6

4 6 3 3

4 6 3 3

7 7 5 4

7 7 5 5

4 4 7 5 7 5 5 7

4 4 7 5 7 5 5 7

4

5

5 3

5 3

56

Stefano Caselli Contradictions can be summarized as follows:

- services provided in the area of complex corporate finance (listing admission, mergers and acquisitions, project financing) and in that of financial risk management are not always consistent with volumes developed in the bank's corporate area as a whole; - low propensity toward product portfolio evolution, above all as a result of banks' organizational and strategic choices; - low propensity toward the supply of services which are often considered as fundamental by the other European banks to achieve strong management of corporate customer relationships (foreign services, asset/liability integrated management, cash management, wealth transfer management, corporate governance services, advisory on securities management, consulting). The above Table 2.10 becomes more exhaustive with the analysis of the other European panel banks. With the exception of market place creation/supply services, all of the other services are already included in the list of services designed for corporate clients.

2.5 IT and Training Emerging Needs On the whole, the strategic diagnosis of the state of the art of corporate banking in Italian banks highlights some relevant IT requirements. The mapping of such needs can be effectively obtained by distinguishing IT application areas into accounting technology, automation technology, liberating technology and innovation technology (De Laurentis 1989). Thanks to this distinction, applications can be defined on the basis of the impact (back office versus front office) and of the type of underlying strategy (simple cost reduction versus differentiation and cost-leadership). With reference to the area of automation technology (back office, costleadership and/or differentiation) the major shortcomings regard the following: - the data-warehousing systems of commercial information (and their poor link with corporate customer loan information). A strong link would lead to the development of a complete and efficient system of Customer Relationship Management (CRM) in view of the forthcoming development of strategies (market analysis and financial services design and positioning) and commercial operations (micro targeting, require-

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57

ments analysis systems at the level of corporate banker's individual portfolio); - the application platforms intended to assist corporate bankers' interaction with the bank's whole information system (for commercial information and registry-loan information). With reference to the area of innovation technology (front office, cost leadership and/or differentiation) the major shortcomings regard the following: - the availability of internet-based advanced CBI systems able to interact with the bank's structure for simple and complex operations, (e.g. Swift or Edifact cross border transfers) and with its internal corporate customer management systems (accounting procedures and management procedures for treasury management); - the development of proactive solutions designed for customers in terms of interaction/support in complex management processes; in this sense great importance is given to application tools dedicated to the integrated management of multi-currency cash registry, to group cash management, to clearing and to integrated domestic and multi-currency asset and liability management (Mottura et al. 2000). As for the other European banks, the IT shortcomings observed for Italian banks seem to be less marked or even absent in the following fields: - CRM systems are in use and dedicated to corporate banking; - product development is very important, above all in the supply of (international and multi-currency) cash management services and cross border payment systems; - product development tends to partially integrate with customer management processes, specially with reference to interactions between account flows, treasury flows and bank work flows. The overall analysis dedicated to supply strategies and policies in the corporate area allows training emerging needs to be identified. The mapping of such requirements can be developed by distinguishing competencies into functional, technical and managerial7. It is worth noticing that competence areas should be further analyzed within the organizational roles which together define the functioning of the corporate banking area. 7

With reference to the Italian market see Fabrizi (1998) for general interpretation approaches; Caselli (2001a) for a more precise view of needs in the corporate area.

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Stefano Caselli

As for functional competencies, training needs are prevailingly identified in both strategic and operational financial marketing. Critical needs concern the following: - ability to analyze the market of financial services; - ability to develop product management criteria so as to make effective choices in terms of individual products positioning. As for technical competencies, training needs are identified in some specialization areas concerning the financial, legal and fiscal aspects of financial operations, above all in the areas different from lending. Such needs are focused on the following: - enhance the intervention of client management roles, develop and protect the specialized know-how concerning products/services; - spread the ability to handle corporate clients within the bank. As for managerial competencies, training needs are identified in the field of customer relations and in team-working activities resulting from the development of a more complex client management approach. Needs are focused on the following: - develop an actually proactive approach with the client; - create a coaching skill for operational teams dealing with customers; - develop client managers' shopping skills within the bank and, more generally, the bank group in order to optimize the servicing of customer needs. The last specifications become more critical as the range of internal and/or available solutions becomes wider and the structure of served clients/provided products/managed geographical areas combinations becomes more extended.

2.6 Critical Aspects of Market, Product and Channel Strategies in the Corporate Area This part of the research has been focused on some critical aspects of the choices being made by Italian banks in the area of corporate banking and has pointed out their main differences in comparison to the approaches undertaken by the other European banks at an international level. The analy-

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59

sis will enable us to identify the critical and determining factors of the success of corporate strategies. Willing to provide a clear description as well as to focus the main characteristics of the critical and determining factors of successful corporate strategies, both internal and external aspects have been analyzed. The former regard the bank's organizational aspects and the type of relations the bank should develop with the corporate financial system as a whole in order to detect the most suitable and effective solutions. The latter regard the relations with customers and involve the ways in which the bank interacts with the demand functions of enterprises with the goal to enhance problem solving and customer satisfaction capacity. In analytical terms, the critical and determining factors of successful strategies are the following: - clear segmentation processes - both of first and, above all, second level - and consistency with the organizational divisionalization course undertaken by the bank; - strategic and operational enhancement of the marketing function; - efficient operational mechanisms for the development of a smooth and substantial interaction between the bank's corporate lending system and the other product areas; - constant and determined quest of the most suitable relational, professional and contractual requisites in management positions; - centralization of educational processes in assistance to the above mentioned requisites and for the actual development of a "corporate culture" within the bank. The overall evaluation of the features of corporate banking models has revealed a number of key aspects which allow identifying possible successful courses of action among the financial intermediaries operating in the market (Caselli 2003b). The first element to be considered is the possibility of re-producing the Anglo-Saxon or Continental Europe financial models in such markets as the Italian one, where: a. a large portion of demand is concentrated between the small business and the corporate area, thus assuming the typical configuration of the middle market. This weakens the wholesale nature of the market of financial services and produces the typical drawbacks of an enterprise/family mix. As a result, under these circumstances, it is difficult

60

Stefano Caselli to enter the market with a global vision of the supply and with product and distribution features suiting the wholesale competition context;

b. the financial system shows mostly local characteristics. Yet, it is true that around a strong and clearly distinguishable supply structure there is a fragmented universe of subjects (banks themselves, Mediocrediti, professional firms, venture capital companies, etc.) who concur to the production of corporate banking services. Therefore, the Italian market seems to be characterized by significant strengths as well as by structural weaknesses. Among the former, the small size of enterprises and the local nature of banks lead the system to a sort of spontaneous balance characterized by significant information and dimensional symmetries. Among the latter, the incompleteness and the fragmentation of corporate banking services make corporate customer needs satisfaction an area of possible competition. The second element to be considered is the role developed by financial intermediaries, who are a natural complement in enterprises' corporate finance choices and therefore represent an important factor for the development of real economy. The analysis of the supply structure in such financial systems as the Italian one, despite the presence of some elements of change, still reveals a quite "anonymous" profile for financial intermediaries. This is the result of the implicit agreement of non-interference between banks and enterprises, which allows banks to increase their investments and enterprises to have abundant financial resources available. Moreover, this element is affected by the still limited product diversification of financial intermediaries toward the entire system of "product/geographical market/customer" combinations. The considerable distance from the "strongly personalized" exchange approaches, which are typical of the German context, or from "strongly professional" exchange approaches, typical of the Anglo-Saxon context, does not contribute to the development of strong, preferential and high-added value relations between banks and enterprises. These fundamental features of the demand/supply system enable us to formulate some indications so as to identify possible development paths. In the first place, the relevant position acquired by banks and confirmed by the overall orientation of financial resources system of transfer represents the critical point for the growth of the market of corporate banking services. Each economic system creates its own original corporate finance model in relation to its own basic orientation in terms of transfer of financial resources, as clearly shown by the Anglo-Saxon and German experiences. This means that both local and international banks must start intensive internal and external restructuring processes. Internally, commercial banking production and managerial processes seem not to suit the more

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61

complex SBU structure. The set up of a corporate banking division and the creation of organizational roles around the figure of the client manager are indispensable steps for the coordination of the supply activity in order to finally create an actual added value for corporate customers. Externally, the organization of a service offer including the whole range of corporate banking services requires the development of production technologies and competencies that are not known or owned. Inevitably this will urge for a rational process of competence and product acquisition by networking with non-banks or by acquiring and controlling them according to the group or the universal bank approach. In the second place, the typology of competitive strategies in corporate banking has to be differentiated according to the size of the bank. The fact that local banks hold a remarkable share of relations in their own territory gives them a "spontaneous" competitive advantage in terms of information and customer proximity. Vice versa, national banks rely on different distinctive competencies largely deriving from the size factor, which is a tool for creating scale and scope economies and for attracting differentiated competencies. As a result the former may defend their natural competitive advantage from the attacks of the latter only if they succeed in preserving their local identity and multiplying their range of services by means of alliances and agreements. Therefore, the local bank may present itself as the small business professional partner, to which the small or medium enterprise out-sources the supervision and the management of its own financial function. Should this not occur, a large number of enterprises would be obliged to satisfy their needs through a discontinued and thus hardly optimizing acquisition process from a fragmented set of domestic and foreign, financial or non financial subjects. On the other hand, national banks should confirm the value of their own entrepreneurial formula in the different business areas of corporate banking.8 This means not so much aiming at the local market areas, but positioning their supply throughout the entire corporate segment as well as the more extended and complex segment of large corporates and institutions. From this point of view, the pursuit of internationalization becomes an indispensable step for the following reasons:

8

However, the development path of national banks can include even intensive acquisition of smaller banks, with the aim of buying the "local" feature, which is small banks' asset.

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Stefano Caselli

- in the first place, the growing internationalization of the production system, even though exclusively based on exports, encourages enterprises to seek financial counterparts able to interact efficiently with a more complex set of requirements. Bigger-size banks should adapt their services to this new scale so as to avoid the risk of the demand migrating toward subjects that are able to operate on a global scale more successfully thanks to their longer-dated experience; - in the second place, the growing extension of markets represents an important chance of growth for the bank's performance as it increases the variety and the diversification of its portfolio. The quest of new SBUs and the confrontation with foreign competitors thus represent the real entrepreneurial challenge for national banks who, after gaining a sufficient critical mass by means of domestic aggregations, should direct their structures to those, even new, sectors that are bound to produce adequate return on investment. If this logical transition seems right, then national banks should confront themselves with other elements that characterize the different levels of the overall corporate system in a transversal way. Such elements are related to the issues of segmentation model sustainability and of corporate and private banking separation management. In the first case the pursuit of the right positioning of the supply at the strategic rather than operational level will result in the definite and precise segmentation model that was chosen in the first place. However, the increasing degree of specialization requires not only the precise measure of the size and volume of the identified segments but above all the careful assessment of the benefits obtained from the availability of the most desired segments in terms of relative costs of organizational structure differentiation. In the second case, the presence of SMEs and the value of family ownership in major countries in continental Europe stimulate a strong demand for products and services in which the synergy between corporate and private banking is a basic prerequisite. This incentive seems to be potentially in opposition with divisionalized supply structures, where the production and operation systems of corporate and private banking are mostly separated. This should start research on the organizational, operational, contractual, process solutions and so on, which will allow the bank to create internally favorable conditions for winning the family business and with time satisfying the family business system of needs.

Organizational Structures

Paola Schwizer

3.1 Chapter Outline The purpose of this chapter is to offer a perspective on the current positioning of the panel banks in terms of level and type of divisionalization. The focus is on the organizational structures of corporate banking, analyzed both in terms of position and configuration within the bank's macrostructures and of the nature of the processes, professional roles and other organizational and cultural mechanisms regulating its internal functioning. Heterogeneous models of organizational differentiation have been identified at head office level, in regional offices, in branch networks, in tasks assigned to customer relationship managers. The chapter will proceed with an outline of the typical evolutionary trend of the divisional structures in Italian banks and conclude by identifying some critical factors for the success of the current organizational choices. The study of organizational models raises the following research questions: - How do panel banks position themselves in terms of level of divisionalization of the structures dealing with corporate customers? - Which are the basic models regarding the positioning of the corporate area within the macrostructure of the bank? - Which are the basic models of the microstructure of the corporate area at head office level? - Which are the basic models of the microstructure of the corporate area at branch network level? - Which are the basic models of the micro-structure of the branches specialized in corporate banking? - Which are the main interactions between the corporate area and the other bank's departments or units?

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Paola Schwizer

- Which are the goals and the performance measurement profiles of the corporate area? - Which are the performance drivers of a divisional structure by customer segment? - To what extent do banks communicate their strategies and organizational choices in corporate banking through specialized brands? The chapter is organized in five parts. In the first part (Sects. 3.2-3.3), we analyze the organizational structures of the panel banks at head office level searching for the presence of specialized customer segment divisions or units. In the second part (Sects. 3.4-3.5), we perform a detailed analysis of the microstructures of regional offices and branch network specialized in the corporate banking business, and examine the relationships with other organizational units inside the bank or the banking group. In the third part (Sects. 3.6-3.7), the correlated choices in terms of performance measurement and brand policy are reviewed. On such a basis, we outline the emerging requirements in terms of information technology and training (Sects. 3.8-3.9), and we conclude with a synthesis of some critical issues constituting the basis for the success or the failure of divisionalization strategies by customer segment (Sect. 3.10).

3.2 The Level of Divisionalization of Corporate Banking Structures Market segmentation, organizational differentiation of structures and processes, separation of decision-making responsibilities for different product/market combinations are common strategic choices among major and big banks. The analysis of panel banks shows a common tendency towards organizational solutions that contain elements of divisionalization by market segment. This goal is based on strategic choices considering the corporate banking area, which is identified with the mix "small and medium enterprises in phase of development" segment and corporate lending and finance integrated products, as an autonomous business unit in the valuecreating process.1 The need to manage a bank according to a portfolio approach, in the search of maximal expected return on invested capital, leads to the creation of corporate centers endowed with the necessary instruments for risk man1

As regards the borders of the segment and the segment-related range (variety) of products, see Caselli, the previous chapter.

Organizational Structures

65

agement, strategic planning and for non-specific resource management. With the intention of controlling the strategy implementation process, the corporate center keeps the control over the whole business. Significant insights can be gained from the empirical study of the panel banks. In the implementation of the model they show relevant differences in terms of the basic requirements of the divisional structures. The literature identifies three fundamental characteristics of such structures (Mintzbergl979;Pilati 1997): a) Organizational design. In divisional structures organizational units are grouped at the first organizational layer under the CEO according to the relative market or business segment (mix of geographical market, customer segment and products). b) Operational autonomy. Each division manages (on the basis of organizational or functional links that guarantee an efficient control of production relations) operational and distribution functions which support the supply of products and services to the relative market in order to minimize interdependencies, and thus co-ordination costs, between divisions. c) Profit responsibility. The divisional structure is a profit center. Planning and control systems are based on "management by objective" (MBO). The main co-ordination mechanism is output standardization. Division managers are evaluated according to the performance results of their business units. In the Italian panel banks divisional structures are prevailingly impure; they probably reflect the remains of functional forms and mark the stage of evolution from the former to the really divisional solution. In many cases corporate banking units, even though already defined as "divisions", still establish themselves as functional organisms, if analyzed in terms of internal microstructures as well as of vertical and horizontal co-ordination mechanisms with other bank areas. The main differences from the "pure" form concern: • unit positioning within the organization chart (not subordinated to the CEO but to the commercial or other functions); • responsibility (profit objectives not assigned to division managers but only to regional or branch network managers); • autonomy in managing operational levers (weak impact on the overall supply co-ordination to the customer segment); • consistency of the model, in presence of divisional solutions in some cases limited to the level of head office or branch network.

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Paola Schwizer

Apart from the interpretational differences, all the panel banks adopt divisional or "almost divisional" organizational forms characterized by market-specialized branches or at least by differentiated relationship roles inside the branch network. In order to define the adopted divisional solutions, apparently heterogeneous and different from the basic model, evidence of divisionalization has been specifically searched in the following areas: a) head office {strategic divisionalization); the division can autonomously formulate the choice of products, pricing, distribution policies, etc; b) regional offices {regional divisionalization); area managers are specialized by market segment and co-ordinate a totally dedicated distribution network; c) branch network {branch divisionalization); branch offices are specialized by customer segment; d) relationship roles {professional divisionalization); corporate bankers are present in branches. Consequently, in the evaluation of single cases we adopted the following criteria (Table 3.1): - presence of divisional units at head office level; - presence of customer segment specialized regional offices and/or branches; - presence of roles (and, thus, of competencies) specialized in relation management with customers from different segments. In such a context, the presence of roles or units with special competencies for enterprises with different dimensions or characteristics (large corporate, SMEs, small business) has been pointed out as well. Table 3.1 confirms fairly marked differences between the Italian and the other European banks in our panel. The latter show more pronounced strategic divisionalization, with autonomous divisional units at head office level and, generally, with regional offices and branches dedicated to single customer segments controlled by head office divisions. Such cases bear evidence of composite and heterogeneous organizational structures, referable to a longer lasting "organizational experience" and to market segmentation choices of greater incisiveness. This does not avoid the fact that some of them (Deutsche Bank, for example) are directing their organization innovation process towards solutions that re-propose market integration (as opposed to divisionalization) as an element of competitive advantage.

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67

Table 3.1. The level of divisionalization: an empirical analysis Divisionalization levels and banks 1. Dresdner Bank

Organization model characteristics Strategic divisionalization

Yes, includes two units: Corporates and Markets (for mediumsize enterprises); Private and Business Clients (for small business) Commerzbank Yes, head office structure consists of 4 divisions ("Corporate divisions"): Group management; Retail banking and asset management; Corporate and Investment Banking; Services.a Fortis Bank Yes, the activity includes 6 business areas, which correspond to as many divisions: three insurance divisions and three bank divisions (Network Banking, Merchant Banking, Private Banking, Asset Management and Information Banking); the three insurance businesses are divided by geographical area; the three banking businesses are organized according to the principle of specialized competencies and are therefore transversal in relation to the different geographical areas. The enterprises are assisted by teams of consultant managers operating within the Corporate & Investment Banking division. This division is internally divided by industrial sector and product groups (skills). HSBC HSBC Holdings has 5 business lines: Personal Financial Services; Commercial Banking; Corporate; Investment Banking and Markets; Private Banking. HSBC Bank controls three segment banks respectively active in: personal banking, business banking, corporate and institutional banking. Barclays Yes. Business divisions (partly by segment, partly by product). HVB (HypoVer- Yes. In January 2002, a structure of 5 market/business divisions einsbank) was introduced: two geographical market segments (Germany and Austria/EU), defined as "Bank of the Regions" and three business segments ("Global Business Segments"): HVB Real Estate, HVB Corporates and Markets, HVB Wealth Management. Credit Agricole Yes, but not in its pure form. Top management is represented by the president and the CEO and by 5 Deputy Chief Executive managers within the group leader CA S.A. Group Management, and they are the true division managers. The 5 macro divisions are: Development and Markets (covering the overall domestic network, retail and corporate); Asset Management; Finance and Risks; Technology, Logistics and Banking Services; Corporate and Investment Banking and International Business (which in fact coincides with CA Indosuez, as well as with one internal section of "Equity Investment and International Affili-

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Paola Schwizer

Divisionalization levels and banks

Organization model characteristics ates"). Macro divisions are subdivided into: a) Divisions (despite the name, such units are not divisional structures, but business departments or administrations); b) Departments (subordinate to divisions); c) Subsidiaries (group external companies). The corporate segment (SME) actually depends on the Retail Banking France division, which shows the prevalence of customers in the small business segment.b ABN Ambro Its divisional structure is based on three "Global Strategic Business Units (SBUs)": Consumer & Commercial Clients (C&CC), Wholesale Clients (WCS) and Private Clients & Asset Management (PCAM). The three SBUs are replicated in the four reference geographical areas, even though each of them is subordinate to Amsterdam head office. SBUs are the heart and the reason for existence of the organizational structure: as a result, production centers are subject to the action of SBUs. The organizational structure develops according to matrix logic, so that there are three SBUs and four geographical market areas. SBUs contain the production centers for the whole bank: production centers sometimes belong to only one SBU and sometimes are shared. The four geographical areas carry out SBUs' commercial action on the territory and develop according to pyramid logic: from the geographical area manager to the macro area manager (e.g. Russia and Baltic countries in Eastern Europe) and to the country manager. In major countries, the country manager has three SBUs replicated at domestic level (e.g. in Brazil). Banco Santander Divisionalization is developed integrally and refers to three business areas: "Corporate Market", "Retail Banking Market", "Private Banking Market". There is the other maybe stronger division of the three geographical areas which, in fact, divide the bank into three. BNP Paribas Yes. Divisionalization is developed integrally and refers to three business areas: "Corporate & Investment Banking", "Retail Banking", "Private Banking, Asset Management, Securities Services and Insurance". The three areas are assigned to three division managers, who are part of bank head office. Deutsche Bank Yes with three units: Corporate and Investment Banking (CIB), Private Clients and Asset Management (PCAM), Corporate Investments (CI). Unicredito Yes. The new organizational structure includes three banks

Organizational Structures

69

Organization model Divisionalization characteristics levels and banks Capitalia Yes. San Paolo IMI No. Divisionalization exists only at the level of Commercial Function. Credem Yes. There are three business units (divisional units) for retail banking, corporate banking and finance. The corporate division has its own registered brand (Credem Imprese). Bancalntesa The current strategy (strategic plan 2003-2005) envisages merging of segment-specialized commercial functions belonging to different divisions into one Division, representing the commercial function for the bank as a whole. The Corporate Division (strongly specialized in corporate finance), the Italian Banks Division (for the coordination of branches controlled by the banking group) and the Overseas Division remain at head office level. MPS No. The Corporate Division was founded in august 2002 and is subordinate to the Deputy General Manager, who is in charge of the commercial function. BNL No. Divisionalization occurs only at the level of commercial functions. 2.

Regional and branch divisionalization

Yes. Not available. Not available. Yes. Regional offices and branches are managed and coordinated as global business. Credit Agricole Yes. There are specialized branches for corporate market of regional offices. Yes. ABN Ambro Banco Santander Yes. Yes. In France some of the branches are dedicated to corporate BNP Paribas customers while others are multi-segment. In the rest of the world, branches are specialized in corporate segments. Yes. Unicredito Yes. Capitalia Yes. San Paolo IMI Yes. Credem Banca Intesa Yes, but in phase of re-structuring towards more integrated solutions at regional offices level, which should merge former tisp^^ Deutsche Bank Dresdner Bank Commerzbank HSBC

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Paola Schwizer

Divisionalization Organization model levels and banks characteristics No. The Corporate Division interacts with the Commercial MPS Functions of the banks dedicated to corporate customers (MPS, BT, BAM, CRPrato) as well as with product companies (for consumer credits, investment banking, rural banking and merchant banking). However, it is the "Banks Division" that coordinates the banks within the group and such banks control the branch network. In each bank's head office and in each branch, marketing and commercial functions are then subdivided according to market segment: corporate and retail. Only 30% of branches are specialized in the corporate segment; BNL the rest consists of multi-segment branches. Dresdner Bank

Yes.

3a. Professional divisionalization: presence of professional roles specialized in relations management with customers from different segments Commerzbank

Fortis Bank

HSBC

Barclays

Quote from the 2001 Annual Report: "Our strong customer orientation as a relationship bank is underscored by the sustained expansion of our modern services and financing through a decentralized distribution system with broad national coverage, the combination of regional and sector distribution for our major customers, incorporating specialists, above all from investment banking and a target-group-oriented product range and professional consulting services for corporate plans and strategic issues." Yes. Relations with corporate customers are run by the Competence Centers in Brussels and Rotterdam. The principle consists in preserving the "global commercial relationship". Yes, there are 900 relationship managers assisted by product specialists all over the world. For multinational companies (the prevailing segment), there are Global Relationship Management teams in 81 countries. A team usually consists of: a) a Global Relationship Manager, who is in charge of the overall management of the relationship and the permanent contacts with customers so as to monitor customer related needs and product/services provided; b) regional and local relationship managers, dealing with customers in the respective geographical areas; c) an Advisory Relationship Manager from the Investment Bank who identifies strategy and tactics opportunities and develops flexible solutions specifically designed for customers; d) product specialists. Yes, the Corporate Manager^esidesthisreference figure, two

Organizational Structures

71

Organization model characteristics additional figures deal with customers in order to guarantee daily back-up and constant service. Credit Agricole Yes, in regional banks. ABN Ambro Yes. Banco Santander Yes, the relationship manager is responsible for small, medium and large enterprises. Yes, the corporate banker. BNP Paribas Yes. Deutsche Bank Unicredito Yes. Capitalia Yes. Yes, in corporate branches San Paolo IMI Credem Yes. Yes, in corporate branches Banca Intesa Yes, in corporate branches MPS BNL Yes. Divisionalization levels and banks

3b. Professional divisionalization: separation of structures designed for large corporates and SMEs Dresdner Bank

The new Corporates & Markets division merges the two former Investment Banking and Corporate Customers divisions, thus integrating the commercial activity with that of investment banking designed for large corporates and SMEs. The Corporates & Markets division customers consist of selected multinational groups located in Germany or abroad as well as approx. 30,000 domestic SMEs. The management of the small business and corporate client segments is assigned to the new Private and Business Clients division. Commerzbank Yes, inside the Corporate and Investment Banking Division there are two "departments" respectively dedicated to Corporate Banking and Multinational Corporates. Fortis Bank The Network Banking Division offers financial services to retail customers and SMEs. As for corporate customers, there are operating centers in the major European cities (mostly for cross-border services). In some specific sectors Network Banking also supplies specialized services for the large corporate segment. The Merchant Banking Division provides Financial Markets, Investment Banking and Private Equity services to institutional clients, SMEs and large corporates. HSBC Yes. Barclays Not available. HVB (HypoVer- Yes. The SME segment is serviced by the Germany and Auseinsbank) tria/EU Divisions (basic financial services and regional corporate finance). The large..cor^oratejegrnent^ is serviced by the

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Divisionalization levels and banks

Organization model characteristics Corporates and Markets Division. The segment includes enterprises capable of facing the capital market or with an over 500 m euro turnover; multinationals; enterprises located in the USA, Asia and Western Europe. Credit Agricole Yes, activities designed for large corporate are almost entirely assigned to the structures of C A Indosuez. Yes. ABN Ambro Banco Santander Yes, there are large corporate managers in branches. BNP Paribas No. The segment is managed by the "Corporate & Investment Banking" business unit. Yes. Deutsche Bank Yes. Unicredito Capitalia Yes, at the level of relationship officers/corporate bankers. San Paolo IMI Yes. Credem A transactional approach is adopted when corporate turnover is over €m 150. The Retail Division includes the small business segment. Yes (inside the Corporate Division) Banca Intesa Yes, the Key Client Office inside the Marketing Area, which MPS will soon become independent. Yes, the commercial function is subdivided into corporate and BNL groups & large enterprises. a

"With the goal of assigning clear cut responsibilities and of concentrating expertise, the customer-oriented Corporate Banking, Multinational Corporate and Financial Institutions departments have been assigned to a single member of the Board of Managing Directors since the start of this year. The scope of Corporate Banking was extended to the whole Europe, while Multinational Corporates and Financial Institutions continue to be active worldwide. At the same time, since the start of the year we have had regional board members for the first time to look after Germany; four in Germany, two in other European countries and one each for America and Asia." (2001 Annual Report). b The Corporate Division is in charge of defining group development lines with respect to customers segments, commercial assistance to regional banks, branch network and its actors. It offers four types of services: industry strategy and monitoring, commercial offers, business animations, local communities identification and protection. Services distribution takes place entirely through regional banks, in accordance to the typical federal model of the CA system (which is similar to the Italian ICCREA - BCC model and to the model of DG Bank in Germany). CA efforts are aimed at achieving growing coordination of banks' activities and developing products and distribution supporting services. However, some customers operate with several regional banks as their business is located in different German regions. If the client is "big", the relation is assigned directly to CA Indosuez.

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73

3.3 Models of Macro-Structure Organization The different combinations of divisionalization parameters (strategic, regional, branch, professional divisionalization) and the differentiation level (organizational structure, institutional model) allow us to trace a typical evolutionary path among Italian banks in the process of change from the functional to the divisional form (Table 3.2). Some of them show evolutions differing from the traditional model and move towards solutions of more advanced specialization or re-integration of relationship management processes for the different customer segments. During transition phases, market segmentation and the consequent differentiation of the bank supply manifest themselves by creating segmentspecialized units within the functional ones; their nature is either commercial (marketing) or productive (loans, finance), depending on the market penetration strategy. The former examine the relevance of the single segments (relative importance within the customer base of the highest added value segments) and, consequently, the competitive positioning of the bank (inclination for retail rather than corporate segments), and thus, the suitability and economic sustainability of the organizational differentiation choices. The latter implement product and process solutions differentiated by segment or by business area to be proposed to the market. The actual decision to implement customer-oriented supply policies according to the different features of target segments, even if in a weak form and with low competitive efficiency, is revealed only by the presence of "divisionalization" at the level of commercial function (i.e. by the introduction of segment managers reporting to the commercial director). Growing competitive efficiency is obtained in segmentation strategies by introducing relationship managers with customer portfolios and with high specialization by customer segment. The pure divisional form is revealed by the presence of strong strategic divisionalization (i.e. division managers at head office level) combined with branch divisionalization (i.e. specialized branches), professional divisionalization and, more rarely, regional divisionalization (i.e. marketspecialized area managers). The most advanced divisionalization level is achieved when divisions have actual operational autonomy. This is confirmed by the presence of strategic identity and defined brand for the division's products and services.

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Table 3.2. Bank organizational models by 1level of divisionalization Organizational models MIN Differentiation Divisionalization typology

Strategic divisionalization Regional divisionalization Branch Divisionalization Professional divisionalization

Level of Divisionalization

MAX Institutional and organizational

Organizational

Organizational

Organizational

Functional form

Modified functional form

Semidivisional form

Weak customer segment / business area differentiation within production functions (marketing, loans, finance, etc.)

Weak customer segment differentiation within commercial function. Sometimes presence of corporate bankers with customer portfolios in the branches

Weak segment differentiation within commercial function. In regional and branch network presence of area managers and/or corporate bankers. Some segmentspecialized branch.

Pure divisional form by business / customer segment Divisions in charge of different product / market / technology mixes which identify customer segments or business areas. Branch distribution structures are usually market or segment specialized.

Banking group with controlled companies that are in fact customer segment or business area specialized banks with separate brands.

No

Weak

Weak

Yes

Yes

No

No

No

In some cases

Yes

No

No

Yes

No

Weak

Yes

None

Yes

Yes

Metadivisional form

Yes

Yes

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The Italian panel banks can be classified according to six organization models (one of which is used as the typical starting point of the process of organizational change), which are identified on the basis of the decreasing level of "specialization", and thus, of differentiation of corporate banking units (Table 3.3.)- Figures 3.1-3.4 show the organization charts of some of the models described in table 3.3. The variety of the models proposed by the panel banks confirms on the one hand the growing tendency towards firm-specific solutions reflecting the bank's history and its own internal characteristics (culture, systems of power, core competencies), and on the other the presence of constant experimentation and innovation in the organizational structures, which is clearly demonstrated by the frequent changes at the level of the overall organizational structure. Table 3.3. Macro-structure models adopted by panel banks Model l.Metadivisional (autonomous company: Corporate Bank) 2. Pure divisional by business areas

3. Pure divisional by customer segments

Prominent characteristics Within the same group there are different banks managing the activities regarding the different market segments (private, corporate) or customer segments (corporate, private, retail), generally with a distinctive brand. Head office is structured by divisions responsible for different product/market/technology mixes, which identify the different business areas. As a rule, there are several structures dealing with corporate customer services, according to the nature of the supplied products and of the satisfied needs. This model is highly flexible due to the frequent business re-organization based on the creation of added value (in the case of Deutsche Bank, the number of divisions has switched from 13 in the late 80's to 5 in the late 90 's and to 9 grouped in 3 macro areas in early 2003). The matrix organization models by business area and geographical market fall into this category. Head office is structured by divisions dealing with customer segments, usually classified as retail, private and corporate.

Banks Unicredito In this particular case, Division central structures are located in different cities. Credit Agricole, Deutsche Bank, Commerzbank, Dresdner Bank, HVB, Barclays, BNP Paribas

Santander, Ambro Credem

ABN

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Model 4. Semidivisional

5. Modified functional

6. Simple functional

Prominent characteristics Branches dedicated to corporate banking are specialized, but subordinate directly to vice managing director or CEO with functions of (non-specialized) market division director. The corporate banking unit is subordinate to or at the same level as the commercial function (with units differentiated by segment). Branches are not specialized. The organization model is functional. No divisional units. Within the marketing or commercial function there are managers responsible for the different customer segments

Banks Banca Intesa, San Paolo IMI, MPS, Capitalia BNL

Typical point of departure for any organizational change.

Managing Director Internal Audit

M

HRM

Operafonal Marketing f

JL Special products

Branch Network

X

_L

Foreign Operations

Key Client

Strategic Marketing

Regional Offices (4:NW,NE, Center, South)

Executive Assistant

Specialist Team

Foreign Operations

Derivatives

f I

Commercial Assistant Liquidity

HRM

Corporate Branches

Branch Director { Corporate Banker Senior Junior

Transaction Assistant Italy

Transaction Assistant Foreign Operations

Fig. 3.1. The organization chart of the Corporate Bank: the Unicredito case

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77

From 1998 to 2001 Corporate branch]

Domestic markets

Foreign markets

Vorstand

Since January 2002

Corporate and Investment Banking

Corporate branch

Domestic markets

Corporate Investment

Private Clients and Asset Management

I

Private Wealth Managent

Corporate Investment

Global Markets

Foreign markets

Global Equities

Asset Management

Corporate Finance

Private and Business Clients

Relationship Management German \ Transaction Banking

Executive Committee Group

.1

Group Finance Committee

Group Risk Committee

Group Investment Committee CFO

CRO

Group Cl/Alternative Assets Committee Group Asset/Liability Committee Spokesman of the Board and Chairman of GEC

Group IT&Operations Committee

Group HR Committee Group Compliance Committee

CRO

CAO

81

8§ Global Markets

Global Corporate Equities Finance

Relationship Germany Transaction Banking

CIB Operating Committee

Corporate Investments

Cl Operating Committee

CD Q

Private Wealth Management

Asset Management

Private & Business Clients

PCAM Operating Committee

Fig. 3.2. The divisional model by business areas: the Deutsche Bank case

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1

i

EDP

Accounting

Back Office

|Head Office | in i PSC

i

i

i

Corporate Business Uhit

Retail Business Uhit

Finance Business Uhit

Corporate Business Unit

Business Unit Dlnector i I

Loans

I

I

I

Products Italy

Corporate Finance

Planning

i

Corporate Branches

Overseas Products

I

Internal Relations

i

Group Manager

Newly constituted Corporate Branches

Fig. 3.3. The pure divisional model by customer segments: the Credem case2

2

The management structure is subdivided into divisions, which are in charge of all the production processes as well as of service supply to different customer segments. There is a business unit dedicated to the corporate customer service. On the other hand, the small business segments are assigned to the retail division

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Model before 2003

2 CEO 1

1

Group Governance Department

Merchant Banking and Asset Management Departement

Corporate Division

Private Division

Retail Division

Corporate Regional Offices

Domestic Branch Network

Corporate Branches

Private Branches

Retail Branches

New model since January 2003

CEO

I Group Governance Department

I

i

Merchant Banking & Asset Mng Department

Branch Administration Division

Corporate Division

I

Foreign Operations Division

I

I Italian Banks Division

Regional Offices 1

Corporate Branches

1

Private Branches

Retail Branches

Fig. 3.4. The semi-divisional model: the case of Banca Intesa3

3

The evolutionary path of Intesa BCI is marked by a radical organizational change from a divisional model in its pure form to a more integrated model at the level of commercial function and regional offices.

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3.4 Basic Models for the Structure at Head Office Level

3.4.1 Organizational Structure of Corporate Centers In the divisional structure, the head office of the parent bank or the corporate center (holding) maintains the following functions: define the overall strategy of the bank or the banking group and the principles of investment allocation; coordinate the single divisions by using the instruments of planning, programming and control; acquire financial resources and allocate them amongst divisions according to respective performance prospects. Inside the corporate center, there are organizational units for the management of common processes (e.g. strategy planning or budgeting) or for the partial coordination of the processes managed by the divisions (e.g. human resources management). These central units tend to be more numerous as divisional resources' interdependencies become greater. Every division can be seen as a self-dependent enterprise as to the management of its own product/market/customer mix: it has wide decisionmaking autonomy; its organizational structure may differ from that of the other divisions and it stands as an independent profit center for planning and control processes. Besides its own internal units, the division coordinates other companies of the group for the supplied products or the serviced markets with reference to the business area or the customer segment controlled by the division director. The division generally adopts a somewhat simpler functional - or ad hoc - type of internal structure, depending on the nature of the requirements dictated by the activity and the processes it manages. The banks of our panel tend to solve the problem of the structure overall profitability by centralizing common functions (operations and other activities marked by specialization, scale and scope economies). Only in the most advanced models (Bank B and some of the other European banks) such central functions represent the essence of the corporate center (Box 3.1.); elsewhere they are still assigned to the head office of the parent bank. The structure of the corporate center can be detected in the following Italian banks: Bank A, Bank B, Bank E, Bank F, and in all of the other European banks in our panel. It is usually connected with most advanced divisionalization models. In some cases (Bank W), it appears as a set of functional units (head offices) at the same level as divisions and responsible for the management of such tasks such as marketing, finance, man-

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81

agement control, risk management, human resources, IT and information systems. The distribution of tasks between corporate center and corporate division is shown in table 3.4. Box 3.1. Advanced corporate centers' structures: Deutsche Bank and HVB Group Deutsche Bank (1998-2001): the corporate center co-ordinates the different divisions by assigning them tasks closely interrelated with the primary objectives of the group and by pursuing the objective of guaranteeing group unitary management. The corporate center should contribute to the exchange of information between the operational units and provide for the optimal distribution of financial resources amongst the divisions. The corporate center is subdivided into the following areas: controlling, credit risk management, management (Fuhrungskrafte), political economy, taxes, marketing and communication, market risk management, human resources management, equity investment, strategic planning, audit, compliance, press, treasury. The corporate center is partly managed directly by the members of the Vorstand. Area managers have the right to give instructions to the operational units. At group level, the bank's strategic portfolio management is backed up by the discounted-cash-flow model, which allows analyzing different business areas with a particular attention to their value contribution, as well as evaluating the efficiency of the invested capital. For the purpose of a periodical value-oriented control, the model is combined with the economic-profit-concept, which measures performance results after capital costs. Starting with January 31, 2002, the corporate center structure has assumed a new configuration and is subdivided into a series of functional and business committees consisting of the Vorstand and the Group's top management representatives and responsible for the coordination of business areas and of transversal relations between product, branch and service units within the group (see Fig. 3.2). Since January 2002, there has been a re-organization in the HypoVereinsbank Group (HVB), to enhance the flexibility of the overall structure and the agility of decision-making processes. The group's management has been assigned to a committee (Group's Board of Directors) consisting of a President, a Chief Financial Officer and a Chief Risk Officer, besides the business divisions' managers. This committee is in charge of the group's business area portfolio composition, division allocation of capital and resources and of internal control. It is backed up by a very agile corporate center.

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Table 3.4. Distribution of functions between the corporate center and the corporate division in panel banks Corporate Center

Corporate Banking Division

Formulates guidelines so as to give con- Defines business/segment strategies sistency to Divisions' strategies and pur- according to corporate center's guidelines. sued objectives. Centralizes the strategy-related functions or resource-management activities (human resources, EDP, organization, etc.) in order to co-ordinate operating systems, management models, control and reporting. For example, the Human Resources function outlines back up functions and processes for personnel management (salary policy, development strategies, professional training choices/options, competencies model, internal communication, etc.), by defining operational standards and efficient management models to be imposed on the divisions. It gathers top-profile resources.

It has its own agile functional units (Personnel, Organization, Loans, etc.) which set the management of resources consistently with the business/segment requirements and in compliance with Corporate Center's guidelines. These functions are often identified with an "Assistant" to Corporate Center's functions (outsourcer control principle).

Determines resource allocation choices.

Competes with other Divisions for the resources on the grounds of performance objectives.

Can be object of divisionalization (for Can adopt a functional or ad hoc strucexample, Bank B has set up its own "Sys- ture based on team working criteria. tems and Services Division", an external company for the management of the information systems of all the divisions). Defines loan policy, measures corporate Defines pricing policies on the grounds of the ratings and of the credit risk, establishes customer ratings. guidelines provided by the Center. Appoints and substitutes divisions' man-

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83

3.4.2 Micro-Structure of Corporate Banking Division

The examined sample shows that the internal functions of the Division appear to be more or less numerous and subdivided according to the degree of divisionalization. In theory, as seen in models 1-3 (Table 3.3), the corporate banking division manages the following functions: • Loans; • Marketing/Planning; • Personnel; • Overseas; • Organization; • Control; • Secretary's Office; • Specialized branch network; • Product units (internal or external). The product units based in other companies within the banking group are managed by the corporate division director not through direct supervision based on hierarchical relations but through functional relationships and informal contact mechanisms allowing products coordination in relation to segment policies. However, there are important differences between the banks in our panel (Table 3.5). The corporate banking division often lacks of operational autonomy, since it has no complete control over the competitive drivers of its own market or segment strategy (products, branches, etc.). Some divisional units (Bank Y, Bank Z) have a prevailing commercial vocation.4

4

The Corporate Division is in charge of creating new products, delivery of products and services, customer relations development and management, compliance with other countries' local regulations.

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Table 3.5. Corporate banking division internal functions

C

X

Xa

D

X

X

X

E

X

X

F

X

X d

x

W

X

X

X

Y Z

X

X d

x xd

X X

X Xb

X

X

X c

x

X X

X

X

X

X

X

X

X

X

X

Xe

X

X

X X

Key Clients

X

X

Products

X

X

Branches

X

Secretary's Office

X

Control

Overseas

X

B

X

a

Marketing

Loan A

Pi

Organization

Bank functions

Bank

X X

X

X

Xf

And planning. Management control1 and risk control. c And Lawyer's office d Strategic planning. e As the business unit produces everything internally without resorting to product companies, it is subdivided into the following departments: corporate finance, equities, fixed income, structured financing, international trade finance, commodities financing, corporate lending. f Only in marketing. In Bank Z, the corporate division employs 37 people, out of which: around one third are employed in strategic planning, one third in supply packages construction, one third in the "development" function (called "sales animation"). Sales staff design back-up instruments for selling new products or for the management of new processes/procedures regarding the branch network (e.g. cash management service supply). These instruments are made available to regional banks and sometimes to final customers as well. The launch of new products is organized on these grounds with internal conventions and development actions. There still remains the fact that channel banks are free to choose and also distribute non-group products. Internal products are not characterized by channel incentive schemes (that is, the regional bank is not "rewarded" for distribution).

b

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85

According to the operational autonomy principle, the internal organization should include at least the following roles/functions (Baravelli 2003): a) product unit (specialists for the products supplied to segment customers, also located in external companies, but managed in a functional way by the division's manager); b) relationship managers (segment managers), coordinators of customer managers (corporate bankers); the latter have competencies correlated to the interlocutor's level and dimensions as well as to industry/regional specialization; c) function managers (marketing, personnel, EDP, etc.) responsible for the connection with Corporate Center units as well as for differentiating processes and activities according to segment's requirements. The Division's human resources (at head office level) are sized according to the functions and the autonomies attributed to the unit. The staff may range from 50 (Bank E, Bank Z) to 15,000 people (Bank Y).s It is not always possible to detect a direct correlation between the bank's dimensions and the number of its Division's employees (for example, the structure of Bank F counts 250 units, Bank E around 50, Bank A and Bank W 500, excluding corporate bankers and network product specialists). The professional roles currently envisaged, within the corporate division and distributed in head offices, regional offices and branches are shown in table 3.6. When the bank does not have a real Corporate Division, the corporate market commercial roles are shown in table 3.7. Bank Z stands as an exception. Besides the division manager, its branch network is controlled by regional banks that have full autonomy in choosing their own models and the nature of their customer relationship roles. Moreover, almost all the banks have (private and corporate) market managers working in close contact with the division managers of Bank Z. In the banks that adopt semi-divisional models, segment strategies are controlled both by the corporate center and the branch network (Fig. 3.5).

5

The Corporate Division (that is, SBU WCS) employs 15,000 people, including the regional network personnel. They are distributed as follows: 10% in strategic planning; 20% in strategic and operational marketing; 40% in products management; 10% in relationship management; 5% in products and services R&D; 15% in staff units.

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Table 3.6. Specialized roles in corporate banking divisional structures Today

Next three years

Corporate division director

X

X

Corporate area managers in regional offices11

X

X

Corporate Banker

X

X

Corporate banker assistants

xb

xb

Credit officers

xb

X

Product managers

xb

X

Others (external consultants)

xc

xc

Bank A, Bank Y, Bank B before January 2003. Not in all cases. c Bank A, Bank Y. Table 3.7. Typical corporate banking specialized roles in non-divisional structures Divisional structures roles

Substitute roles

Corporate division director

Commercial director

Area managers in regional offices

Area manager

Corporate Banker

Corporate banker assistants

Sometimes relationship manager with client portfolio within the branch; credit officer or branch manager in functional structures Credit officer

Credit officers

Credit officer

Product managers

Sometimes in regional office

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87

Corporate Centre (section CB) 1 Deputy GM Business Manager

Loan Department 1

Corporate Banking Manager Planning Marketing (9 persons)

Retail Banking Manger

—

Distribution channels (5 persons)

Products (7 persons) Regional Offices (20 units)

Banks (4 banks) Commercial Function Corporate Banking

Credit Department

Retail Banking

Corporate Banking Commercial Function f Supervisors [ Branch Network management

Segmet Manager Small Business

Segment Manager SME

Fig. 3.5. Organizational structure of the corporate banking units in a non-fully divisional bank: the case of Bank E

3.5 The Structure Of Regional Offices And Branch Network

3.5.1 Regional Offices

Regional offices are an important link between the corporate banking division in the head office and the branches. In most panel banks, the regional offices manage the branches specialized in both "private" and "corporate" customers, even where branches are highly specialized (Bank C). However, there are cases (Bank A, Bank B) where regional offices coordinate exclusively corporate branches. In general, regional offices present some roles symmetrical to those of the division, such as market managers (enterprises) or segment managers (corporate, small business) and product specialists. Market managers coordinate customer managers and sales development managers. In some cases, directly or together with the corporate banker, they manage high standing customer relations.

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Product structures are represented by specialists (Bank C), also called product managers (Bank A) when the sales mission and competence prevail over the production process technique. Generally speaking, product specialists: - possess product technical and management competencies (business), - interact with corporate bankers and possibly with customers, but without managing customers relations, - can work within the bank or in one of the "network'Vgroup's companies, - provide innovative solutions on the grounds of the analysis of the banks' target sector/market, - are driven not only by "product selling" but also by the satisfaction of their "team leaders", that is corporate bankers, - show capacities of integration and collaboration in relation to the channel objectives. Box 3.2. The special case of Credit Lyonnais Since 1991 the structure of the Credit Lyonnais distribution network, which is represented by the regional banks, has included: - 161 agencies (branches) for regional banks' enterprises (each one endowed with a staff of approx. 7-8 units) + 20 agencies specialized in real estate and asset management (against 8,500 retail agencies). C/C customer management and back office are centrally run by the bank managing the relationship; - 660 "charges d'affaires" (customer managers) in the agencies, exclusively dedicated to corporate customer relations; - 475 assistants (an average of 2 assistants every 3 managers) operating according to team-working criteria; - 192 "experts", product specialists, always operating in the agencies; some of them are employees of the companies controlled by the group. Regional "product" teams (the so-called "centers d'expertise") have been recently created in some key-centers (8-9 head offices). They include all the product specialists of the group's companies and operate in close contact with banks and support them in customer relations as well. The revenues from the operations are divided by half between the product companies and the bank (transfer pricing is defined at head office level).

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The area managers in the Italian panel banks - directly or through the area market managers - perform the functions shown in table 3.8 (see also Chap. 5). Moreover, in almost all of the banks, area managers are not specialized in the corporate market but they are multi-market. Table 3.8. Area manager's functions Functions of the area manager

Next three years

Now

Banks Strategy definition and management of corporate area activities Corporate area strategic marketing manageA a ,Y ment, that is management of product, pricing, distribution and communication policies Coordination of corporate bankers' activities C,H,W,X,Y and corporate customer portfolio assignment Connection between corporate area activities A,C,H,W,X,Y and the activities of the whole bank Connection between corporate area and head A,C,D,H,W,X,Y office or organizational structure hierarchically superior to the corporate area Supervision of the activities performed by proH,W,X,Y fessional figures in the corporate area Connection between corporate bankers' activi- AC,D, H,W, X,Y ties and area overall activity Partial lending authority A,C,D,H,W,X,Y Controlling/monitoring of credit risk A,C,D,X H,W,YC Other : customer development, relationship A,C,H, W development with community and institutions a

With limited authority. Hierarchical subordination. 0 Not directly but through branch manager. c Banks H,W,Y partly. d Banks W,Y partly.

A Y

A,H,W,Y,X A,H,W,X,Y A,H,W,X,Y

Ab,H,W,X,Y A,H,W, X,Y A,H,W, X,Y A,H,X W,Yd H,W

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3.5.2 Branches Branches are structured according to the relative degree of market/segment specialization.6 Three models can be identified (Table 3.9). Table 3.9. Characteristics of the three models Traditional full services Multi-segment branch branch Traditionally organized banks Main typical roles: • branch manager; • credit officer; • service officer; • securities officer; • (overseas officer).

BankH Main typical roles: • branch manager; • CB; • private manager; • customer service advisor; • etc.

Corporate branch Banks A,B,C, D, E, F Main typical roles: • branch manager; • CB; • product specialist (not always); • back-office officer; • etc.

Max

Operational autonomy Min (capability of performing all the steps in process) Min Sales efficiency (capability of developing the customer base and Max the operational volumes with the existing customers) Max Integrated approach to cross-market customers' problems and Min connected pricing policies Classical ^Ejolutionaryjrend ^ ^ New 6

There are currently no branches specialized in single market segments in Bank E, only "corporate modules", that is managers without portfolio. In the future, "retail and small business" branches will be separated from "SME centers"; the latter will have the task to develop sales in favour of branches where operations will be executed. Corporate Centers will perform functions of sales development. When corporate branches become operative, the retail branch will be in charge of the overall back office activity on behalf of the corporate branch. Each center will employ 3-4 teams with senior and junior managers (each of them responsible for 60-70 firms) and one director. The Team will be coordinated by the Segment Manager, who will have personal objectives, such as: a) manage his/her own geographical market; b) achieve his/her budget objectives; c) control profitability (annual report; it can be consulted on-line). Customers will be assigned to SME centers according to geograhical criteria. Corporate bankers and product specialists will coexist in SME centers; also the latter will be involved in sales development and will share budgets with corporate bankers; formally, they are detached from the product companies in which they are employed. Cross fertilization should result from the interaction between corporate bankers and different product specialists.

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91

The micro-structure of the corporate branch is subdivided into relations roles (the CB), product roles, back-office roles, coordination roles (branch managers, team leaders). Some of these roles sometimes overlap (e.g. Bank C) and create, for instance, the figure of the branch manager/CB/team leader or, more simply, that of the CB/team leader (see Fig. 3.6). The main differences discerned amongst the models in the panel banks with reference to the nature of the roles concern the following: a) individual approach versus team approach (CB team with horizontal relations vs. CB individually active or with internal vertical relations, like the senior-junior-assistant type of relation). In the first case, CBs have individual objectives of development of their own customers portfolio; in the second one, several CBs forming a team share the objective of development of the overall assigned portfolio; b) presence or absence of back office functions inside the corporate branch; c) correspondence between the roles of portfolio manager and branch manager (branch managers with portfolio point out time distribution problems as to their functions of coordination and branch control as well as their relations with other branches and with the regional office); d) presence or absence of product specialists working in branch rather than regional offices or in head office or group's product company units. 3.5.3 Professional Roles

Professional figures in corporate branches (Banks A, B, C, E, W) have particularly wide responsibility areas. In a typical branch office of average dimensions, they assume the following configuration: a) Branch manager. The objectives of this role concern branch profitability, the quality of the service provided by the branch, the control of the efficient operational and administrative functioning of the operating unit. He/she manages a customer portfolio (according to the abovedefined criteria) and has partial lending authority.

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Product Consultants Management Team

Management Team

Management Team

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_L Medium and Long Term Loan Specialist

Remote Banking Specialist

Senior Corporate Banker

Junior Corporate Banker Assistant

Fig. 3.6. Typical organizational charts of the corporate branch

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b) CB team leader or CB senior. The role consists in acquiring, managing and developing commercial relationships with customers in order to increase profitability and improve credit overall quality, as well as in coordinating CBs and the other members of the team (Bank C) or junior corporate bankers and assistants (Banks B and E). In the case of Bank C, he/she can also work within a "detached team" located in a retail branch. He/she manages a customer portfolio, has partial lending authority and formulates credit proposals for major amounts. c) Corporate banker (CB). The role consists in acquiring, managing and developing commercial relationships with customers in order to increase profitability and improve credit overall quality. In the case of Bank C, he/she can also work within a "detached team" located in a retail branch. He/she manages a customer portfolio, makes investigations and formulates proposals regarding his/her customers' loans. d) Corporate banker assistant. The role consists in supporting the team leader or senior CB in the management of the different stages of customer relationships. He/she collaborates in the management of CB's customer portfolio, collects useful market information for the identification of new customers, supports CB in developing investigations for loan approval processes and in controlling credit lines and guarantees and in managing administration activities required for the conclusion of products and services selling (middle office). e) Product specialist or advisor. The role consists in supporting the team leader or senior CB in the management of the different stages of customer relationships in order to increase work flows and profitability of the relative products; he/she is responsible for the quality of the services provided for such products; he/she operates within larger corporate branches with the aim of providing his/her specialist advice about mid/long term loans or foreign credits; he/she coordinates the activities regarding the specific products within the corporate branch and has administrative responsibility for the accomplishment of technically more complex administrative activities for his/her own products. f)

Corporate back office manager. The role consists in supporting the corporate branch activities in order to maximize the efficiency of the corporate back office as a whole. He/she has the managerial and administrative responsibility for the efficient and punctual accomplishment of the services provided by the corporate back office as well as for the implementation of procedure controls on the activity of the corporate back office.

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Banks W and X also indicate the function of the credit officer, who is hierarchically subordinated to the head office credit manager. This preliminary evaluation of the degree of consistency between macro-structures, roles and competencies within segmentation strategies underlines some critical aspects which might be decisive for the success of these same strategies. More specifically, Bank C, Bank W and Bank B reveal that for certain roles (branch manager, team leader or senior corporate banker) a definite choice is still to be made between managerial competencies and tasks (coordination, planning, control, management of human resources and organizational climate) and the functions regarding the management of external relations backed up by the assignment of customer portfolios. As for Bank C and Bank B, the choice is to be made by the regional offices which, case by case, establish the map of competencies and the boundaries of the relative roles. In all panel banks the process of customer attribution to corporate branches is based exclusively on criteria of geographical area rather than segment specialization.

3.6 Major Interactions Between the Corporate Area and Other Bank Units Market integration is a crucial aspect for the success of the divisional structures in the banking sector as there is a quite significant number of customers who manifest at the same time the typical needs of the different segments (corporate, private, retail). The banks in our panel consider the ability to find definite solutions to such a problem in terms of operating mechanisms (customer integrated information systems; monetary incentives to collaboration, etc.) or of behavior (collaboration culture; personal initiatives, etc.) a factor of crucial importance for the market success of divisionalization. As a matter of fact, having noted the adopted organizational structures fail to generate customer satisfactory forms of integration able to compensate them for the cost of sustaining "trust" relations with three different interlocutors (corporate banker, retail branch manager and private banker), some banks have modified their structures in order to reunite the administration of the commercial network (Bank B) and encourage team-working between differently specialized branches by means of incentive mechanisms and objective assignment (Bank C). In the examined cases, integration solutions regarding branches specialized in different markets and activities (corporate branches: advisory and credit; private branches: payments and basic operations ) with the purpose

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of exchanging names and contacts as well as of achieving joint management of cross-market customers, focus on two different models (see Table 3.10): a) corporate branch backed by retail branch for basic operations; b) fully independent corporate branch even for basic operations. The prevailing choice of the first model shows the need to avoid function duplication by using the retail branch for the material execution of basic operations as well as an attempt at implementing soft coordination models so that customers will not perceive excessive penalization for the fragmentation of accounts.7 This option, theoretically more demanding in terms of organization and implementation times, is not considered by larger size banks where the relative weight of the corporate or large corporate customer base urges for fully specialized models of independent divisional structures. Table 3.10. Relations between market-specialized distribution structures Characteristics of the model

Corporate branch supported by Fully independent corporate retail branch for basic opera- branch (including basic options erations)

Banks

Banks B,C, D

Strengths

Possibility of integrated solu- Legitimization of branch and tions for the cross-market cus- relationship roles in front of tomer relationship management customers

Weaknesses

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Bank A for overseas (retail branches for cash services) Banks W, X

_ ... . .. . Possible rejection by cross. . : i - , market customer, who feels obliged to deal with three dif5 . terent interlocutors

' To find out more about this issue, see the following Chap.4.

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3.7 Objectives and Performance Valuation in the Corporate Area In the divisional organization structure each division is responsible for the profits of its own business area or customer segment (profit center). In the case of the corporate division, this means risk-return responsibility. Panel banks assign such responsibility only in the case of fully divisionalized structures (Table 3.11.). Table 3.11. Risk-return responsibility of the Corporate Division ———^ ________ The Division has its own profit and loss account; its performance is evaluated on the basis of the overall performance of the business area. Capital allocation has not been formally defined yet. Income is calculated after direct and indirect costs and after credit losses entirely deducted in the year they are suffered. Banks A,B>C,D, F; main other EuropeanBanks

_ _

The Division does not have its own profit and loss account. In some cases it is produced but forwarded only to head office as internal report. This solution points out some hybrid models (Bank Z) or semidivisional forms with non-independent divisional units in head office. Banks E and H.

3.8 External Communication and Brand Choices Only Bank A and Bank F have their own corporate brand; Bank C has only an internal label. The problem of the external communication of organizational choices is above all linked to: - difficult or inefficient communication of the value of the change to customers (even in presence of better competencies and higher service quality); — slow and inefficient communication of better staff opportunities resulting from the change (even in presence of better development and incentive schemes).

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3.9 Critical Aspects for the Successful Design of Divisionalized Organizational Structures In theory, the three basic parameters typical of the divisional form (organizational position, operational autonomy, profit responsibility) along with the different typologies of divisionalization represent the basis for the study of the typical evolutionary trend leading to the "pure" model (see Table 3.12.). In this research, the comparison of the organizational structures in the other European and Italian banks has pointed out a problem of heterogeneity in dimensions and in the customer base. The other European banks are decidedly oriented towards the large corporate segment. The application of the other European models in Italian banks (a tendency revealed by this analysis) must be object of careful study, also in the light of accurate analyses developed on the markets and the internal organizational systems. The other European banks show advanced divisionalization choices, which produce highly differentiated and independent divisional units, with consistent control over production units (internal product units and controlled external companies) and distribution channels in relation to their individual business areas. Subdivision by business areas is different from that by customer segments as the former maintains a separation between highly technical competence areas (asset management; corporate finance, real estate, etc.). Italian banks show a clear tendency to adopt divisional solutions. This seems to be consistent with the fact that almost all examined banks have made choices of production diversification and of external dimensional growth. Production flexibility (a wide-ranging mix of products and services adjustable to market requirements and transformations) combined with the particular configuration of large banks institutional models, actually requires administration and management solutions that are efficient in policy and performance evaluation but oriented towards organizational differentiation logics. The divisional structure guarantees high flexibility to the management of each business area, which can be designed and organized according to the organizational models best suiting the competitive approach of the specific sector. The specific features of each business sub-area should be met by differentiated structures and operating mechanisms, which would provide flexibility also to large-size structures characterized by high product diversification.

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The ability to define and introduce differentiated structures and mechanisms depends on a whole series of reasons, starting from internal organizational flexibility. Impediments to incentives for differentiation are often internal rigidity as well as institutional and contractual constraints. The survey of the panel banks reveals, on the one hand, significant efforts for the re-adaptation of typically functional units and models towards a more market-oriented approach. On the other hand, the approach to the organizational change is sometimes different as much as the degree of external and internal consistency, all of which should be better evaluated in the light of the actual performances of the divisional structures. Among the positive aspects revealed by the analysis, in the first place, we can observe the awareness that in the organizational design by business areas, the traditional strategic approach - based on a cause-effect linear sequence between environmental evolution, enterprises' strategic decisions and organizational configurations most often producing solutions imitating pioneering behaviors - is now considered obsolete. In its place, a new model of strategic planning has been gaining ground: this model searches the value in the individual and organizational competencies capable of making the services provided different from those of the competition, thus producing more heterogeneous and firm-specific positioning models. As a result, innovative efforts are made on levels different from the traditional ones (products, channels, etc.), such as the network micro-structure design, the know-how management systems, the operating mechanisms for resource development and incentives. Finally, organizational solutions and models are more heterogeneous and reflect the constant experimentation and the highly significant effort of innovation. As for the differences in terms of the approach to the organizational change, the divisionalization model adopted by the Italian panel banks is based on a deep separation between the activities and processes dedicated to the corporate segment (SMEs with an over 1.5m euro turnover), those directed to small business, a segment "confined" in retail areas, and finally those intended for the large corporate segment (its definition varies from one case to another), which is assigned to head office departments or functions. From the organizational point of view, this replicates the dimensional segmentation model, which is based on the differentiation of customers' needs and of the bank relationship approach on the part of the enterprises from all of the three segments. What seems to be apparent from this research is that the enterprise classification by exclusively dimensional criteria is likely to lead to the corporate segment firms showing a quite different perception of the relationshiporiented approach, on which the corporate banking strategy is founded. As

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a matter of fact, if the border line between small business and SMEs is placed too low, the enterprises actually showing financial behaviors typical of the "retail" segment can be re-introduced in the second group. If this impression should be confirmed on the basis of a second level behavior-type segmentation (see Chap. 2), than the chosen organizational models would determine dimension and approach asymmetry between the bank and the client that cannot be found among the other European banks. As a result, clients accustomed to establishing their bank relations on the basis of their personal relationships with the branch manager and to negotiating economic conditions in an "integral" and complementary way, find the segment divisionalized model less attractive: they reject the specialization by product line and perceive pricing conditions as economically disadvantageous. In relation to the more favorable regime proposed by Basel New Capital Accord, a shift of clients is expected towards the small business segment. This segment is involved by a more favorable discipline for the intermediaries, provided that the supply process is in fact organized according to criteria that comply with the segment real qualification (by means of internal clustering techniques), with services and relative management processes differentiated from those directed to the corporate segment. Such a shift will be mediated by considering customers' behaviors and their actual advisory requirements. In presence of asymmetries, the gap between the bank and the client should be bridged by enhancing customers' culture and their perception of the value of the advisory and assistance services provided by the relationship-oriented bank. The exchange model, at the basis of the value creation, must be jointly designed by the bank and the client, starting from the real knowledge of the organizational characteristics of the target enterprises (for example, the dimensions and competencies of the finance area, the dimensions of the eligible loans office, etc.), on which the "integrative" relation proposal can be made. This assumes an organizational life-cycle for the divisional model which is correlated to the customer's financial progress. The shift to the divisional model requires a significant effort in change management on the part of the bank; the bank, however, requires the same effort from its clients who are forced to quit their relationship habits with the traditional branch and to distribute themselves onto three markets and, consequently, on three interlocutors (corporate banker, private manager for family wealth and retail agent for the cash and payment operations). Clients will accept the change only if they perceive some kind of reward correlated to their effort and thus an advantage from the new model. The bank should emphasize such value by investing in customer communication, but

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also by proposing some complementary competencies. The value creating model, which is at the basis of the organizational decisions, should start from the analysis of the value created for the client. The created value should be evaluated in integrated terms: the problem of dividing the value between the bank and the client is subsequent. As for the internal consistency of the divisional organization structure, there are many areas of shade. Amongst the declared divisional structures, only a few are "real". The organizational change has mainly involved the structures and the roles, which are important aspects liable to become a "limit" for the strategy and thus require accurate preventive planning. With major delay, operating mechanisms and cultural models are now being redesigned; they are at the basis of the real change in behaviors and responsible for higher organizational flexibility levels. This aspect, which should be interpreted as the capacity of adaptation and change of the character and the functioning mechanisms, seems to be of great relevance for banks in the current competitive context. Quite often new branch organizational models, new roles can be observed along with old planning and control instruments (e.g. budgets showing performance by product), with the consequent strategic inefficiency of the overall organizational structure. It is known, in fact, that apart from the declared strategy and the mission attributed to the role, people act in order to gain the goals on the basis of which they will be evaluated. Therefore, in the cited example, one would not pursue a relationship strategy but a product strategy (Di Antonio 2002). In short, differentiation pursued through divisionalization is only marginally re-produced at the level of organizational variables different from the structure, with a basically limited impact on final behaviors. A further element of inconsistency in the organizational model concerns the differentiation/integration mix. Divisionalization choices at head office level have been followed by the creation of corporate centers responsible for division coordination and resource allocation; on the contrary, divisionalization choices at branch network level have not been suitably accompanied by the design of integration instruments, above all in terms of distribution. In particular, the systems for the management of mutual interdependencies between branches designed for different markets and between customer and product units are still embryonic. These instruments are instead of crucial importance to back supervision and coordination hierarchy mechanisms with more flexible solutions allowing contingent situations of particular cross market clients to be successfully managed. The question of the actual economic value generated by divisionalization remains open. The dual concept divisional structure-performance will be object of further investigations and studies aimed at evaluating the economic impact of organizational choices in terms of dimensions (increase in

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volumes and number of clients) and of the perceived value of specialization (increase in interest/commission returns). In order to improve the process of organizational change, organizational differentiation needs to be accomplished by the implementation of new IT systems specifically designed for head offices (corporate division) and branch network (areas, branches, CBs). At head office level there is a need for growing autonomy, which can be attained through dedicated information systems differentiated according to the integrated and independent vision of the business, in terms of strategy planning (definition of business plans on the basis of scenario and benchmarking analyses) and of management budgeting and control. In compliance with the principle of operational autonomy and to control segment strategies, the division managers need their own information system and reporting instruments to be able to monitor their business trends and anticipate possible changes in demand propensity as well as in the conditions of partial profitability of the division related units (partial profits, direct and indirect costs). The resulting indicators should represent both "external" value drivers (number of old and new clients , volume of investments, number of operations, interest margin and services proceeds, risk-adjusted profitability measures, number of clients per rating class, customer satisfaction indicators, cross selling, etc.) and "internal" performance determinants (processes efficacy and efficiency, staff competence enhancement, suitable internal control system, climate, etc.). The set of available data supporting the formulation of operational plans and budgeting along with the information systems allow knowledge sharing between network and head office by means of a more efficient conveyance of the relevant data from the bottom up to the top of the structure and on the horizontal level between segment-related units. This means sharing in real time and in a systematic way necessary information for credit risk evaluation and portfolio analysis (industry data, performance of single operations, risk related to industry trends and single technical forms, recovery actions efficacy), as well as entering and forwarding non-monetary information both internal customer satisfaction (CB) and external customer satisfaction in relation to proposed solutions (product specialists support, advisory quality, etc.). For the purpose of a correct attribution of performance valuation measures (risk adjusted profitability) to division directors, analytical accounting should be assisted by systems allowing the attribution of structure general costs by means of ABC (activity based costing) and ABM (activity based management) logics. At branch network level, there is a need for instruments supporting the planning of development policies over a period exceeding the short term as well as instruments designed for the improvement of customer information

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and supporting the collection, classification and sharing of, even soft, information on single customer relationships (customer personal file or electronic card fed by the data collected during the different stages of the relationship's life cycle). Generally speaking, information sharing on performed activities by means of knowledge management leads to the specification of business competencies and to the creation of a corporate banking expert community acting as an inter-functional coordination mechanism characterized by weak organizational layers and able to trigger growth and development processes aimed at the professionality and the distinctive competencies of the business area. Training requirements concern in particular the areas of managerial and behavioral competencies designed for the conditions of actual operational autonomy and competitive efficiency of divisional solutions. Training seems to be the unavoidable supporting instrument for the definition process of the corporate banker's role and, more generally, of the division structures by creating a common cultural model aimed at the mission of the business area. Competencies include a number of different factors, such as the capacity of "thinking and strategy making"; the ability to change and question traditional banking business management modes; the capacity of "reading the market" based on the needs expressed by the demand and on their evolutionary trends; the quality of employed resources and developed competencies; staff involvement at any organizational layer. The primary goal thus consists in inducing common brainstorming about the customer relationship approach modes and encouraging the integrated and flexible application of technical and relationship competencies, network and head office resources, channel and product leverages, in order to establish long-lasting relationships characterized by the constant pursuit of value creation to the benefit of all the parties involved. To this aim, training schemes designed for division directors, regional office directors and corporate branch managers should aim at developing the following capacities: • identify and manage the increasing inter-dependencies between the different management areas of the bank, and in particular, between the corporate, retail and private areas, by considering the management of the different businesses as a composite but unitary process of complex decisions in order to identify and control inter-functional relations; • identify and control the existing relations that at business area level trace the static and dynamic consistency balances between: environment and market variables; bank strategic standing and the choice of activities

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to be developed and organizational and managerial structures of financial, human and technological resources; plan commercial development activities and customer and network assistance activities; manage internal relations according to team-working logics; manage relations with collaborators and other bank organizational units and enhance team spirit; reason by processes and issues rather than by functional areas or by single management action or operation; develop the capacities of identification/analysis of problems and decision-making in order to achieve the best performance in the context of one's own field of responsibility; develop market culture and customer orientation, where customer means the "external" as well as the "internal" one; improve managerial skills, that is the capacities of planning, choice, direction and coordination, organization and control of resources, motivation of collaborators, leadership; develop a common management philosophy and vision in the analysis and interpretation of the problems and in the identification of solutions, so as to enhance the team spirit and unify the bank culture of the corporate business.

4 Corporate Banker's Role and Credit Risk Management Giacomo De Laurentis

4.1 Chapter Outline This chapter examines the configuration of the corporate banker's role and credit risk management as a result of the new customer approach and the new organization of bank branches and head offices. On the one hand, the analysis will consider the tasks of corporate bankers and those of their assistants, the extension and the diversification of their customer portfolios and their involvement in credit underwriting; on the other, it will observe the nature of credit analysis processes and the structure of rating systems which are being introduced, as well as the management of non-performing loans. The analysis will then tackle the issues of information synergies, the involvement of other operators, the corporate banker's background and professional competencies as well as the resulting needs for information technology and training tools. The chapter will conclude by highlighting the critical aspects of configuring the corporate banker's role and credit risk management processes which might determine the success/failure of the strategy of divisionalization by market segment.

4.2 The Corporate Banker's Tasks Table 4.1 shows the choices made by banks included in our panel. Corporate banker's role includes: a) features common to almost all the institutions and thus defined as "characterizing" of the role itself (client portfolio assignment and customer need diagnosis); b) tasks observed in the majority of banks and thus defined as "common" (credit management and credit risk analysis, product specialist triggering, client scouting);

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c) tasks observed only in a few banks and thus defined as "distinctive" (pricing, product specialist coordination, direct interface with Area manager or Corporate division manager, loan approval). Table 4.1. Tasks assigned to corporate bankers (CBs)* Banks A B C D E F H V W X Y Z Management of corporate client portfolio assigned by bank and X X X X X X X X X X X X no longer governed by traditional structures X X X X X X X X X X Customer needs diagnosis X a c c c c c c Credit management and credit X X x X b X x x x x x x risk analysis Triggering of product specialists and advisors on the basis of X X X X X X X X X X X identified customer needs c Scouting (development of relaX X X x X xd X X X tions with new clients) Service pricing on the basis of e guidelines and independent dex f Xs x x x x X x cisions as established by the corporate area manager Coordination of product speh x X x x x x x x x cialists and advisors Relationship with Corporate dix x x x xc vision manager X X X X X Relationship with Area manager X Xs Credit approval * In one bank there are two types of CBs: the table references to the first CB type; the second type is responsible for less relevant clients. a Except for group-clients. b This activity provides for the intervention of credit officers from the corporate division and the wide use of automatic risk analysis systems. c Partially. d The action is triggered by centrally produced lists of potential customers. e The Corporate branch manager is in charge of pricing and can delegate the CB. f It is a pricing proposal. g Pricing decisions are taken by the Corporate branch manager. h Coordination is performed by Area manager. 1 Credit limits are significant as long as the CB is a senior officer. The absence of one or more "common" tasks in the configuration of the corporate banker's role in some banks is due to different factors. As for credit management, the wide use of automatic risk analysis systems, the

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presence of credit specialists within the Division or specialists from the credit function outside the single market divisions produce the absence of such tasks and the resulting commercial characterization of the corporate banker. As for product specialist triggering, the decision is sometimes taken by the corporate branch manager rather than the individual corporate bankers. Finally the lack of scouting tasks results from the centrally managed identification of potential clients. As for "distinctive tasks", choices are due to a number of factors. Among them we can observe: - highly customized negotiations of credit terms or more centralized and standardized pricing; - the search for customer proximity for loan approval or the preference for arm's length lending; in the former delegation of lending authorities is nevertheless quite restricted and subject to the indications provided by the automatic systems of credit risk analysis; - the dominance of relationship roles or of product specialists (to be triggered and coordinated in some banks, to be triggered but not coordinated in others); - the possible existence of intermediate filters (Corporate branch managers) between corporate bankers and Area or Division managers. The comparison between the Italian and the other European banks reveals greater differences in role configurations in the former group. One exception is the share of out-of-branch activity of corporate bankers. Panel banks state the corporate banker's activity is or should be carried out predominantly outside the bank premises (at least 50% of the working day is devoted to visiting clients); both the peaks of 60% and 70% and the lowest value of 5% are indicated by the other European banks. Some major changes are expected in the configuration of the corporate banker's role over the next three years in the Italian banks: enhancement of his/her ability and responsibility in the independent management of the above described functions; more sophisticated management mechanisms (commercial and credit ratings, risk-adjusted performance valuation,...) and better tuned interaction with product units. In the other European banks the role configuration is already consolidated and no changes are expected for the next three years. In conclusion, the prevailing configuration of the corporate banker's role is strongly oriented toward customer interaction outside the bank premises and tends to combine commercial tasks (namely the analysis of customer needs) with information collecting tasks for credit risk valuation.

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The actual interaction with product specialists and Area or Division managers as well as the actual involvement in loan approval and pricing depend on the structure of the corporate branch where the corporate banker is usually located and on the orientation of the operating mechanisms. In the near future, while the other European banks will face no relevant changes, Italian banks will increase the independency of corporate bankers and will implement management tools and operating mechanisms.

4.3 The Tasks of the Corporate Banker's Assistant The corporate banker has nearly always an assistant. Among the common features and tasks of the assistant we can observe the following: - he reports to the corporate banker and, thus, has a more limited interaction with higher-rank managers and product specialists; - his sometimes merely administrative activity is primarily or almost exclusively carried out inside the bank premises; - the role is perceived as a learning/training stage in view of finally achieving the corporate banker's status. Apart from the above described and generally shared aspects, the role configuration presents highly different details in banks (Table 4.2). Table 4.2. The corporate banker's assistants Model

Banks

CBs without assistants CBs sharing the same assistant CBs with 2 specialized assistants (in sale and credit analysis functions) 2 assistants every 3 CBs on average with also credit management tasks CB's personal assistant (one to one): - with credit management and commercial tasks; - with no credit risk management tasks.

EaBbV A Bb C Z D Fc HWX

miiii_ Y Corporate bankers work in a team. The team-leader substitutes the corporate banker in case of absence. b In Bank B there are two cases. In corporate branches (serving clients with € 2.550m turnover) two CBs share one assistant; in corporate branches (serving clients with over € 50m turnover but different from large corporates) each CB has one assistant. c Available only for senior corporate bankers. a

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In particular, there are different basic philosophies as to the CB-assistant biunique relationship and to the latter's sale/credit analysis specialization. Each philosophy actually seems to bear important advantages and disadvantages (Table 4.3): therefore, instead of identifying the best model, it would be advisable to make sure all the operating mechanisms are consistent with the selected role configuration in order to reduce the weaknesses and maximize the strengths of the choice. Table 4.3. Advantages and disadvantages of the different role configurations of the CB's assistants Advantages

Disadvantages

Simpler coordination and Personal assistant to a sole CB valuation More focus on a limited-size client portfolio

Possible lower status, independence, responsibility and empowerment Smaller chances of learning new management styles and professional competencies

Higher effectiveness and efficiency thanks to activity and learning focused on more limited range of tasks

Misalignment with CB's integrated management of customer relation (aimed at exploiting synergy between credit management and customer need diagnosis)

Task specialization, sometimes reporting to more CBs

4.4 The Corporate Banker's Portfolio The number and the range of customers in the corporate banker's portfolio are closely connected with the bank's decisions regarding market segmentation, which have already been examined in this book. The prevailing size of the portfolio includes about 80-100 corporate clients per corporate banker. There are cases of smaller portfolios as a result of an explicit search for quality (in particular 20-30 clients for Bank Y, 60-70 clients for Bank B) or in the cases of junior corporate bankers (40 clients); several banks use average portfolios of 110-120 clients per corporate banker. Some banks have pointed out strong fluctuation round the average value. Table 4.4 shows the variation range.

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Table <•.4. Size variability of portfolios assigned to corporate bankers

o o o

r-

o o oo ON

o

120 130 140 150 160 170 180 190 200 210 220 230 240 250

o

100

Bank

Number of clients

C D H W X

In the future, however, all Italian banks expect to assign each corporate banker a 70-80 clients average portfolio. Explanatory factors for the varying number of clients in CBs' portfolios within the same bank are several, without a significant concentration on one specific factor. The following factors have been listed by decreasing number of indications by panel banks: • number of corporate companies in the territory; • CB's experience or seniority; • size of corporate companies in portfolios; • standing of corporates in portfolios (according to bank internal ranking); • workload involved by clients; • number of corporates belonging to the same groups; • corporate company risk level. Only one Italian bank explicitly aims at concentrating clients in the corporate banker's portfolios by economic sector; yet, against expectations, this choice does not match the CB's special involvement in credit management and valuation. Among the other European banks, three out of four focus on economic sector specialization and on CBs' cultural affinity with corporate clients: in one of them deep industrial competencies are a distinctive feature of CBs' (Bank Y).

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4.5 The Corporate Banker's Involvement in Loan Underwriting In order to analyze loan approval and review processes as well as CBs' involvement in such activities, it is necessary to examine three phenomena concurrent with the creation of corporate divisions/areas: a) reallocation of tasks to different roles, in particular, those concerning credit analysis, loan proposals and approvals; b) introduction of new operating mechanisms, such as credit limits for individual customers; c) changes in risk analysis methodologies. The first two points will be analyzed here below; the third in the next paragraph. Note that the structure of credit renewal processes is nearly always similar to that of underwriting new loans (however, the set of variables conditioning the reviewing frequency is wider than in the past; in particular, the lower the borrowers' ratings the more frequent the reviews). Table 4.5 shows the choices regarding the organizational profiles of credit selection in corporate areas/divisions in the Italian banks of our panel. Table 4.6 shows the same information for the other European banks. The assignment of credit underwriting and management tasks as well as the use of the operating mechanism of lending limits in these banks reveal no significant discrepancies in comparison to Italian banks. It is evident that CBs are usually specialized in collecting credit applications, consulting and negotiations but are not granted lending authority. This is consistent both with the traditional indications by the Bank of Italy and with the recent proposals of the Basel Committee regarding the validation requisites for the internal rating systems used to calculate banks' capital adequacy. Paragraph 386 in the Consultative Document of April 2003, which includes a new comprehensive and updated description of the proposal of the New Basel Capital Accord, underlines the same requisite to distinguish the loan sale function from the credit risk function on which the bank's organization has been grounded for quite a long time.1 1

"Rating assignments and periodic rating reviews must be completed or approved by a party that does not directly stand to benefit from the extension of credit. Independence of the rating assignment process can be achieved through a range of practices that will be carefully reviewed by supervisors. These operational processes must be documented in the bank's procedures and incorporated into bank policies. Credit policies and underwriting procedures must reinforce and foster the independence of the rating process."

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Table 4.5. Credit management and loan approval in Italian banks

Bank

CBs have lending authority

A

Yes, it is rather limited and correlated to CBs' seniority. Lending authority is usually located in 14 Regional Centers and is conditioned by mainly automatic rating systems. Yes, it is significant if CBs are executive cadres; in Corporate and Regional Centers there are credit officers with lending authority who report to the bank's credit function. Yes, but extremely limited. In Corporate branches there are credit officers.

B

C

D

E

F

H

CBs are involved in loan approval processes CBs make investigations and formulate proposals.

CBs make investigations and formulate proposals; assistants have mainly administrative functions.

CBs resorting to specialized assistants for credit valuation have a proposing role; credit officers are responsible for investigations; CBs generally work outside bank premises while credit officers usually work inside. No; loans are approved by credit CBs have investigation tasks and officers after consulting Regional are entitled to make proposals to Area managers who trigger the Centers. credit function. No (extremely limited if any). The Credit analysis and approval procCorporate branch manager is enti- esses will become increasingly tled to approve most credits (the automated; they involve credit offidelegation level is ad personam) cers from Corporate Division or group specialized units. and does not visit his clients. No. Ratings are issued on the basis With the help of their assistants, of prevailingly automatic ap- CBs collect documentation, make a proaches, based on also qualitative report on balance sheets and ininformation provided during inves- come statements, Credit Register and internal behavioral data and retigations. quest ratings. Yes, rather limited. The person re- CBs develop investigations and colsponsible for credit approval usu- laborate to formulate credit proposally dedicates 15% of working time als; investigations also involve bank's credit officers (there are no to visiting clients. credit officers from Corporate Division).

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Table 4.6. Credit management and loan approval in the other European banks r> i Bank V

W

X

Y

Z

r^r, v. -.-^. J*u •*. CBs have credit lending authority

CBs are involved in . . loan approval processes No. The task is assigned to credit Yes, partially, as corporate credit offiofficers from the Corporate Divi- cers are also involved sion No. The task is assigned to Divi- Yes, partially, as they are assisted by sion or Bank credit function some- credit officers from Corporate branch times supported by Risk management unit No. The task is assigned to Bank Yes, partially, as they are assisted by credit function (Division doesn't bank credit officers from Corporate have any), which serves also as branch credit risk management unit No. The approval process is circu- Yes, as per the already described cirlar. Credit officers express clients' cular process ratings; CBs integrate them and propose credit amounts; area managers express opinion and sometimes modify ratings; credit officers validate final ratings and approve credit amounts No. Their lending authority is quite CBs are always in charge of credit restricted proposals; for credit investigations and analysis they also rely on assis-

As a result, higher customer proximity in credit decisions is pursued by placing officers with large loan limits in corporate branches and more often in (now prevailingly multi-segment) Area structures; they are often assisted by semi-automatic credit valuation systems. Customer proximity is not pursued by granting CBs larger credit limits in comparison to those traditionally assigned to branch managers of nondivisionalized banks. As a rule, officers with large credit limits have a few or no contacts with clients, so that another milestone of credit management is thus confirmed. The negative effects of this choice (lower perception of customer specificities as the investigating officer is the sole observer; less information is available to the credit officer; objective and quantitative data are more emphasized than qualitative ones) tend to be more moderate than in the past as the lending authority is delegated to officers directly interacting with

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CBs in corporate or regional centers. In the case of Bank B, CBs' origins (mainly from the credit function) and the goal to achieve a thorough understanding of the customer creditworthiness have induced the bank to assign the CB significant lending authority. Among the major innovations envisaged over the next three years, there is the introduction of credit officers from the corporate banking division/area so that the bank credit function, which today is often a unitary department all the officers (from corporate branches/areas as well as from the retail banking units) must report to, is bound to vanish in a lot of banks. Variables conditioning the delegation of the lending authority seem to be more numerous and more differentiated than in the past. The type of loan and the officer seniority are being sided by other variables; among them first of all the rating (usually the borrower's rather than the facility's), the loan maturity, the officer's professional competencies. In some instances further variables are considered such as (the average risk of) the borrower's geographical area. In some banks global lending limits have been introduced for the overall client's debt with the bank, in addition to lending limits for each specific loan. There are two schemes: under the traditional one, any new loan requires a lending authority commensurate not with its size but with the overall amount of the debt the customer will eventually have with the bank. Under the new scheme, with no particular loan application pending, the CB presents an analysis of the customer's creditworthiness either to his/her credit officer or to a credit committee, thus acquiring the lending authority for the individual customer, to be exercised within a given period of time and for an amount that is specified case by case. The traditional scheme restricts credit extension and thus is mainly functional to risk control. Normally, it is based on the use of largely automated risk valuation systems. The new scheme is definitely oriented toward sales effectiveness, thus reducing operative procedures and enhancing customers' perception of CBs' status as they can approve new loans within the global lending limit received for that specific customer. It, however, requires the ability to assess borrowers' creditworthiness over a more extended time horizon; on the other hand, the fact that a loan application is not pending at the time the credit analysis is being made and discussed with the credit officer or the credit committee allows the bank to develop deeper investigations and take more meditated decisions.

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4.6 Credit Risk Analysis and Rating System Structure Traditional credit selection methodologies are being subject to important changes as a result of market segmentation and bank organization differentiation: a) the methodologies for the analysis of credit risk in the various market segments become more differentiated; b) the credit analysis process tends to rely more on mechanical methodologies (statistical scoring, expert systems and other similar procedures); c) internal ratings are progressively introduced in more banks and in more market segments. Ratings are classifications on an ordinal scale of the perceived borrower's default probability (borrower rating), or of the expected "loss given default" rate (LGD rating or rating of loss severity) or of the expected loss rate of the line of credit (facility rating, that is the combination of the previous ratings). The first phenomenon is a direct and consistent consequence of bank divisionalization by market segment, whose final goal consists in optimizing the effectiveness/efficiency of the management processes implemented in the various segments. The second and the third phenomena derive from the contextual evolution of credit risk management techniques and supervisory regulations rather than from bank divisionalization processes and, therefore, they can be considered as concurrent but not consequential to such organization choices. Traditional credit valuation processes can be renamed rating assignment processes if they lead to a judgment of the counterpart or of the operation expressed on an ordinal scale; Table 4.7 shows a classification of possible rating assignment methodologies. As for the above classification, Table 4.8 shows the evidence observed in our Italian panel banks. Compared to the recent past, a large number of banks have developed or at least experimented processes designed to express credit ratings (so far borrower's ratings almost exclusively) and have adopted more mechanical methodologies, thus reducing the influence of the analyst's subjective judgments.

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Table 4.7. Classification of credit valuation and rating assignment methodologies Basel Committee categories

Nature of process

Judgmentbased

Nonstructured

Credit valuation and rating assignment methodologies

Orientation

n.l. Traditional without preestablished investigation areas and without partial judgments referring to Bottom-up them Subjectively n.2. Traditional with pre-established structured investigation areas and with partial judgments referring to them, but without standard weights per area

Constrained Mechanical, n.3. Subjective grids/scorings with preExpert Judgbased on established weights for investigation ment-based subjectively areas identified by risk-factors(e.g.: predefined strategic, operating, financial, market, technological,..) weights n.4. Subjective grids/scorings with preestablished weights for investigation areas identified by information sources (e.g.: balance sheets, internal trends, Credit Register data, industry, company SWOT analysis) n.5. Subjective expert systems/grids/scorings with preestablished weights for indicators Statistical, n.6. Statistical scorings and other similar applications based on indicators and weights identified by statistical proceTop-down dures Pure Top- n.7. Actuarial analysis down segmentation Source: De Laurentis (2001). Statistical based

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Table 4.8. Methodologies and risk classification in Italian banks Prevailing nature of credit valuation/rating assignment processes in corporate area Bank Approach n.3 for qualitative section, n.6 for quantitative section. For small companies indicative weights are 30% and 70% respectively. B Approach n.2; automated procedures provide the analyst with a "risk indicator" in any case. Approach n.2

D Approach n. 1, though n.2 is now being considered. Mechanical approaches are being implemented y in the retail business.

Almost exclusively mechanical approaches for small business; mostly automaticstatistical for SMEs (judgmental approach should account for 30%); CB should anyway develop personal analyses for his own commercial purposes. For large corporates automatic evaluation accounts no more than 50% on the final assessment. Approach n.5, (judgmental contribution is limited to 20%). Nevertheless, CBs are requested to produce analytical reports on borrowers' major profiles (accounting and Credit Register data, industry). H Approaches n.l and n.2 are prevailing and developed by credit area officers; statistical scoring is being introduced for small business.

Ratings as ordinal classification of credit risk Only borrower rating is issued for each operation to be valuated. Being tested, After experimenting a mostly mechanical rating system, at present judgment involves credit analysts and loan officers. The rating assigned by risk management unit serves as starting point for credit analysis. Borrower and facility ratings are issued for large corporates. Pricing will be centralized for all segments. Borrower rating assignment is being tested and approach is partially statistical and partially judgmental; target review frequency is annual. Facility rating will be used for small business and borrower rating for SMEs. The analyst's valuation does not affect the rating. The review will be monthly.

The system produces only a borrower rating; the review frequency is proportional to rating quality and ranges from six months to two years. Only a borrower rating is assigned.

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This trend is also observed by Treacy and Carey (Strischek 1999) who, just one year earlier, had observed a clear predominance of methodologies more similar to the traditional ones: "in essentially all cases, the human judgment exercised by experienced bank staff is central to the assignment of rating. Banks thus design the operational flow of the rating process in ways that are aimed at promoting the accuracy and consistency of rating while not unduly restricting the exercise of judgment" (Treacy and Carey 1998)2. The limited mechanization of the rating process was also confirmed by the generic nature of the written guidelines regarding rating formulation, by the lack of pre-established weights for the different risk profiles, by the presence of grids of relevant factors in a limited number of banks (whereas the majority of them required an extended written report of the reasons for the assigned rating). The rating assignment process turned out to be an "unwritten knowledge embedded in the bank's credit culture" (Treacy and Carey 1998). Similar results have been obtained in other surveys3. In the other European panel banks, probably owing to a) the larger usage of the rating system well before the development of portfolio credit risk models which require cardinal measurements of risk and b) to the larger size of corporate counterparts, the rating assignment process relies more substantially on judgmental analyses, which play a highly significant role compared to the more structured systems. For smaller-size companies, however, the latter become more relevant. The trend toward mechanization in credit valuation processes bears multiple consequences both in terms of the system and of the company. In the first group, along with a favorable discipline-effect among borrower companies, there may be a number of adverse phenomena: bank-company relationships tend to become less flexible, credit tends to be considered a commodity and credit decisions are characterized by possible short termism with intensified pro-cyclic bank behaviors and difficult financing of medium-term corporate strategies. In the second group, along with the favorable effects of the squeeze in operative costs and process standardization, the following may occur:

2

The survey carried out by Treacy and Carey, representatives of the Federal Reserve, is based on three information sources: the analysis of internal reports and of the documents regarding the credit policy of fifty among the greatest American banks, on the interviews to more than fifteen senior bankers in more than fifteen major banks and finally on the experience of the Federal Reserve inspectors. 3 They have been synthesized with a research on Italian banks in Basel Committee (2000), De Laurentis (2001).

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a) weaker pressure to develop corporate analysts' skills which are necessary to meet companies' medium term investment needs; b) lack of consistency with customized assistance/advisory approaches of corporate division; highly structured procedures that aseptically assess credit risk do not produce information spillovers for the selling of bank products/services. The concept of spillover here used refers to activities which may be performed by the same subject; the meaning is similar to that suggested by Baron and Besanko (2001): "know-how and skills in the performance of an activity that, when shared with other units in the firm, enable those units to perform that activity better than they would otherwise". The tendency to automate underwriting techniques questions the basic principles of the lending relationships identified by Berger and Udell (1996) and by Petersen and Rajan (1994) in the unique information requirements typical of the small business lending and typically met by locally based banks. Worries about the deterioration of bank-borrower relationships and about credit availability are present in a large number of countries (Feldman 1997; De Laurentis 2001) but with contrasting empirical evidence. Recent empirical surveys regarding small business lending (which, as mentioned in Chap.2, is managed by the corporate area in a lot of, above all, Italian banks) reveal that banks' intention to increase SME credit share is positively correlated with the use of scoring systems (Frame et al. 2001). The research carried out by Berger, Frame, Miller (2002) reveals that the usage of scoring systems in the segment of small business (loans amounting up to US$100,000) raises both credit availability and price, both the market shares of small business lending in major banks and credit availability for higher-risk debtors; such effects are quite irrelevant for lending between US$ 100,000 and 250,000. It is worth noticing, however, that the banks adopting scoring systems in this segment are far less numerous and only 8 of them are included in the surveyed panel; on the contrary in the United States scoring systems were widely implemented in the segment of small business lending already in the mid-nineties (Ely and Robinson 2001; Akhavein et al. 2001). As a result, in the small business lower loans segment a structural change seems to be involving credit supply and banks' roles: customer proximity is bound to become meaningless, competitiveness is bound to grow and the competitive advantage seems to be connected with the ability to become cost leader. Nevertheless, banks' stated mission and most of their actual choices regarding the organization and management of corporate banking seem to be customization-oriented. As to credit risk management, it is important to establish the extent to which non-public information determines corporate

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ratings. Research is still quite limited. Brunner, Krahnen, Weber (2000) on the one hand have observed that during the '90s all of the five major German commercial banks being investigated standardized credit approval procedures on the basis of credit scoring systems, on the other they have confirmed that the set of qualitative, or soft, factors is not redundant with respect to publicly available accounting data. Rather, qualitative information tends to be decisive in at least one third of the cases. If we now consider our panel banks, we can see that in several cases rating assignment is still to be suitably integrated in the operative processes of loan approval. As a consequence, the compliance with Basel's provisions as to the rating system validation for the measurement of capital requirements will need some organizational refinements. Let us consider the following paragraphs of The New Basel Capital Accord Consultative Document dated April 2003, which contains the most recent version of the proposal of a New Capital Accord 4: "For corporate, sovereign, and bank exposures, each borrower and all recognized guarantors must be assigned a rating and each exposure must be associated with a facility rating as part of the loan approval process. Similarly, for retail, each exposure must be assigned to a pool as part of the loan approval process" (paragraph 384); "Rating assignments and periodic rating reviews must be completed or approved by a party that does not directly stand to benefit from the extension of credit. Independence of the rating assignment process can be achieved through a range of practices that will be carefully reviewed by supervisors. These operational processes must be documented in the bank's procedures and incorporated into bank policies" (paragraph 386); "Internal ratings and default and loss estimates must play an essential role in the credit approval, risk management, internal capital allocations, and corporate governance functions of banks using the IRB approach. Ratings systems and estimates designed and implemented exclusively for the purpose of qualifying for the IRB approach and used only to provide IRB inputs are not acceptable" (paragraph 406). The lack of integration of rating systems into loan approval processes ("double way approach") can be explained by two main reasons. The first, acceptable, provides for a transitory stage before ratings become "operational". The second, not acceptable, considers ratings as mainly mechanical processes for estimating the borrower's default probability or the operation's expected loss designed to feed credit risk models and to manage loan portfolios, while leaving the wide range of traditional evaluations and the usual roles entrusted with credit investigations, proposals and approvals of single loans. Basel Committee on Banking Supervision (2003).

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In the other European banks the problem seems to be less serious: the rating system is in fact better integrated in credit management and the approval processes carried out by credit structures and it affects the price (banks Y and Z) as well as the credit amount; in two banks (W and X) the officer with significant lending authority keeps contacts with customers by working outside the bank premises for about 20%-35% of his time. The time horizon varies in the banks surveyed with no precise relation with the more or less mechanical nature of the methodologies implemented. It ranges from six months to the entire length of the operation, with the one-year prevailing choice; the two-year period is indicated for larger-size or higher-risk customers and medium term loans. In most of the Italian and other European banks, however, the target time-horizon is not explicitly declared to officers and the conceptual distinction of the three relevant time profiles is not immediate(the frequency of reviews, the quantification of defaults/losses and the time horizon targeted in the assignment processes). As a result, the position of the Basel Committee is useful as it makes clear that "although the time horizon used in PD estimation is one year (as described in paragraph 409), banks must use a longer time horizon in assigning ratings".5 Let us now consider the set of information regarded as relevant by the Italian banks for credit risk exposure (Table 4.9). Table 4.9. Relevance of information sources/typologies for reliability judgment Prevailing replies* Guarantees and corporate assets

L-M-H

Balance sheet indicators

M

Personal knowledge of the borrower; External information (specialized agencies, clients, suppliers, banks, stock exchange market); Qualitative information on company's business plans and on organizational and technological situation; Qualitative and quantitative analyses on sector structural characteristics and on rules of the competitive game entered by the company

H

Bank relationship and Credit Register's data

M

•"Importance H=High, M=Medium, L=Low 5

Ibidem, paragraph 376. The Basel Committee confirms the necessity to avoid confusion between rating assignment processes and rating quantification processes (De Laurentis, 2001, Chap. "II processo di rating quantification").

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We can observe: a) opinions are quite differentiated as to the profiles of guarantees/capital analyses with no prevailing replies; b) opinions are concordant as to the importance of other information sources; c) qualitative information is highly relevant in all banks. As for the relative importance of the analyses on liquidation values of collaterals/guarantees and corporate assets (i.e. on LGD, loss given default, that is the loss rate in case of counterpart's default), banks have quite different opinions, almost equally distributed among those who retain such valuations highly, medium or little important in the corporate segment. Ceteris paribus, the relative importance of the guarantees is higher in smaller size customer segments. The information deductible from the company balances is given medium or high importance by all the banks except for one, which remarks the poor reliability of financial statements; the analysis, however, is carried out by comparing one company's balance sheets in the course of time by means of financial ratios, whereas a very low incidence has been observed for synoptic valuations designed to compare one company's performances with that of others or with average data from significant aggregates of corporates. On the contrary, it is evident the assignment of risk ratings is based on the comparison of different borrowers and, hence, the synoptic analysis is bound to become more important at least in the banks which will not rely exclusively on mechanical procedures for their balance valuations. Qualitative analyses are on the whole considered very important but there is a certain difference among banks as for the single aspects. More specifically, the role assigned to "personal knowledge of the borrower" is high in two banks (above all for smaller-size corporate clients) and low in another three banks. Analyses of bank relationship and Credit Register data are given medium or high relevance, except for two banks. Note that if such information is given much too relevance in the traditional valuation process or in the mechanical processes often utilized to synthesize quantitative data, the entire risk valuation process is characterized by poor forecasting ability. In fact, due to their own nature, such information sources: a) concern information showing companies' difficulties with great evidence, but only after their actual entry in cash flow drains and higher indebtedness status; b) give account of the company's behavior in relation to lending banks; in other words they are not original data, that is exogenous to banks' credit decisions, but they reflect lending banks' perception of borrower risk: this is reflected information (comparable to data used in the technical analysis for security investments decisions and, thus, different from the information used for the fundamental analysis); c) the better the company the less

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significant the information they provide. As for the three other European banks providing indications about the information sources they consider important for credit risk analysis, we can observe the following situations: Bank W gives very little importance to guarantees and corporate assets, medium importance to balance sheets and great importance to company and sector qualitative aspects; Bank X, on the contrary, gives significant importance to balance sheets and guarantees; both banks consider bank relationship and Credit Register data relatively little important; Bank V gives great importance to balance sheets (both historical and synoptic) analysis, sector strategic analysis and credit behavioral data.

4.7 Credit Risk Control Day by day credit risk monitoring processes typically rely on such information sources as Credit Register and internal behavioral data, along with the so-called prejudicial events (e.g. judicial mortgage registration, protests and so on). Information technology for the identification of creditworthiness deterioration signals is managed by a specific organization unit (monitoring unit) in all the Italian banks of our sample. This unit must assess the significance of irregularities, share the assessment with credit officers and relationship managers, solicit further information and sometimes start reviewing the borrower's position, which may lead to its being classified in regulatory grades. The organizational and geographical location of this unit is not univocal. If the credit function is still outside the corporate division, this unit is also outside; in most banks it is in regional centers so as to guarantee necessary closeness to customers' management units. The introduction of mainly mechanical rating assignment systems has caused an improper convergence of loan approval and monitoring processes owing to the usage of increasingly similar methodologies (in terms of both techniques and processed data). With reference to the Credit Risk Management Unit, it may be in charge of one or more of four activities: 1) tools, methodologies and processes innovation; 2) controlling and reporting; 3) credit and portfolio management; 4) operation origination. Despite the multiple theoretical combinations, the Italian panel banks show a large number of common features: the organizational collocation of the unit within the corporate branch of the bank group; the unit's governance of credit risk modeling and its involvement in the setting up of credit

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policy; its direct assignment of ratings for lending operations of highest amount and/or complexity. As expected, also the Auditing Function is outside the corporate division as it is carried out by a central unit within the bank's head-office or by an ad hoc Auditing Company within the bank group. The other European panel banks on the average show limited differences in comparison to Italian banks. It is worth noticing the absence of a specific monitoring unit in Bank W and the presence of a credit review unit in banks X and V, which is responsible for the review and the coordination of the ratings assigned by credit structures.

4.8 The Management of Non-Performing Loans Italian banks show different solutions as to the way of dealing with nonperforming loans (i.e. with the lowest categories in the scale of borrower ratings). Two are the most relevant aspects: the positioning of the units dedicated to their management within the organization and the risk threshold which determines the shift of credit management from the corporate banker to the specialized units for non-performing loans. As for the first profile, the unit for non-performing loans is located sometimes in corporate division headquarters, sometimes in the monitoring or credit units in the divisional regional centers, sometimes in the credit function outside the corporate division. Only in one bank, credit officers from corporate branches are responsible for the monitoring and the management of non-performing loans. As for the second profile, in some banks management is removed from the corporate banker when loans are classified worse than "watch grade"; in other banks also watch grade loans are transferred to dedicated units; in other banks if the early warning system gives evidence of deteriorating signals, the corporate banker has to decide whether to transfer the loan management immediately to the specialized unit or formally demand for a period of time by the end of which the borrower is expected to fall again into pass grade; finally, in one bank, if the automatic system identifies a non-performing loan, the lending authority usually assigned to hierarchical levels becomes more stringent but credit management is not necessarily moved to other units. In the other European banks surveyed the management of nonperforming loans is more frequently carried out by corporate bankers and by the credit officers they collaborate with, sometimes assisted by specialists. On the contrary, the management of default loans is always entrusted

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with legal firms, with the possible assistance of the credit function. In the majority of Italian banks corporate loans classified as non-performing are managed by a central legal services unit for work-outs. In many banks procedures for calculating and recording costs, time and returns of recovery processes from single loans and even from individual guarantees/collaterals are being implemented in these days. Such new procedures will enable the bank to quantify and then use historical collection rates: a) for management purposes, as LGD estimates are an important component of expected loss and of expected returns; b) for regulation purposes, as the LGD estimate is required in the advanced internal rating based approach of the new proposal on bank capital of the Basel Committee.

4.9 The Exploitation of Information Synergies The accumulation and sharing of know-how is a key objective of learning organizations. According to Baron and Besanko (2001) the choice of organizational structure and incentives can shape the intensity with which know-how is shared and thus affect the extent to which latent capabilities become mobilized to benefit the firm as a whole. The same considerations made for macro-organization choices can be applied to micro decisions regarding the configuration of organization roles. In the case of the corporate banker's role configuration, the search of information synergies can be developed onto two levels: a) the ability to exploit for commercial purposes the information acquired and processed for credit risk valuation and, vice versa, to exploit for credit risk valuation the information acquired for commercial purposes; b) the ability to create information synergies with other distribution channels or bank product-units. As for the first level, we have analyzed the perceived importance of such synergies and the main mode with which this information exchange is encouraged. While there is full concordance about the critical relevance of such synergies for all the Italian banks in our survey, methodologies to achieve such synergies vary quite significantly from bank to bank (Table 4.10). Some banks rely on information systems specifically designed for this goal, probably (and hopefully) the evolutions of customer relationship management systems used in the retail area. Other banks develop synergies by exploiting the concentration of commercial functions and credit investigation tasks into one figure, that of the corporate banker. This solution bears great potentialities if a critical aspect associated with the nature of the investigation tasks assigned to the corpo-

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rate banker does not hamper them: if investigation tasks consist in merely collecting information without a direct and explicit interpretation of the corporate competitive and financial situation, the search for synergies becomes more problematic. The third solution is the most traditional (personal interaction between credit officers and relationship managers) but it can be re-interpreted in an innovative and effective way by increasing operators' logistic and organizational proximity through the scheme of working-teams. Table 4.10. Information synergies between credit valuation and commercial activity ,

R

The sharing of information acquired in sales/assistance/advisory activities and in credit risk evaluation is achieved by:

A

Focusing commercial and investigation roles in the corporate banker (though the credit risk analysis system is mainly mechanical)

B

Focusing commercial and risk management functions in the corporate banker and team-work in corporate branches

C

Team-work in corporate centers

D

Assigning the corporate banker investigation and commercial roles

E

The presence of information systems designed for this goal

F

Assigning the corporate banker commercial and investigation roles (though the credit risk analysis system is prevailingly mechanical)

H

Information systems designed for this goal and through intense exchanges between commercial relationship managers and credit managers

Also in the other European banks the ability to exploit for commercial purposes the information acquired and processed for credit risk valuation purposes and, vice versa, to exploit for credit risk valuation purposes the information acquired for commercial purposes is considered of crucial importance. It is pursued by involving the corporate banker in investigations and in the formulation of credit proposals, as well as through the close interaction between credit officers and corporate bankers. In two banks it is pursued by involving figures with lending authority in the interaction with customers.

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As for the second level (i.e. the ability to create information synergies between the corporate banker and the other distribution channels or bank product-units), the quest of such synergies is considered important by all the Italian banks. The ability to interact with retail branches, where payment and credit services are provided, is frequently mentioned. It is also important to coordinate the activity of corporate and private bankers in relation to small and medium enterprises, whose entrepreneurs express important requirements as to the management of their personal wealth. In fact, one of the main limits of bank current divisionalization processes by market segment is the neat distinction in the management of customers who, on the contrary, often are entrepreneurs and well-off savers. There are two main organizational models to deal with product specialists: in the first model the corporate banker must trigger those interlocutors; in the second model there is the Area managers' filter. Product-unit specialists, who are often independent agents, are usually oriented toward collaboration through incentive schemes based on the sharing of volumes and margins or on internal transfer prices. In the other European banks the problem of information synergies between the corporate banker and the other distribution channels of the bank is far less important. This is due to that, except for Bank Z, in all the other banks the corporate banker is the only distribution channel for customers. Information synergies with product-units are mainly concentrated on "product" aspects and are pursued by making specialists promptly available. Team-working is one of the specific skills of the corporate banker, as confirmed explicitly by all the surveyed banks, in Italy and abroad. Teamworking is particularly intense in the quadrangle composed of the corporate banker, the assistant, the credit manager and the product specialist. In the majority of banks, the first three figures work inside the corporate branches and, thus, structural decisions are clearly aimed at improving team-working. In various banks product specialists have been distributed over the territory, though with less capillarity than for the corporate banker. As noted in the previous paragraph, the other European banks tend to maximize information sharing also in the management of non-performing loans, whereas Italian banks tend to increase the arm's length management of such loans transferring the responsibility from corporate bankers to specialized units.

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4.10 The Corporate Banker's Competencies and Tools The role of the corporate banker can be better understood by identifying the roles and the functions from which he/she has been selected (Table 4.11). Table 4.11. Corporate bankers' back-ground Bank

Back-ground

A B C D E F H

Branch credit managers Credit function Branch senior managers or assistant managers Branches, areas, credit; about 40% of CBs come from other banks Skill assessment and two-year training Branch managers; new experienced staff from other banks Credit function and branch management; staff from other banks limited to 10% Credit risk analysis, relationship and linguistic skills Experience in the industrial sector, both in banks or companies Commercial function, not necessarily in the corporate area Various functions, staff from outside usually with experience in the industrial sector

V W X Y

If we consider that traditional branch managers have usually had an important experience in credit risk valuation, the training of current corporate bankers can rely on a sound basis of competencies in corporate analysis. In the other European banks this aspect seems to be more stressed (except for one bank) as corporate bankers generally come from outside with experiences in the industrial sector or from the bank credit function. The following selection parameters are used for recruiting corporate bankers: previous role/function, curriculum vitae, professional seniority and age, commercial attitude. Some banks have given their staff the possibility of choosing, though sometimes more formally than substantially. The units involved in the selection process are the following: personnel function (always), the top management (often) with people involved in the development of the corporate division, sometimes their higher-ups and credit and commercial functions. In the future the role is expected to be covered by corporate bankers' assistants, whose presence is also justified by the need to provide a kind of back-up for such role. The role/territory turnover is expected to be rather low in order to strengthen skills and market relations.

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Table 4.12 shows the skills and attitudes considered relevant by Italian banks for the definition of the corporate banker's role. The answers provided by the other European banks show large correspondence with those of Italian banks. Table 4.12. Corporate bankers' skills and attitudes Prevailing answers* 1) Professional background: - market analysis and valuation - business sectors understanding - credit products/financial advisory - fiscal matters - legal matters - corporate management (strategy, p&c, promotion, etc.) - bank internal procedures - customer needs analysis and sales techniques - budgeting - branch/customer action planning - credit risk valuation - managed saving - security investment services - structured finance and derivatives - payment systems

M M M-H L L M M H H M M L L M M

2) Skills and attitudes: - relationship management - organization - planning and control (budgeting) - leadership - problem solving - integration and negotiation - commercial boost and vitality - stress management - collaborators' leadership and development - performance orientation - communication and impact * Importance H=High, M=Medium, L=Low

H M-H M H H M-H H M M M M

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The role tends to be characterized under the commercial profile, but some attention is also paid to credit risk valuation capabilities. Under the first profile, customer's needs analysis and budgeting are the most important competencies whereas relationship, negotiation, commercial boost, leadership and problem solving are the most important skills and attitudes. The lower relevance of fiscal and legal profiles arouses some perplexity. In this field, in fact, advisory activity can be developed both in relation to bank product and services and to the multiple needs that may be expressed by corporate clients (e.g. assistance for drawing contracts with foreign counterparts, verification of guarantee reliability, etc.) and enormous information synergies may be produced for credit risk valuation. Various banks have stressed the need to avoid competition with legal and accounting firms. The medium relevance attributed to professional background as to corporate management (strategy, planning & control, marketing, etc.) is important for the consolidation of customer relationships and the creation of the image of a "house-bank". The corporate banker's role and the implementation of internal rating systems imply strong needs for innovative information systems. Though believing one of the fundamental features of such systems must be their integrated design on the basis of the selected configuration of the corporate banker's role in every single bank, we shall analyze here below the most important general needs resulting from the commercial, credit risk management and managerial profiles of the "average" corporate banker that has emerged from this research. As for commercial profiles, there seems to be the need to integrate into a sole tool the supporting systems for customer needs identification, bank products and services presentation, and the development of advisory activity. This tool should allow corporate managers to: 1. interact with clients by "surfing", if necessary, among advisory services and products provided with fully updated information; 2. develop advanced advisory by analysis and simulation applications; 3. regularly enhance their competencies by using the tool as a distance or assisted learning instrument; 4. receive communications and file them automatically in a daily-used tool; 5. collect and store customer relevant information by means of customer relationship management instruments, which are deeper and more flexi-

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ble than those typically used in contexts of less customized relations (retail banking) or less complex relations (private banking). As for the profiles regarding credit risk, the corporate banker's needs are apparently conditioned by the type of involvement in credit management which characterizes the role in the various banks. As information synergy between commercial activities and credit risk valuation is nevertheless considered crucially important, it is evident the corporate banker should be provided with all the analyses carried out by credit structures. If such analyses are prevailingly mechanical, the corporate banker will clearly have to interpret available information in pro-active terms and require information supports that are typical of the corporate analyst. As for managerial profiles, there is the need to develop budgeting and measurement systems of individual managers' portfolio performances, by identifying key performance indicators and suitable benchmarks. In other words, the corporate banker should have his own Tableau de Bord for the management of his portfolio and this should be a component integrated with the management systems from other coordination roles (team-leader, corporate branch manager, area managers, corporate division director). A distinctive feature of the corporate banker is the remarkable amount of activity developed on the client, outside the bank premises. There are important communication needs with typical interlocutors (first of all the corporate banker's assistant, the manager of the branch where services are provided, product specialists, higher-ups, other clients), important storage needs for the exchanged information and the decisions taken. Other important information supports regard time management and activity optimization. Our survey has highlighted important training needs, which can be gathered by commercial, risk valuation and management profiles. More specifically, Table 4.12 can be used for further specifications regarding training requirements. We would like to point out only two aspects. First of all, banks where the credit risk analysis process is essentially mechanic should try and avoid the gradual deterioration of corporate bankers' corporate analysis skills. In this case, training might make up for the reduced incentives resulting from the use of automated models of rating assignment. The second aspect regards training tools. If traditional training schemes can rely on the above mentioned information tools, which are concurrently operating and learning tools, the value added of training processes can be significantly enhanced.

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4.11 The Corporate Banker's Role and Credit Risk Management: Critical Aspects The critical aspects regarding this section of the research can be summarized as follows: 1. consistency of the corporate banker's wide-ranging tasks and skills with the mission of the corporate area; 2. consistency of credit risk management approaches with the mission of the corporate area; 3. consistency of training schemes and information tools designed to assist the corporate banker's activity with the mission of the corporate area. As for the first aspect, the bank has to make sure the target clients of the corporate segment find a correspondence between the expected and the actually perceived corporate bankers' skills and authority. At one end there is the figure of the "facilitator", the corporate banker who promotes customer needs in the bank structures (specialized in products or risk valuation and operation approvals) by triggering product specialists and credit officers promptly and according to customer oriented approach. At the opposite end there is the figure of the "banker", the corporate banker who interacts with the enterprise far more deeply by addressing a wide range of financial or non-financial solutions with high competence and who has the authority to promptly provide the majority of services in the contiguous restricted context of the corporate branch. The first and second critical aspects share the CB's involvement in the valuation of the client-company and, therefore, of its opportunities and risks. Banks should substantiate what they have declared about the crucial and/or unavoidable importance of the synergic exploitation of the information acquired in the commercial activity for credit risk valuation purposes and, vice versa, of the information acquired and processed in this context for the advisory and commercial interaction with the customer. The possible exploitation of such synergies depends on risk analysis models and on their more or less extensive automation. It is worth noticing that the current trend of increasing the automation of risk analysis processes leading to rating assignment through scoring systems and limited adjustments by credit officers (usually bound by preestablished grids of qualitative aspects which are given standard weights) is not required by the New Basel Proposal, as assumed by a number of banks, but it is an entirely free choice. The approach suggested by Basel 2 provides for much stronger decision automation "after" rating assignment

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(capital amount to be allocated, devaluations to be effected, prices to be applied according to ratings) rather than "for" the rating assignment process. To this end, the Authorities intend to keep a non-binding attitude so as not to condition the enhancement of corporate processes and the search for the competitive advantage. This is closely consistent with the general philosophy of the new proposal, which intends to reduce binding regulations, lead supervisory tools back to banks' internal management tools and drop the reference to the need for a level playing field, typical of the current prudential regulation.6 The choices made by the Italian and often by the other European banks tend to privilege process standardization and cost reduction in the corporate area. When such choices are extended to the entire corporate segment and they are made by customization rather than commoditization oriented banks and they are not explicitly transitory, there is a problem of consistency with the exploitation of the information synergies between the assistance/advisory activities, the sales of bank products and risk valuation which all the banks described as crucial. The choices now prevailing probably result from the just started and improvable client segmentation process, as it is unlikely that all the companies sharing the wide turnover fork now classifying the corporate segment actually deserve the assistance of a highly skilled corporate banker. Moreover, the current segmentation often leads to far too wide and not business specialized portfolios. Finally, the problem of reduced corporate analysis skills resulting from highly structured investigations bound to feed prevailingly mechanical rating systems is not fully perceived at the moment because of the reliable risk analysis background of the officers initially selected for the role of corporate bankers; the problem might grow more serious when the role is covered by corporate bankers' current assistants who have trained in the new operating environment. 6

It is sufficient to observe paragraphs 372 to 407 where guidelines for rating assignment are described. Indications are loose and leave banks full independence; they become more stringent only if mechanical systems are implemented (ibidem, paragraphs 379-383). The Basel Committee states that mechanical systems are not forbidden: "Credit scoring models and other mechanical procedures are permissible as the primary or partial basis of rating assignments, and may play a role in the estimation of loss characteristics" (ibidem, paragraph 379). However the Committee is fully aware of that "Credit scoring models and other mechanical rating procedures generally use only a subset of available information. Although mechanical rating procedures may sometimes avoid some of the idiosyncratic errors made by rating systems in which human judgment plays a large role, mechanical use of limited information also is a source of rating errors." (Basel Committee on Banking Supervision 2003).

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This issue is more serious in Italian banks due to the wider definition of the corporate segment and of the even more mechanical approaches to rating assignment. One Italian bank, however, has definitely modified the initial choice by limiting the role of essentially mechanical processes to the SME segment and, thus, taking a completely opposite direction compared with the choice it had made a few months earlier. The need for consistent ratings can be pursued without process standardization. If we look at the taxonomy of work coordinating mechanisms by Mintzberg (1983) (Table 4.13), we can see that standardization is typical of simple and routine activities, such as short-term low-amount lending in a commoditization oriented transaction. Table 4.13. Work coordinating mechanisms Type of coordination

Modes of coordination

Work complexity

Mutual adjustment

Peers' informal communication

Low

Direct supervision

Others' work control and responsibility Work contents specification

/\ L A

Work process standardization Output standardization Skills standardization Mutual adjustment Direct supervision

Work expected results specification Skills and capabilities homogenization Peers' informal communication

\

/

V High

Others' work control and responsibility

This choice turns out to be less consistent if the mission of the corporate area consists in establishing consolidated and privileged customer relationships, which imply medium-term company valuation and a much more skilled contribution to the identification and solution of company critical issues. From this point of view, two aspects are worthy of note: a) some banks have achieved satisfactory economic performances as to customer relationships only when the bank is considered as the reference bank; b) the traditional fragmentation of bank relationships in Italian companies has been significantly reduced (Table 4.14).

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Table 4.14. Multiple bank relations in Italy Loans (euro) a) All non-financial firms Average number of banks per borrower % of total borrowing granted by lead bank

< 500.000

Average

d) Services Average number of banks per borrower % of total borrowing granted by lead bank Source: Bank of Italy (2002).

2.500.000- 5.000.0005.000.000 25.000.000

2,90

4,69

6,61

61

52

45

3,45

5,58

7,63

51

42

36

2,33

3,45

4,88

72

67

61

2,70

4,24

5,85

65

57

51

number of

banks not b) Industry Average number of banks higher than 2 per borrower and first % of total borrowing granted by lead bank bank's c) Building industry Average number of banks per borrower % of total borrowing granted by lead bank

500.0002.500.000

average credit share not lower than 67%

The third critical aspect regards the consistency of training processes and information tools supporting the corporate banker's activity with the mission of the corporate area, so as to align customer's expectations with customer's perceived added value of the bank's new organization structure. The corporate banker's competencies and the information supporting systems in his advisory activity along with his lending authority are in fact the most immediate valuation elements customers seem to adopt when measuring the added value of the bank's new organization structure. Compared with the traditional approach, quality enhancement can be achieved with reasonable costs and timing only by providing the corporate banker with competencies and tools able to establish deep interaction with customers.

5 Operating Mechanisms

Paola Schwizer

5.1 Chapter Outline Operating mechanisms are the basic processes and rules regulating the functioning of the organizational structures and form a major determinant of the adopted behavior. They make the vibrant spirit of the organization in opposition to the static framework of the structures (Airoldi 1980). The following analysis aims at identifying the organizational innovation elements within the configuration of the following typology of operating mechanisms: - human resources management systems (remuneration, evaluation, career, training); - planning, budgeting and management control; - communication, creation and spread of corporate culture. The specific aim of the analysis was to highlight the state of the art of divisionalization with reference to the degree of differentiation of the systems adopted for the corporate division or branch unit compared to the other departments of the bank. Owing to the specificity and the "internal" nature of the management systems, they were researched only in the panel of interviewed banks. For some aspects, like the corporate culture, the research was aimed at identifying any clues of cultural differentiation.

5.2 The Degree of Differentiation in Human Resources Management At present the degree of differentiation is actually rather limited mostly due to the recent introduction of organizational changes in almost all of the Italian panel banks. Adjustment projects are in fact being carried out. The degree of differentiation increases where banks have already started divisionalization

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processes (Bank A, Bank B), which proves the fact that changes in operating mechanisms are successive to changes in the structures. In the case of "pure" divisional banks, human resources management is a task of the division director, who is supported by professionals. The division is not autonomous in the field of promotions: everything is decided at head office level. This allows exchanges of personnel between the divisions. Corporate bankers are former branch managers characterized by long experience in corporate relationship management and with a personal talent for the corporate segment. When looking at remuneration structures, we can observe significant heterogeneity in the basis (bank, unit, branch office performance, other parameters, etc.) as well as in the methods of calculation of variable remunerations (at team level, individually and branch office level, etc.) as shown in Table 5.1. The research considers only the banks with relevant and significant information. Table 5.1. Human resources management in corporate banking: features and degree of differentiation Bank A

B C D E H W X A

B

C D E

Specific Elements Corporate Banker's remuneration CB's remuneration is variable under 50%; it can be attained in the medium term (3 years) on the basis of a scoring scheme related to profits generated (after absorbed capital costs) and customer fidelity. Variable rate accounts for 5-10%. Fixed rate accounts for 85-90 % of remuneration Fixed rate accounts for 85-90 % of remuneration Specific tools for CBs management are being defined. Since 2001 an incentive scheme has been introduced for managers (formerly only directors). Fixed rate accounts for 85-90 % of remuneration Fixed rate accounts for 85 % of remuneration Fixed rate accounts for 95 % of remuneration Variable rate definition parameters Targets are defined at the beginning of the year (including quality parameters). Branch managers distribute them among corporate bankers. They are shared and approved by HR managers and directors. Intermediation margin on branch/regional office portfolio (branch office in the start up phase); campaign bonus (not only monetary) starting when budget is met. This mechanism is quite similar in different divisions. Budget objectives The variable part is linked to corporate division. Incentive scheme is linked to profitability parameters. It is distributed among teams according to division objectives. A trade union agreement "forbids" any evaluation, distribution of objectives and bonus calculation on an individual basis. The same agreement urges for mcentiye standardization.

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141

JBank Specific Elements F Business area performance. Bonus is first of all given to team (bank general principle). The person is given a bonus if the bank, business unit or corporate branch have reached their objectives. Individual performance is evaluated on the basis of team performance. H Division commercial budget and bank total income. No specific calculation criteria applied to corporate units. W Division commercial budget and bank total income (substantially similar to that of other bank activities) X Division commercial budget and bank total income (substantially similar to that of other bank activities Other incentive factors A Career B Career; non-monetary rewards for campaigns C None D Being considered E Career. Other forms of incentives (benefits) but limited to retail and private banking sectors H None W Benefit X Different types of benefits Career paths of Corporate Bankers A Possible developments involve the role of branch manager or private banker (not vice versa). Two particular growth models: young talents, as described by the different banks of the group, and key-roles (about 200 resources). Database used for professional development of different banks. B Corporate banker is a transitional role toward branch manager or product specialist. Career profiles are quite different in corporate and retail banking. C Poor chances of vertical development, mainly toward branch or area manager. D Career profile is now vertically defined in terms of "corporate banker assistant-corporate banker-branch manager" relation. Inter-division transfers to retail or large corporate are not excluded. E Careers follow the organizational layers of roles in the commercial network. The role of corporate banker has medium/long term permanence. F The CB may become corporate branch manager or assume division head office roles. H Recent introduction of the position and career profile has not been defined yet. Corporate banker assistant has direct access to corporate banker position and corporate banker to that of branch manager. W Corporate banker represents the top of the career. There is a horizontal transfer between business areas/departments in business unit or head office. X Process tends to be vertical toward branch network or head office.

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Corporate bankers' career profiles have not been always defined: this creates uncertainty about motivation sources, where variable remuneration rates are limited to about 10% of the total amount and career prospects are not certain. Evaluation systems have shown very different models of competence analysis that are used for the selection of corporate bankers and human resources for specialized branch offices (Table 5.2). Banks F and B show a high degree of differentiation even in the performance evaluation system. Evaluation systems of potential are on average poorly developed. Customer and staff satisfaction evaluation systems are not systemized and almost negligible. Only Bank W considers customer satisfaction evaluation of crucial importance and intends to combine it with remuneration. Table 5.2. Corporate banker evaluation systems in the panel of Italian banks Human Resources Evaluation Models Performance evaluation

Banks with Corporate Banker Bank A Bank B

Bank C Bank E

Bank F

Bank D

Degree of differentiation None. Model is common to other positions, except for some specific objectives. MBO-link. Evaluation based on performance, knowledge and behavior based on corporate division input. None. Model is common to other positions, except for some specific objectives They are working on a new performance evaluation system on line with Tableau de Bord (key performance indicators). Performance indicators are different for corporate and retail units. The corporate division rewards profitability, development, efficiency and innovation (capacity to set sophisticated products) on a yearly basis and with different weighting depending on the markets (new, traditional, etc.) decided by the division director. The reward is given to the team and to the branch as a team. This is different from financial advisors incentive schemes which are designed on an individual basis. An integrated evaluation model based on perfom

Operating Mechanisms

Human Resources Evaluation Models

Banks with Corporate Banker Bank H

Potentials evaluation

Bank A

Bank B

Competence evaluation

BankB Bank C BankE

Bank F

Customer satisfaction evaluation

Bank A

Bank E

Corporate banker satisfaction evaluation

Bank A Bank B

143

Degree of differentiation being studied. Yes, based on budget achievement. It is not differentiated. Self-evaluation model of potentials and attitudes. Parameters are differentiated according to position. Manager assesses self-evaluation and a development path is commonly established. Used for access to position of corporate banker (from assistant position) and branch manager (from corporate banker) and to higher positions. System is connected with performance evaluation. High differentiation. High differentiation. Competence model already defined and used for skill assessment (from positions to role behavior). At the moment 150 people from Lombardy have been evaluated. In the course of 2004 evaluation will be extended to whole Group. Creation of professional families to be used as a base for differentiation in human resources policies. High differentiation. Necessary competencies are established by division director. Ad hoc created model with external companies but not applied systematically. Future constant evaluation through CRM portal. Interviews with those who had interacted with potential corporate bankers for evaluation of potential. After initial experimentation, final clients evaluation. Primary survey through call center to evaluate client interest in relationship approach. Only interviews with head-up. Climate analysis with external companies. Only interviews with head-up. Future, climate analysis (now union obstacles).

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5.3 The Degree of Differentiation in Planning and Management Control Corporate banking strategies are defined within the following units: • head office; • corporate division; • external and independent advisors (even in the biggest banks like Bank D and Bank H); • regional offices (Bank X). The organizational units of the division (marketing, loans, commercial, corporate functions) contribute to defining business plans. In the most advanced situations (e.g. Bank F) such plans are represented by a 3-year business plan (5 years in the future) including: • market positioning analysis compared to companies in different market places; • rating analysis with the aim of screening market potential; • definition of general development objectives. In some cases there are no systematic processes of strategic planning (Bank H, Bank G). The differentiation degree of budgeting and management control per market segment is rather limited. Apart from Bank A, the degree of differentiation is not always in correlation with the degree of divisionalization, but it seems to be dependent on the orientation of the division management and the top management of the group. As for budgeting and management control structure, tools and processes in the corporate banking area: • planning, definition of the objectives and control tools are not different from those used within the bank in its overall activities. In some cases (Bank D, Bank A) an integrated analytical accounting system is being implemented for the corporate division; • detection tools designed for monitoring the mission of the corporate area are quite rare: customer profit and loss account (if any, rarely used to assign objectives to corporate bankers and branch office managers)1; 1

In Bank E, currently there are no profit and loss accounts per product or client. Profitability analysis tool for the corporate branch is the branch income statement.

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• clients may be concurrently served by different banks of the group, without a global vision. Bank E has established to arrange monthly meetings with sales managers from the different banks of the group so as to reduce possible overlapping and avoid competition on the same client; • in most banks corporate banking indicators in the budget reach the level of RAROC. VAR and rating systems are used for the management of corporate banking overall activity (assignment of objectives and performance control). They will be soon used for the management of corporate branches in Bank A, Bank H and Bank D; • in several cases branch office budget still includes volume indicators distinguished by products and overall profitability. It does not cover non-monetary indicators, different from the number of operations. The need for strategic control tools (balanced score card, customer satisfaction, etc.) is not particularly strong. If any, they are produced independently by regional offices or head offices (marketing, commercial functions, etc.). In some cases (Bank A) such tool are been extended to the overall branch network. Bank A and Bank C have a widely used Corporate Information Portal with data on customers and market potential; • corporate banking budgeting is a merely top-down process. The negotiation about budget marginal aspects usually occurs between area managers and corporate branches; • measurement and enhancement of group synergies (link between the channel and the product, etc.) are specific tasks of the corporate branch, but are almost always disregarded2;

Client profit and loss account is reliable up to the interest margin. There are still problems with the allocation of the commissions earned on each customer. Until the situation has changed, it is difficult to set incentive mechanisms on economic bases, RAROC measures, etc. Besides, while significant changes are taking place, it has been decided not to proceed with the incentive mechanisms review that would add more pressure on the staff. 2 In Bank E, the corporate center is responsible for the sales volumes per product. Corporate banking budgets are assigned to individual branch offices. The knowledge of the territory enables to fine tune the assigned budget. There is no product or client profit and loss account at the group level. Every bank has its own budget for every product and for every segment. Prices of the different banks to the same client could be different (even if rationalization of lines of credit amounts has already been done). The commercial bank tends to decide on loan granting decisions and not, for example, the product company. Product companies concentration on

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• reporting is mostly related to credit activity (volumes, profitability, credit quality) and, in some cases, to revenues from services on individual products. Data on overall profitability (after direct costs) from individual customer relationships are disregarded. Quite often it is difficult to build up both the service related revenues connected with the single customer or the CB's customer portfolio and the overall contribution margin of the relationship on the basis of data produced exclusively by the automatic information systems, that is without any manual input. Moreover, no systemized soft information is provided regarding external, and above all, internal customer satisfaction, product quality, product innovation rate, positioning in relation to competition, product efficiency and effectiveness, etc. As for the organizational integration between distribution units: • There are measurement and incentive tools for the contribution client managers receive from product managers. In Bank A they are defined "tools of solidarity". They are fees for the distribution services performed by the branch. In Bank E there are price transfer economic agreements with product companies defined in terms of up front and continuing commissions. • Services between branch offices operating on different markets (retail branches and corporate branches) are measured and remunerated by commission systems, which account for about 10% of retail branches revenues. In some cases (Bank D, Bank H) no remuneration is provided. In Bank E, the branch office is in charge of all the transaction activities with SMEs and, as against other banks, it benefits from the whole economic return. The final aim of divisionalization is in fact to remove corporate bankers from transaction activities and allow them to work outside the bank premises for at least 50% of the time. • There are no measurement and incentive tools for the contribution provided by the back office staff in the corporate branch, apart from sharing the objectives of the branch office. • Only in some cases, client managers are motivated to develop long-term relationships with customers by means of point scoring systems (Bank A) or by assigning responsibilities over multi-annual contribution margin objectives.

the captive market is a strength, but at the same time the distribution capacity of the product units should not be dismantled.

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5.4 Specificity Required/Pursued in Leadership and Corporate Culture In organizational change corporate culture may become an important issue if behaviors are not consistent with project objectives. A strong culture does in fact provide an effective system of informal rules which establish the conduct to be adopted in most of the occurrences in the company life. The fundamental values of the corporate culture "powerfully" lead the allocation of resources and the orientation of energies within the company. Successful management greatly depends on the individual ability to interpret corporate culture and to adjust it to market requirements. Tangible behaviors (actions, decisions) of human resources are not only inspired by internal and external market logics based on price mechanisms, by agreements between different parties based on authority, mutual adjustments and negotiations, by the formal or legal institutionalization based on corporate internal and external rules but also by the compliance with "informal" rules, often adopted through experience and accepted on the basis of trust. The presence of these forms of coordination (along with or instead of the others) reduces the overall cost of the coordination itself and enhances its chances of success. As the methodology of our research does not enable us to analyze organizational culture as a whole, our attention will be focused on just a few characteristics of the value systems and the management styles in the corporate area so as to identify common and different aspects within the panel banks.3 The examined parameters have led to the formulation of the following questions: a) Is leadership capacity considered a relevant parameter in the selection of corporate bankers? What makes them different from private bankers? b) What is the degree of formalization of the structures within the individual units (division / branch network) dedicated to corporate banking? Does the formal structure prevail on the informal relations during production processes? Do corporate bankers often deal with branch/division market managers? What is the role of the branch office manager? Which relations prevail? The transversal or the hierarchical ones?

1

On the issue see Corigliano (2001).

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c) Is corporate bankers' propensity to innovation and individual initiative rewarded or "regulated"? d) In which way are team-working and team-spirit encouraged within the corporate branch? e) Is staff turnover in the corporate area higher or lower than the bank's average? f) Are there communication/interaction/socialization instances between the bank's corporate bankers (e.g. dedicated conventions, periodical meetings, etc.)? g) Is corporate bankers' average age higher or lower than the bank's overall average age? The answers (Table 5.3) reveal a low interest in the topic of culture and just a few steps have been taken in order to communicate and spread new cultural models, also in terms of socialization and exchange between the corporate bankers. There is awareness of the importance of an informal organization beside formal structures, but no attempts seem to have been made to encourage common behavior practices aimed at integration and internal relations. These are left to individual initiative and, thus, to the individual skills available. Table 5.3. Common aspects of corporate culture in the corporate banking area Cultural element Leadership

Formal vs. Informal Structures

Banks' position Leadership capacity in relation to managers and customers is considered an important but not prevailing parameter in the selection of corporate bankers

The degree of formalization of the structures within the organizational units dedicated to corporate banking is high. The formal structure prevails on informal relations during production processes ._(ggip_OTate bankers .o_ftga_deal__wjtii_

Specific aspects Bank G: structures are not differentiated; leadership capacity is an important parameter in the selection of corporate branch managers; the CB's position is considered prevailingly technical in this first stage

Operating Mechanisms Cultural element

Innovation propensity

Team

Turnover

Banks' position branch/division market managers) Formal structures are dominating but in fact corporate units are more effective when corporate bankers can establish good informal relations with other bank units (retail branches, regional offices, etc.) Corporate bankers' propensity to innovation and individual initiative is "regulated", not rewarded

Team working and team spirit in the relations between corporate banker, regional offices, head office and retail branches are an important aspect. Team working and team spirit are encouraged within the corporate branch in a non-structured way, where the branch is rewarded as a whole Heterogeneous situation

149

Specific aspects

Bank C and Bank F: it is revealed in competence cards; it is not object of explicit incentive but only of evaluation

Bank A, Bank H: lower than bank's average Bank D, Bank G: average

Community

Average age

Communication/interaction/socialization forms between the bank's corporate bankers are based on dedicated conventions Heterogeneous situation

Other banks: not available. Bank D and Bank E: still not existing in a structured form Bank A, Bank D: low Bank G, Bank C: average Bank H: high, but being reduced Other banks: not available.

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5.5 IT and Training Emerging Needs In panel banks information systems seem to be largely integrated by markets, with a consequent delay in the creation of structures and positions differentiated by business specificity and by the objectives declared in strategic and feasibility plans. System differentiation requirements are revealed in planning and control, staff performance evaluation, commercial planning. The nature of these requirements can be better explained by distinguishing organizational planning needs (i.e. the necessity of systems assisting the division organizational configuration in relation to the objectives assigned) from self management needs (i.e. the necessity of an information base for the set-up of positions and behaviors) (see Table 5.4). Table 5.4. IT requirements: aims and features Operating systems Human Resources Management

Planning and control

Commercial planning

Development of competencies, communication and culture

Organizational planning IT requirements Manpower planning systems for task analysis and distribution within branches Data warehousing systems and expert systems for mapping competencies and positions Analytical accounting systems to establish client margin contribution Cost analysis and accounting systems by process stages (ABC, ABM). Information/data collection, processing and analysis tools for corporate customers Information/data collection, processing and analysis tools for groups of corporate customers Monitoring tools for interrelations (relations with retail branches and product companies)

Self management IT requirements Systems for managing individual positions (analyses of potentials, attitudes, career paths) 11

IWUUUUllblU^

Corporate bankers' portfolios performance indicators (with possible geographical or sector benchmark) Commercial planning tools (list of visits, client history, agenda, etc.) CRM (self diagnosis of customer offered opportunities) with configurations similar to those for the private department Knowledge management systems for sector/product information transfer and sharing also to create business expert communities E-learning platforms for self training

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As already pointed out, training needs regard technical competencies above all in the area of corporate finance as well as managerial competencies and the knowledge of organizational behaviors (see Chapters 2-3). As for operating mechanisms, CBs' and corporate branch managers' needs are focused on the following: • comprehension of budgeting methodology for the corporate area and identification of performance individual measurements and respective value drivers; • capacity to develop efficiency monitoring systems for distribution units and teams according to entrepreneurial criteria and with a long-term approach to be combined with data provided by head offices; • capacity to manage cross production processes in the light of the value creation approach applied by all the units involved (corporate bankers, product specialists, back office units, etc.); • development and diffusion of competencies regarding change management and change propensity; • management of cultural and behavioral levers; • team-working leadership and team-spirit boosting; • development of integrated negotiation capacities in internal and external relationships aimed at the creation of expert teams for customer needs satisfaction. The observation of cases reveals that not all of the panel banks have already arranged training courses specifically designed for corporate bankers (Table 5.5). If any, so far courses have met only the need for the enhancement of technical competencies. Table 5.5. Specialized training for corporate bankers Yes

No

Banks B, C, D, F, W,X, Z

Banks A, H

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5.6 Choosing the Operating Mechanisms: Critical Aspects The analysis of operating mechanisms is particularly interesting for the evaluation of the state of the art and the future prospects of bank divisionalization choices. In the first place, the degree of differentiation of mechanisms by business areas indicates the stage of development of organizational models. In the second place, the consistency of the adopted mechanisms in terms of stimulated behaviors in relation to the strategic focus and to the distribution of responsibilities within the structure reveals the nature of the impact of segmentation policies on final customers. The analysis of cases highlights the approach of banks' organizational changes, which is characterized by a limited involvement of the functions responsible for the design of operating mechanisms in divisionalization projects. They are usually involved ex-post to implement specific aspects of the change projects. As a result, the differentiation of systems is still at the very beginning. The areas of major application are those related to the analysis and evaluation models of competencies (at the basis of the recruitment of corporate bankers and corporate branch managers) and partially to the performance evaluation models of corporate banking with specific reference to credit risk evaluation. The management of operating mechanisms is essentially aimed at finding the optimal mix between scale and scope economies through the centralization of the dedicated functions within the corporate branch and by specializing/differentiating the same branches through the decentralization of functions within the divisions. The most widespread solution sees a twofold form of management: the strategic and methodological one within the head office and the operational one in the divisions. Some crucial elements in behavior orientation seem to remain unvaried: objective-related systems, for instance, and staff incentive schemes are not always oriented to measure the overall performance of the customer relationship (client contribution margin). Also motivational tools in terms of integration and cooperation between markets are not being considered. The design of operating mechanisms shows some potential drivers to failure. The lack of a prompt action in this direction is liable to hamper the final accomplishment of the organizational changes. As for the differentiation of services, operating mechanisms have an even more critical impact on structures as they are directly aimed at conditioning people's final behaviors.

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Critical points are related to: late action on operating mechanisms (people perceive change more on this side than on structures); branch budget fails to consider qualitative goals regarding strategy success factors; objective-related systems are not consistent with strategic choices (e.g. relationship strategy and product objectives); no action on behaviors and corporate culture; no action on information tools for communication between people in the same position (e.g. virtual community) above all in the case of high uncertainty regarding role contents and behaviors.

6 Information Systems Severino Meregalli

6.1 Chapter Outline The area of research which deals with Information Systems (IS) has suffered from some difficulties in the collection of the information to be analyzed. These difficulties were not unexpected when one considers the development and maturity of organizational-managerial solutions in the area of corporate banking. Despite this, collected information has shown well defined and significant trends. The difficulties encountered in the collection of information regarding the area of corporate banking Information Systems are to be attributed to the almost complete overlapping of the bank IS and the corporate banking IS, which did not allow us to distinguish and value resources specifically dedicated to corporate banking. Beside the indicated relative "youth" of the subject and the organizational solutions, it is also important to underline that the respondents who demonstrated a good knowledge of IS did actually have some difficulty in discussing IS as a corporate banking support. Information Technology resources are often shared as they are considered assets to be frequently replaced and which benefit from economies of scale and scope. In particular, the presence of IT companies in the same banking group makes it difficult to obtain a complete and homogeneous vision of the topic. This happens because it is quite difficult to distinguish the areas of intervention of: a) the bank IT subsidiary, b) the bank IS functions c) external suppliers. In fact, Information Systems are realized and managed not only by the internal IS function, but also by the group IS subsidiaries and/or outside suppliers.

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6.2 Differentiation and Organizational Separation of IT for the Corporate Area The organizational separation between Business Information Systems and Information Systems for corporate banking is very low. In none of the banks analyzed were ICT structures were specifically focused on corporate banking or characterized by strong technical or managerial autonomy. None of the banks observed did show a group of people solely dedicated to Information Systems for corporate banking. So far, the priority has been on finding economies of scale and scope by grouping all Information Systems. The examples of major focus on corporate banking Information Systems were those where the emerging needs of corporate banking were examined separately from those of retail and were not treated as a subset of the existing structures, even if the technical structures were not significantly different (e.g. Bank B). Therefore the highest level of separation regards the examination of needs rather than the technical/organizational structures dedicated to the corporate area. An indication of the low level of organizational separation is given by the difficulty in separating the IT budget dedicated to corporate banking from the overall IT budget. Even in the cases where organizational decisions are more clearly separated (Unicredito), no IS strategy has been clearly defined so far. In fact, even when a truly separate corporate bank has been created, IT structures and investments are shared without increasing the level of differentiation and specialization of the structures. As for individual IT systems, we can see that only a few are specialized and specific to corporate banking. In particular, this occurs only when the tools from the portfolio of retail applications cannot be used.

6.3 Organizational Basic Models for the Corporate Area Information Systems If we therefore look at the Information Systems scenario, responses to problems regarding organizational and technological structures are given in a reactive manner and with a strong influence from the "status quo" of the existing Information Systems. It remains to be established whether this represents only a sort of preliminary approach to Information Systems

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(which will be subject to subsequent modifications) or an established trend which will be pursued with determination. In many cases corporate banking IS needs are analyzed and solved by the bank IS function. Sometimes area managers help IS people to identify development trends even if they do not control IT resources and their allocation (e.g. Bank F). With regard to architectural and organizational models, it is interesting to note the lack of benchmark banks. None of those interviewed explicitly referred to a bank which could be a complete point of reference. The same holds true for "best practice" benchmarks for the single features of Information Systems in the corporate area. Therefore no best practices or models seem to stand out, although it remains to be seen whether this is completely true or whether they do not exist because banks have not made any efforts to compare themselves with other institutions.

6.4 Application Acquisition/Development Basic Models In IT applications development there is a strong tendency to resort to "make": in many cases the creation of IT applications is generally entrusted to internal resources or suppliers who then develop customized solutions. The weighting of the "make" part, although it is important in all banks, reaches very high levels in some cases (in Bank F 90%, in Bank E 70%, in Bank X 100%). It is difficult to say whether this is data which is generally valid or whether it is only to be seen in those banks which were examined closely. It is certain that the sample analyzed represents a situation where there is high dependence on ad-hoc developments and which nevertheless seems to be representative of the actual situation of banks' Information Systems. In this regard we can observe that the penetration of the "buy" type systems such as the ERP systems has not yet significantly changed the models of developing and buying IT applications in banks. This observation, which is confirmed by the research undertaken, currently holds true for corporate banking, even if, in theory at least, this area should be more open to solutions and models inspired by the world of manufacturing and service companies. As with organizational structures, no-one has clearly identified benchmarks with regard to the development of the application portfolio. Only in some cases were allusions made to the need to develop some solutions, as has been done with those of the software producers such as SAP.

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Severino Meregalli

With regard to the implementation and management of applications, the core topic at the center of the debate is still which areas to outsource, how to structure outsourcing and the relationship with the outsourcers. The choice of the right mix between internal and external activities seems to be more important than the problem of the availability and implementation of specialized applications for corporate banking. The role of consultants and more generally representatives of the ICT products and services market seems to be reduced. Only a few banks had structured agreements with consultants, suppliers, or ICT firms with regard to the development and management of corporate banking applications. None of those interviewed mentioned consultancy or technology firms as reference points to acquire architectural or technological solutions for corporate banking. This reduced role in the banking and finance sector, which in the past was characterized by the very active part played by some operators (for example IBM), who had a strong influence on the actual structure of Information Systems, requires some thought: - ICT operators have found themselves faced with an area which has not been well defined yet, particularly with regard to the needs and investments specifically set aside for corporate banking. This situation can justify a "wait and see" approach. - On the supply side, we can see a certain lack of ideas and stimuli, and this insufficiency has reinforced the idea that one should act by oneself without bothering too much about what is offered on the market. - The bank IS functions, meant as people and suppliers who currently manage Information Systems, have perhaps taken on a role of filtering and controlling changes. This has certainly not helped the arrival of new operators and the adoption of innovative solutions.

6.5 Involvement of the Corporate Area Operating Units in IT Decisions The operating structures of the corporate area generally are little involved in choosing and managing IT systems. As we have already seen, the most "sophisticated" cases represent situations where interface figures have been identified or there has been a survey of needs through specialized users of corporate banking (Bank B). This model certainly does not have any innovative or particularly sophisticated characteristics as it is pretty obvious that one needs to involve those who are competent in this area in the creation of systems dedicated to corporate banking. Nevertheless, up to

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the present day, the mere identification of a communication channel for IT needs can be considered a step forward. In the majority of cases, in fact, it appears that they copy the classic model in which, faced with both the wishes and constraints, the set-up of the architecture and the detailed realization of the Information System is delegated to IS technical experts. The creation of new figures of "accountantship", of product managers and of client managers could change this situation. These figures' roles seem not to have been defined yet with regard to the responsibility for the orientation of Information Systems.

6.6 Information Technology Solutions for Emerging Needs The IT needs of corporate banking do not seem to have been very well examined and placed within the overall organizational, applications and architectural scenario. When we look at the list of defined corporate banking products typically containing products which are already offered to the firm, the IT solutions available to support the offer are few in number and concentrated on more consolidated areas (e.g. payment services) and on those where it is more simple to transfer solutions already available for retail. It was stated, however, that when the interviewees were faced with a check-list of possible applications of IT technologies for corporate banking they indicated their needs and shared their operational ideas with regard to IT responses necessary for specifically supporting corporate activities. This fact supports the theory of an Information Systems design process for corporate banking which has not yet been finalized, but one which, once started with the right methodologies and reference models, could rely on the people capable of articulating their needs. We are therefore talking about bringing together a process in which IT needs are sought and supported by business models which are significant and coherent with the mission of the individual banks. With regard to IT responses to the needs of corporate banking, few of those interviewed cited studies or systematic and consolidated works to separate the needs of corporate banking with regard to the support given by Information Systems. The most common response to IT needs is therefore that of "cutting off a part of the existing application portfolio and adapting it to corporate banking through development projects and the reconfiguration of existing

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software products. This strategy is justified by the need for speed and the attempt to share past infrastructure investments. In fact there seems to be a strong trade off, if not actual conflict, between the focus and separation of corporate banking and the attempt to develop economies of scope in Information Systems by re-using existing IT solutions. From the point of view of Information Systems we know that both commoditization and customization of products require strong investments. That this does not vary with the positioning strategies chosen is the piece of information needed to direct and reconsider the Information Systems. In particular, the frequently mentioned product customization, typical of the corporate context, will require banks to operationally support the whole process from client information gathering to the identification of products and services consistent with their needs. When this process is seen in terms of customization, it can only be based on systems which take account of this requirement, starting from the fundamental components such as client data, which should be translated at once as a part of the CRM and not as a mere instrument for managing relationships between the client and the supplier. In all the cases in which reference is made to product "factories", it is fundamental to understand the link between the industrialization of the product and the explicit needs of management of commercial relations with the market. It is easy to understand that these two needs, which are difficult to reconcile, can be tackled only with specific instruments.

6.7 Management of IT Investments in the Corporate Area It is not possible to extrapolate a single investment trend based on available sources. We can only highlight some of the significant behavior which expresses possible organizational/technological choices. - Some banks are beginning to invest in purpose-built technology infrastructures (portals, Lan, intranet and extranet) as an initial response to the new requirements in order to move towards the design of specialized applications (Bank F). In these cases they are investing according to a bottom-up logic (first technology infrastructures, then applications) which these same interviewees do not consider optimal, but which at least has the advantage of beginning to create a pool of resources specifically dedicated to corporate banking.

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- In other cases investments in corporate banking are completely incorporated into those of Information Systems and so reflect the overall direction of ICT investments, without having a great influence upon them. - Other banks are waiting. In the case of Bank B, for example, they are waiting to have a clearer overall picture of the organizational and managerial model before determining the areas of investment and autonomy for the corporate banking IS. One of the few common trends seen in the sample analyzed is the setting up of a database of a data warehouse type in order to support the corporate banking processes. The basic idea underlying these investments is the acquisition as soon as possible of at least a "view" of the market and clients by bringing together what already exists within the Bank's Information System. A second area of investment common to the majority of interviewees is that of internet technologies. Banks continue to invest in E-banking projects and in all internet technologies which are also considered fundamental for corporate banking. Among the banks interviewed there were some, such as Unicredito, which have promoted and continue to invest in portals for the creation of virtual markets. Finally, there is clearly a general need for support of the CRM type even if, in terms of individual Information Systems development plans, there does not seem to be any consolidated trend or launch of specific projects. In the area of internal management, the need to implement systems to measure results which are specifically geared towards corporate banking is very common. They need to be able to accommodate new metrics and indicators. In some cases systems of this type already exist, but are for the most part based on unofficial and barely consolidated instruments and architectures. We are thinking, for example, of the use of electronic spreadsheets and databases which are managed outside the bank Information System. From the point of view of investment size, in the majority of cases, as we have already seen, there is no information in order to separate the ICT investments dedicated to corporate banking from the overall investments. This is indicative of and consistent with the initial stage of the Information Systems life cycle for corporate banking, but makes it impossible to quantify the size of investments and to disaggregate them in order to discover which IT projects are absorbing economic resources.

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6.8 Management of Information Systems in Corporate Banking: Critical Aspects On the basis of what has been investigated and on the basis of some analyses previously undertaken it is possible to identify a series of criticalities with regard to Information Systems for corporate banking which can become wither barriers or aids for the strategy of market division. In the following part these criticalities are shown: - First of all considering corporate banking Information Systems as a simple specialization of existing systems can be a serious error which is difficult to reverse. Not explicitly defining the level of differentiation and separation of the Information Systems while at the same time defining the business models can lead to a "mismatch" of the systems which in a situation of unsatisfactory results requires a radical review which cannot be obtained through marginal adjustments. Using the muchabused but still useful example of the construction of a building, we are talking about defining at once the type of building in order to plan the available foundations. The choice of using what is available on the retail side, which appears to be relatively diffused, is an example of this type of decision. The problem is saying whether this practice is only an initial response or whether it has been strategically considered. - It is then fundamental to plan the systems to measure performance results consistently with the logic of divisionalization and all the other dimensions of the business adopted to deal with corporate banking (e.g. attribution of costs and revenues by area of responsibility). This does not seem to be currently available in the actual structures of application portfolios. Even in this case we are faced with decisions/projects where we have to address the obvious problem of coordinating and linking the systems to manage the firm's processes. - Many of the individual criteria for segmentation, in particular the more articulated ones which are based on more dimensions, rely on the availability of information about client firms, which is not always easily available or existing in IS. This lack of availability could nullify or make it difficult to adopt segmentations which are not based on information which is already available. To avoid "circular" discussions on segmentation criteria and availability of information, it will be necessary to gradually introduce more sophisticated segmentations by synchronizing data availability and the models for reading the market.

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- A further area for attention regards the comparison which will eventually be made (in individual cases it has already happened) between the level of performance and the solutions adopted by client firms for corporate banking services and bank IS. For this reason it is fundamental to assess the level of sophistication reached by client Information Systems. In particular criticalities can arise from valuations which are concentrated generically on market potential without taking account of the technology chain which must support the relationships in the world of business with particular reference to all those services/products which will be supplied through IT channels or though computer-to-computer integration. In all these cases the Information Systems for corporate banking will be "in direct contact" with those of the client firm, and any missing information or inconsistency will become immediately important and could lead to a loss of credibility for the individual bank or the financial system. At this point we do not want to state that the quality of Bank Systems for corporate banking is or will necessarily be lower than that of the client firm, but only to underline that gaps must be rapidly eliminated. It will therefore be necessary to show an updated picture of the ways in which firms are tackling corporate banking offerings from the IT point of view. For example, we are thinking of the topic of treasury and the software products which have been adopted by client firms. When faced with these areas of special attention such as those previously listed, there is also a first series of aspects which from now on require interventions. Amongst these it is useful to remember the following: - the transfer of the "inspiring principles" from the retail area to corporate banking (people, decisional autonomy, response times, quality of service, of mechanisms of economic responsibility) without rewarding the specificity of corporate banking; - the risk of generating response times which are not phased with the needs of client firms and so not measured on clients' time scale (e.g. time required to adapt a service to new needs); - the lack of devices for the specific allocation of resources to the area of Information Systems for corporate banking such as the existence of budgets for costs, specific investments allocated clearly in terms of responsibility; - the use of lock-in information such as a system for creating client loyalty in the Corporate area without having closely considered whether the products/services offered through telecommunications are aligned with the market both in terms of technology and in terms of pricing.

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In summary some critical aspects can be shown: The level of maturity of ICT architectures to support corporate banking is modest. None of those interviewed was able to provide documentary evidence or descriptions of Information Systems architectures for corporate banking. Furthermore common models based on consolidated organizational architectures or resulting from structured planning processes did not emerge. The aspects chosen are in many cases expression of an initial response given to the problem of ICT support to corporate banking. In other cases the topic of the organizational structure to give to the IS for corporate banking had still not been completely faced. Other banks only mentioned "work in progress" on the topic, the limits and objectives of which are not yet clear. None of the banks interviewed could be considered a benchmark for the others. Best practices or at least experiences to use as benchmarks are few or inexistent. In a start-up context, greater concentration on the essence of the products/services to be offered (type, target) before designing the Information Systems seems to be reasonable and normal. However, this clashes against the fact that many of the corporate products can only be offered when automatic corporate banking Information Systems are offered. The asymmetry between the organization of the bank Information Systems and those of the client is transformed into a point of strength. Hitherto the organization of banks has matched very little that of business. In the area of professional service and application offerings there do not seem to be common experiences and proposals. It will not therefore be easy to pursue a way to accelerate the adoption of adapted solutions through leveraging only on the external competencies of consultancy companies and ICT service and product suppliers. The widespread diffusion of Information Systems of the "make" type can create a link with the time needed to create new functionalities. Someone who intends to build a "make" model could be exposed to lengthy delays in delivering new solutions. Clearly the actual existence of valid market alternatives remains to be investigated. Many client firms, in particular those of a medium to large size, have substantially improved their Information Systems during the past years due to the "millennium bug" and the introduction of the euro. These

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firms are no longer willing to interact with suppliers who do not have IT levels of performance which are at least comparable. - Structures dedicated to the theme with sufficient critical mass. The theory that, as for the virtual banks and new internet banks, it will be necessary to create separate ICT structures to obtain satisfactory performance from the IS remains to be verified. - The idea that economies of scale and scope exist is still important, but in the area of Information Systems these synergies tend to diminish. This is even truer in the presence of an ICT market in a phase of stagnation. In this context Information Systems could soon become a significant limit for the diffusion of corporate banking. As usual, when faced with problems of this kind, the Information System variable can become, for those who are able to manage it with success, a source of competitive advantage at least in the short to medium term. The level of awareness of this appears to be low and based on trust which is barely supported by strong evidence. In summary some considerations can be useful to focus the attention on the main aspects which emerged from the research: - We see the risk of a general underestimation of the problem of IS as critical for the development of corporate banking. - Overall no preliminary work seems to be being done in order to align corporate banking and IS (IS governance not managed or only referred to). - The dimension and type of investments made in IS in the world of banking are currently a strong constraint on the possibility of choosing the best application solutions for corporate banking (cost levels, technology solutions). We could talk about a phenomenon of internal "lock-in" due to the fact that the overall mass of investments, competencies and organizational solutions granted to IS could play a part in delaying appropriate solutions. - Only radical solutions in terms of managerial autonomy can bring about innovative solutions. In this case there is the problem of having the time to reconstruct application portfolios (which have strong overlaps with existing applications) starting from zero. - The common choice of data warehouses as the first projects dedicated to corporate banking can be a sign of poor initiative about IS. In other terms, people prefer to bring existing information together rather than generate new information and develop more specific applications.

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The attention to the combination of corporate banking and the Internet can be seen as an attempt to save on investments which are not always focused on re-orientation towards corporate banking. This orientation towards corporate banking via the Internet seems to repeat what has already happened with the move from Business to Consumer to Business to Business in the world of e-business. There is a doubt that the services actually offered (e.g. remote banking) would not be easy to sell separately if prices were based on the internal costs of realization and management. The IT budgets of banks are always significant in quantitative terms. The feeling that this sector is still absorbing a "price premium" which is to the advantage of the supplier can lead to a difference between the IS costs of banks and the economic spaces in the market. At a historical moment when the IT components of the product/service systems are on the increase, this could lead to higher "production costs" for these components. If the banks wanted to incorporate part of their IT services into their own products they should look closely at the level of IS sophistication and the costs of their own target clients and use them as benchmarks. A greater separation and specificity of IS for corporate banking could be desirable and even fundamental to support corporate banking structures in a timely and focused manner. We should remember that the most successful e-business projects were often obtained thanks to a "special team" who had autonomy even on the IS side. The competitiveness of Information Systems for corporate banking in the face of solutions adopted by some firms will be difficult to obtain in the short term. Furthermore it should be remembered that firms are changing entities in continuous evolution. The research undertaken shows that, except for a few rare exceptions (Bank W), this effort is not yet perceptible or only hinted at.

7 Conclusions Giacomo De Laurentis

The drivers explaining the evolution of the organizational structures in large-size companies along the three basic configurations (functional, functional-unit holding and multi-divisional) suggested by Williamson (1975) have been identified in literature in the levels of the following variables: a) business diversification, b) business correlation, c) availability of appropriate systems for performances valuation and corporate management (planning and control). Apart from one specification, the same theoretical framework can be applied to financial institutions and justify the delayed departure of the divisionalization process (which started almost a quarter of a century later than in the industrial segment). The specification lies in that literature has typically studied divisionalization drivers irrespective of the type (i.e. geographical, by business/product, or by client/market segment), whereas banks need to distinguish the various typologies because geographical divisionalization is almost innate in their type of business and product divisionalization has a definitely different scope from that by market segment. The bank has always been a "divided" firm, in which the business and the management of corporate processes have always been characterized by a certain share of territorial decentralization. In fact, despite the attempt to disconnect production from distribution phases, the bank continues to provide services rather than products (though in the banking language it is quite common to use the latter to indicate the former). As a result, a large section of "production" is decentralized and requires a strong interaction with the client. The most traditional organizational structures are founded on the functional model (which maximizes business specialization by shared technical aspects) and provide for decentralized management structures in the sales function. Therefore banks are not new to geographical divisionalization in their domestic markets, which has been attributed to coordination needs (in particular, the need for a reduced span of control on the part of head offices). In front of more global financial services and less differentiated national

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regulations, geographical divisionalization implemented by big international banks is aimed at exploiting arena-driven linkages, servicing clients more efficiently in one arena as a result of having an active presence in another arena (Smith and Walter 1997). Yet, intermediate organizational units for geographical coordination are still present in the domestic context even in banks divisionalized by product or by market segment, though the size and the role of such structures vary significantly in the various divisions. Nowadays the divisionalization process of major relevance is the one being carried out within given territorial areas, in which organization is differentiated by products or by market segments. Considering the remarkably different scope of divisionalization by products and by clients, it is crucial to identify the specific approach and its drivers. Even the general term "corporate banking" is, in fact, sometimes opposed to commercial banking, sometimes to retail banking and sometimes to transactional banking, thus assuming deeply different specification perspectives in terms of product/client profile relevance (Fig.7.1).

Fig. 7.1. Corporate banking perspectives Nowadays the picture of the detailed choices made by the different banks seems quite varied, but divisionalization by market segment seems to stand out as the prevailing approach, that is as the most common and modern solution which allows running the bank according to a portfolio approach.

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Divisionalization by products is typical of big international banks in non-domestic markets. This can be attributed to the need for product specialization in clearly defined areas, which are characterized by limited organizational correlation compared with the remaining business. Quite often the selected unit has an independent juridical configuration and, thus, more exactly, represents an element of the banking group rather than a division, which often results from the acquisition of well-known specialized companies. Divisionalization by market segment (meant as set of customers) represents the most recent and the most apparent evolutionary phenomenon in bank organization; it is typical of all the main Italian banks and of the domestic strategy in the big, above all European, banks. This type of divisionalization can be easily explained with the above-mentioned perspective of "diversification, correlation and measurement systems". Since the mid-eighties, there has been the attempt to extend scale and scope economies by exploiting Ansoff s synergies (1965) or Porter's interrelations (1985) and by using the excess productive resources (Mottura 1996) freed by the technological innovation. As a result, products/services as well as distribution channels have multiplied with the consequent growth in the diversification of business areas. Diversification has been to a large extent "correlated diversification", although the global level of banking business correlation has decreased; the complex nature of product and distribution processes has stimulated the development of performance valuation systems (divisionalization's third driver) and led to the hypothesis of complexity driven diseconomies. The first organizational reply has been that of holdings of productcompanies, characterized by remarkable management independence. The development of divisionalization by market segment represents the overcoming of such management of diversified but apparently little correlated activities, thus giving evidence of banking business correlation within the customer segment. To conclude, the first research question set in the Introduction has a quite definite reply: bank divisionalization is led by the same drivers as those indicated in literature for non-financial firms. Studies on the typology of divisional choices are still quite limited; Baron and Besanko (2001) emphasize that banks choose the type of divisions (by customer/product/geography) according to what they believe is the most effective way to maximize the accumulation and sharing of know-how within the organization. Undoubtedly organizational differentiation by market segment can be interpreted as the last stage of the bank "customer-oriented" approach, which started at least twenty years ago. This kind of differentiation enables banks to guarantee some product specialization and, at the same time, to exploit business correlation which be-

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comes relevant when close to customers. This allows banks to "differentiate" their services through better quality or lower costs and more accurate performance valuations compared with traditionally organized competing banks. The client-perspective theoretically enables the bank to maximize cross-selling and relationship banking. This subject leads to the second research question: can the corporate division rationalize and reduce costs within cost-leadership strategies or can it modify the nature of bank services and relations through a competitive differentiation of the supply model, especially in terms of relationship oriented activities? In other words, is the approach to customers transactionoriented or relationship-oriented (Moriarty et al. 1983) in the divisions designed for corporate banking? The banks examined are almost equally divided when it comes to the vision of corporate banking and assume opposite positions as to the basic nature of the business: customization or commoditization. It is not clear whether this represents a radical distinction of the competitive models or, rather, two complementary visions which have been indicated as priorities by banks where the process of divisionalization is at different stages of implementation (the initially prevailing need for rationalization, i.e. commoditization, is then replaced by the need for competitive differentiation, i.e. supply customization). It is difficult to perceive the explanation best suiting the panel of banks' answers because it is hard to find sufficient consistency between the answers provided by banks to the customization/commoditization question and the specific organization choices they have actually made, in particular as regards the configuration of the corporate banker's role and the structure of the process of credit-risk evaluation. As a matter of fact, it is evident that the corporate banker, as the sole manager of client-relationships, seems to be naturally customization and relationship oriented; on the other hand credit-risk evaluation processes tend to be substantially mechanic and they seem to aim at a short-term evaluation of the borrower's creditworthiness. As for the mission of corporate banking as declared by the examined banks, the basic goal of recent re-organizations mainly consists in raising the market value of banks by increasing the volume of business and customer satisfaction. The other European banks explicitly indicate the goal of increasing the international penetration of corporate banking far more frequently than Italian banks. Such banks consider as top-priority the necessity to offer the entire system of products of corporate lending, corporate finance and asset management (often through highly reputed dedicated product-companies acquired on the market). Corporate lending and the

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segment of small and medium-size companies play a key role in the banks of continental Europe and, above all, in the original domestic markets. Italian banks have a different mission as they show significant overlapping between: 1. corporate lending and corporate banking; 2. corporate banking target segment and SME clients. It is worth noticing that corporate lending shows the highest degree of relevance among the product areas (corporate lending, corporate finance, advisory). This applies to all panel banks, in Italy and abroad, except for one bank (consistently with its nature and international strategy). Only two banks clearly state the goal to gain ground in corporate finance and only one bank explicitly states they intend to transform advisory from a mere lending complement to an independent business in the medium term; the process of extending the range of services (so as to include business risk management, market place services, foreign payment services, corporate governance services, internationalization services) has been started but it is still at an initial stage. The basic segmentation criterion used by both the Italian and the other European banks, nowadays and in the next three years, is the company's revenue. Sometimes the criterion becomes somehow more sophisticated with a specific evaluation of the individual names and with the amount of the extended credit. Such approach is objective and simple, which is an advantage. Nevertheless three Italian banks declare they feel the need for subsegmentation, which would enable them to better distinguish customer needs and their market potential. One bank envisages differentiating the structure of the corporate division into two segments (small business and SMEs). Such approach has already been adopted by one Italian bank and two other European banks. No correlation can be observed between corporate banking vision (customization or commoditization), the lower and upper limits set for the access to the corporate segment and the number of companies served by corporate banking structures. On the contrary, the customization approach was reasonably expected to entail a higher access threshold and a lower ceiling, as well as a lower number of companies in the corporate banking target (Table 7.1). This situation confirms what has been remarked as to the poor correlation between the vision and the choices regarding the role played by the corporate banker and credit risk evaluation processes.

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Table 7.1. Corporate banking vision and customer segmentation Bank

Z

H

E

B

C

Y

X

A

D

W

F

V

banking

C

C

C

C

C

C

U

U

U

U

U

U

1,5

2,5

10

15 200

Minand

1,5

1,5

1,5

2,5

3

20

0

max reveno nueofcor- 75 250 150 100 500 n.a. li- 250 300 n.a. 150 n.a. porate mits firms (€m) Number of ^ corporate 4? UQ m 2QQ 9Q 2 5 5 80Q 8Q 255 ? na companies (thousands) __ t t a C stands for commoditization-oriented business, U stands for customizationoriented business Organizational solutions adopted by Italian banks to manage corporate banking are divisional structures which often get far from the pure divisional model due to one or more of the following aspects: - the unit does not report to the CEO but to the commercial director; - profit objectives attributed to branches rather than to division managers; - limited independence in the management of products, customers, markets, channels; - market segment specialization limited to head offices or branches network. At present the most significant divisional solutions are Unicredito's meta-divisional model with independent companies, the divisional model by business areas (product/market/technology combinations), which is common among several banks (e.g. Credit Agricole, ABN Ambro, Deutsche Bank, Commerzbank, Dresdner Bank, Barclays, HVB, BNP Paribas), and Credem's pure divisional model by market segment. The choice characterized by the lowest rate of divisionalization (BNL) places the corporate banking unit under the direction of or at the same level as the commercial director, whereas branches are not specialized and the bank

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173

global organizational structure is functional. The other Italian banks surveyed in the course of our research have chosen a semi-divisional form, which does not always meet all of the following divisionalization profiles: a) strategic divisionalization: the division may take independent decisions concerning products, pricing, distribution policy, etc.; b) regional divisionalization: presence of market-specialized area managers and of a fully dedicated distribution network; c) branch divisionalization: presence of market-specialized distribution units (branches, agencies); d) professional divisionalization: presence of corporate bankers in the branches. While the above mentioned profiles of divisionalization are nearly always present in the other European banks, in Italy there seems to be an extremely close correlation between the existence of strategic and regional divisionalizations and the vision of corporate banking as a customizationoriented business. All the Italian banks indicating such vision show the above types of divisionalization, all the other Italian banks with a commodity-oriented vision of corporate banking lack strategic divisionalization and, in some cases, at least partially, also regional divisionalization (Table 7.2). This induces us to consider that the rate of consistency with corporate banking vision is far higher for macro-organization choices than for micro (professional roles definition) and soft (operating mechanisms) organization profiles. Table 7.2. Corporate banking vision and forms of divisionalization in the Italian banks Strategic and/or regional divisionalization Yes Commoditization

.

Vision of corporate banking Customization

ADF

No B CEH

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The several theoretically possible and practically implemented semidivisional configurations lead to: a) differently sized and differently organized central structures, where the corporate division head-office sometimes has a real mission of strategic coordination and sometimes still shows many profiles of traditional functional structures; b) corporate division micro-structures with a different amount of line functions (credits, products, ...) or staff functions (planning, marketing, organization, human resources, training); c) geographical coordination structures sometimes multi-segment with internal staff responsible for the various markets. In all of the Italian and the other European banks provided with units defined as "corporate divisions" (except for two cases), the division has its own income statement and is evaluated on the basis of the overall performance of the business area. In many banks capital absorption has not been formally defined yet, though it is being tested; income is calculated after direct and indirect costs and after credit losses entirely deducted in the year they are suffered. The persistence of semi-divisional structures in corporate banking, sometimes resulting from recent changes leading to lower "rates of divisionalization" (Banca Intesa, Deutsche Bank), induces us to conclude that the pure divisional model is considered neither the necessary final goal nor an intrinsically superior model. Due to the limited time depth of the phenomena under analysis, no reliable measurement can be carried out for the performances of the banks adopting the different models nor can the possible superiority of a given model be empirically verified. Once the remaining profiles of the research have been examined, the question will be resumed. Branches have been (or are about to be) specialized by market segment in all the Italian banks except one. There are two basic models: the corporate branch backed by the retail branch for basic operations and the fully independent corporate branch even in terms of basic operations. The choice of the former is neatly prevailing and confirms the necessity to limit the duplication of functions by exploiting the retail branch for the material execution of operations. Once again the micro-organization of the corporate branch underlines the great disparity of solutions, which can be summarized as follows: a) the dominance of the corporate banker's individualistic approach or of the branch's team approach;

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b) the coincidence or the separation of the portfolio manager's role and that of the branch manager; c) the presence or absence of branch product specialists; d) the presence or absence of credit specialists in the bank branch, and their belonging to the corporate division or hierarchically reporting to a credit function outside the division; e) the range of tasks for the corporate banker; f) the presence of assistants to the corporate banker, their relationship (one to one, more to one, one to more) with their chief and their credit/commercial specialization. The corporate banker's role shows some tasks which are common to almost all the banks of the panel and which can be defined as "characterizing" the role itself (client portfolio assignment, client need diagnosis); some tasks are present in the majority of banks and can be defined as "common" (credit management, risk analysis, product specialist triggering, client scouting); some tasks are present just in a few banks and can be defined as "distinctive" (pricing, product specialist coordination, direct interface with the area manager or corporate division manager, loan underwriting). The Italian banks show a more varied range of configurations compared with the other European banks; once again, as observed for other micro-organization aspects, there is no correlation with either the commoditization or customization oriented vision of corporate banking. The basic and almost universal feature of the role is that the corporate banker carries out his/her activity prevailingly outside the bank premises in order to constantly interact with clients and fulfill the primary sales function and the secondary function of collecting "confidential" information for credit risk analysis. A client portfolio is nearly always formally assigned and, in Italy, consists of 80-100 companies which are not selected by business sector but by geographical proximity. The great number and the business diversity of companies condition the specialization of corporate bankers. The fact that a certain number of companies belong to groups can alleviate the problem, at least partially. Choices concerning portfolio size are determined by the need to cover the corporate banker's costs with the margins of managed clients. It is true, however, that the chances of growth in such margins depend on the quality of the service provided by the corporate banker, and that such quality depends on the number and the diversification of the portfolio he/she has been assigned. Due to the lack of a definite decision model, banks have to proceed by trials and errors.

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At present a critical aspect is the gap between expected and perceived competencies and independence of the corporate banker from the point of view of his/her customers. On one side there is the figure of the "facilitator", the corporate banker who promotes customer needs in front of other bank structures (specialized on products or risk evaluations and operation approvals) by promptly and purposefully triggering product and credit specialists. On the opposite side there is the figure of the "banker", the corporate banker who interacts with the company much more deeply, professionally and continuously by covering a far wider range of financial or non-financial solutions with great competence and who is able to promptly provide the majority of services by operating in the corporate (specialized) branch. Customer proximity in credit underwriting is being raised not so much by increasing corporate bankers' lending authorities compared with those traditionally assigned to branch managers in non-divisionalized banks, but by placing in corporate branches, and more often in regional structures, operators with significant lending authorities, often supported by semiautomatic evaluation processes. Credit risk management evolves, on the one hand, by increasing the differentiation of the methodologies applied to the various market segments and, on the other, by introducing internal ratings. In the typical target market segment of corporate banking in Italian banks, such ratings are not interpreted as an ordinal expression of the level of the risk being perceived, but as judgments founded on largely structured and mechanical analysis processes (statistical scoring, expert systems and other similar procedures). The consequences of the mechanization of credit evaluation processes are multiple and may involve either the system (macro) or the company (micro). In the first group, along with a favorable discipline-effect among debtor companies, there may be a number of adverse phenomena: bankcompany relationships tend to become less flexible, credit tends to be considered a commodity, pro-cyclic bank behaviors grow intensified, credit decisions are characterized by possible "short termism". In the second group, along with the favorable effects of the squeeze in operating costs and process standardization, there may be weaker pressure on the development of corporate analysis skills in the bank and a lack of consistency with the customized approach of the corporate division. This is due to the poor sharing of information among such activities as customer advisory, sales and risk assessment, which is considered by all the banks of great importance. Mechanical credit risk assessment applies to the banks viewing corporate banking as a customization-oriented business as well as to those viewing the same as a commoditization-oriented business.

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In the banks surveyed no particular consistency can be observed between corporate banking vision/mission on the one hand and credit-risk evaluation approaches on the other (Table 7.3). In particular, no empirical confirmation has been found for the assumption that the customizedrelationship approach is associated with a growing exploitation of medium-term credit risk analyses primarily based on analysts' skills; the same applies to the assumption that the commoditization-oriented approach is associated with analyses aimed at shorter-term objectives and substantially relying on mechanical systems. Table 7.3. Corporate banking vision and credit risk analyses approach Credit risk analysis Orientation Judgmental

Mechanical

Commoditization

BCH Y Z

E

Customization

DV XW

AF

Corporate banking vision

The use of mechanical evaluation models is often attributed to Basel's new proposal on capital regulation. On the contrary the reform aims at stimulating the competitive development of internal management methodologies (i.e. independently established by individual banks,) which should be utilized also to regulatory purposes, and the specific provisions regarding rating assignment procedures - as per paragraphs 372-407 of The New Basel Capital Accord Consultative Document dated April 2003 - establish that banks should have absolute freedom in selecting the evaluation procedures they retain most appropriate in the various business segments controlled by the individual banks. The choice, therefore, is up to the bank. As for credit lending authority regarding most corporate clients' credit operations, the prevailing trend sees customization-oriented banks place such authorities in less customer-proximate structures (Table 7.4). This might be an attempt to balance the expected high customer-proximity of commercial functions with a more detached evaluation of credit risk. In the case of banks A and F, whose analysis process has a higher mechanical content, the choice seems particularly defensive.

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Table 7.4. Corporate banking vision and delegation of lending authority

Corporate banking vision 3

U U U U U U C C C C C C

Lending authority for most operations is given to: - credit officers in corpoX X rate branches - corporate branch manX agement - credit officers in reXX gional offices - regional offices X X X X X X - credit function of corporate division - bank credit function XX XX C stands for commoditization-oriented business, U stands for customizationoriented business. The benefits of relationship banking for both financial institutions and customers as well as the determinants of transactional/relationship orientation of bank lending in different market segments and in different countries are still controversial (Petersen and Rajan 1994; Angelini et al. 1997; Foglia et al. 1998; Emmons and Schmid 1998; D'Auria et al. 1999; Boot and Thakor 2000; Farinha and Santos 2000; Schmidt 2004). Also the way relationship banking adds value to banks and customers needs much more research (Boot 2000; Elsas and Krahnen 2004). However, a common assumption in the banking literature is that relationship lending is associated with a credit risk assessment based on the use of soft information, bottom-up methodologies, customer proximity of those having lending authority (Berger and Udell 2001). Large banks, traditionally less inclined to interrelate with small, informationally opaque and risky businesses with a relationship-oriented approach (Berger et al. 2002), may see divisionalization by market segment as the way to attack the attractive markets of local banks. These, in fact, are attractive but also highly exposed to the competitive choices of large banks if characterized by service customization,: "a community bank business model that emphasizes personalized service and relationships based on soft information is likely to be viable in the long run.. .the survival of community banks in the future depends on the ability of large banks to increase personalization and

Conclusions

179

customization of their services, while still maintaining their low unit cost advantage" (De Young et al. 2003). Instead, our research has not confirmed the expected consistency between the declared vision of corporate banking (as a customization or commoditization oriented business) and rating assignment procedures. On the contrary, the pursuit of a customization-oriented supply model seems to be attributed to the configuration of commercial functions and processes, whereas the task to balance the commoditization-oriented approach of corporate branches and corporate bankers is assigned to the mechanization of rating assignment processes. In other words, while Udell (1989) empirically verified that banks who delegated greater lending authority to loan officers were actually investing more on their control through the loan review function, in the new context characterized by organizational divisionalization and by the introduction of rating procedures, banks seem to exploit the standardization of the loan approval process as a tool for simplifying the credit supply by means of the new contact roles. This choice may strengthen the bank's capacity of daily monitoring (as the use of highly automated systems allow banks to start up evaluation processes on a continual basis) but it also suffers from short termism and, as such, it may affect the optimal allocation of financial resources intermediated by banks and it is little consistent with banks' competitive strategies in the market segments where they intend to consolidate customer relationships. Considering the other operating mechanisms of the corporate division, the current level of differentiation is on the whole quite limited. The areas which, above all but not only in the Italian banks, require more substantial interventions are: the definition of corporate bankers' career profiles, the definition of incentive criteria (the variable remuneration rate is still limited to 10% of the total), client and staff customer satisfaction analysis, planning and control instruments explicitly designed for the mission of the corporate division and its organization, integration mechanisms for units operating outside the corporate division but strictly necessary to its functioning (product units, retail branches), "corporate culture" development, training processes specifically designed for corporate bankers (about budgeting, management and control, behavioral and cultural aspects, negotiation, time management and, last but not least, corporate finance). The reason lying behind the limited evolution of the operating mechanisms is to be attributed to the relatively recent times in which divisionalization has been introduced and to the priority obviously given to the hard rather than soft aspects of the organization. So far the involvement of the functions responsible for the design of the operating systems in divisionalization projects has been quite limited. Generally, they have been in-

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volved ex-post for the realization of some specific aspects of such projects. As a result the level of consistency between the operating mechanisms and the vision/mission/strategy trio of corporate banking still appears to be quite limited and strongly conditioning the effective and clear-cut differentiation of the organizational behavior and the quality perceived by customers. The scenario does not change when looking at the use of information technology. Even in the banks with more independent corporate divisions* the management of information systems is left to substantially nondifferentiated structures aiming at obtaining competitive advantages from scale and scope economies: sometimes managerial figures have been selected to direct the phase of acquisition of bank divisions' specific requirements. Corporate division managers are generally little involved in technological decisions. The first main initiatives dedicated to corporate banking have been concentrated on the set-up of a data-warehouse and major efforts have been made in order to integrate the new corporate divisions into the operating and executive procedures previously utilized by the nondivisionalized bank. No bank may be considered a point of reference. As a matter of fact, latent technological requirements are several, deep and innovative. The new figure of the corporate banker requires the integration of advanced information systems for the identification of customer needs, the presentation of bank products and services, for the development of the advisory capabilities and the evaluation of credit risk. Such systems, along with the corporate banker's independent lending authority and professional competencies, seem to be the most immediate elements of assessment adopted by customers to measure the value added of the bank new organizational structure. IT requirements for organizational planning and self management regard all the main operating systems: sales planning, planning and control, staff management, competence and communication development. To conclude, researchers have identified the causal factors and the achievable advantages of some general categories of organizational structures and have provided only a few detailed concepts about the configuration of the optimal models specifically designed for some particular business areas. The other European banks, which have started the divisionalization process earlier on, and Italian banks, which have more recently introduced first the private and then the corporate divisions, are trying to find strategically-organizationally balanced solutions. Such solutions usually present a high degree of diversity and unsteadiness because of the difficulty, above all for the corporate division, to rely on a sufficiently powerful and shared model of value creation. Diversified solutions

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181

can be observed also within specific contexts and, thus, they are not the mere expression of the contingency theory (Lawrence and Lorsh 1967). Without a defined theoretical framework and a dominant model, the use of experimental solutions is a widespread phenomenon. On the one hand, banks have focused on the structure profiles of the organization rather than on the soft profiles of the operating mechanisms, competencies, information systems; on the other, customer segmentation still relies on a far too general specification system (above all in the Italian banks, which have provided such an extensive definition of the corporate structure reference target that small and medium-size companies are always included). The awareness of having to accomplish a consistent process of change which cannot be confined to the hard profiles of the organizational structures, to the introduction of the corporate banker's role and to the separation of corporate firms from small business concerns, seems to clash against the need to reduce the already high costs of the divisionalization process being pursued. Customer segmentation and the new configuration of the bank structure must be considered as necessary, but not sufficient, conditions for the achievement of a lasting competitive advantage in the corporate segment: the course of action started by several banks must be completed. This becomes even more urgent as the external communication of the organizational change risks widening the gap between customers' expected and perceived quality, thus exalting the former with times and dimensions that are incompatible with the enhancement of the latter. On the one hand, there is no doubt that banks' quest of the competitive advantage is bound to lead them toward a far greater differentiation (of strategy and organization) than in the past, thus increasing the complexity of the business. On the other, declared strategies are not always fully consistent with the organization, and banks' choices are not always mutually and fully consistent (according to the current theoretical framework, above all that of relationship lending). Should bank choices prove to be strong and sustainable in the long run, it would be necessary to critically redesign a large part of the theories regarding financial intermediation and, in particular, relationship banking.

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List of Contributors Corresponding Address Professor Giacomo De Laurentis Institute of Financial Markets and Financial Institutions Bocconi University Via Sarfatti, 25 20136 Milan Italy [email protected] Stefano Caselli Associate Professor of Banking at Bocconi University, Milan, Italy Professor at Banking and Insurance Department of SDA Bocconi School of Management E-mail: [email protected] Giacomo De Laurentis Full Professor of Banking at Bocconi University, Milan, Italy Director of Banking and Insurance Department of SDA Bocconi School of Management E-mail: [email protected] Severino Meregalli Professor at Information System Department of SDA Bocconi School of Management E-mail: [email protected] Paola Schwizer Full Professor of Banking at Parma University, Parma, Italy Professor at Banking and Insurance Department of SDA Bocconi School of Management E-mail: [email protected] Ozlem Yildirim Ph.D. in Business Administration, Master in International Economics and Management, SDA Bocconi School of Management E-mail: [email protected]