Organisational transformation is easy in theory, but much harder in practice. Craig Donaldson speaks with ANZ’s John McFarlane and Shane Freeman about the mammoth task of changing the culture of a major bank
Organisational transformation is easy in theory, but much harder in practice. Craig Donaldson speaks with ANZ’s John McFarlane and Shane Freeman about the mammoth task of changing the culture of a major bank
Australia’s major banks operate within a fiercely competitive environment, with intense scrutiny of performance and shareholder returns. But after years of downsizing, streamlining and squeezing efficiencies out of every possible process, Australia’s major banks are earnestly looking at the last bastion of competitive advantage – their people. Maximising workforce performance is complex and unchartered territory area for many companies, but arguably one with the greatest returns if they manage to get it right.
ANZ was the first of Australia’s Big Four banks to earnestly undertake organisational transformation in the race to achieve a long-term competitive and sustainable advantage. It is one of the five largest and most successful companies in Australia. With assets of $259 billion, its total shareholder return for the 12 months to 30 September 2005 was 33 per cent. With 1,190 worldwide points of representation and 746 branches in Australia, it employs more than 30,000 people across Australia, New Zealand, Asia, the Pacific, UK/Europe, India and the USA.
Following several years of poor performance, ANZ appointed John McFarlane to the role of CEO in the late 1990s. Together with a new management team, the bank realised better financial performance, but McFarlane acknowledged there was widespread ill-will and distrust towards Australia’s major banks. After years of branch closures and fee increases, McFarlane says there was a perception that banks were not doing the right thing by the community, their customers or their employees.
“In fact some people hated banks, if you remember,” he says. “We worked out early on that if we really wanted to have superior performance, value for shareholders and maintain service for customers, then we needed to change the hearts and minds of the people inside the organisation. If people are happy and productive, then those things will happen eventually.”
First steps of a thousand miles
In 2000, ANZ took the first steps towards organisational transformation. With a mission to transform ANZ into “the bank with a human face”, McFarlane and his leadership team instigated a strategy called Perform (delivering financial performance and shareholder value), Grow (strengthening revenue, leadership and brand) and Breakout (building the foundations for sustainable leadership and long-term success).
In late 2000, ANZ brought in McKinsey & Co to conduct a thorough study of the bank’s culture. This revealed a number of discrepancies between existing bank values, personal employee values and how they perceived the bank. While some positive values such as goal and results orientation had been built into the culture, some employees felt there was too much bureaucracy and hierarchy, a silo mentality and too much control of information. Instead of values dreamed up by executives, McFarlane recognised the bank would need to live values based on employee input in order to make decisions using common language and a shared vision of success.
McKinsey also benchmarked the bank against some of Australasia’s highest performing organisations. While it performed well in financial and operational areas, it fell down in others, including living its own values. Through this study the bank determined the biggest areas for improvement, and as a result, set up a performance ethic and values assessment survey. Within the performance ethic survey, there are 11 measures where ANZ ranks its position compared to world-class companies. The 11 measures are: mission/aspiration; targets/goals; organisational approach; business unit performance feedback; consequence management; co-ordination and control in terms of people; co-ordination and control in terms of financial; co-ordination and control in terms of operational; motivation in terms of rewards/recognition; motivation in terms of opportunities; and motivation in terms of values.
The studies also provided the bank’s leadership team with solid ammunition to earnestly undertake the Perform, Grow and Breakout strategy.
Breaking out of the mould
A foundational element of the strategy is Breakout, which focuses on cultural transformation. McFarlane says Breakout is essentially about creating a fundamentally different experience for the bank’s stakeholders, including employees, customers, shareholders and the broader community.
“It’s a very comprehensive program, which includes a broader sense of mission. It stretches target objectives for people, removes bureaucracy in the organisation and gives people a lot more freedom, a lot more responsibility and clear feedback – both positive and negative. It’s about how they act on the feedback and their resulting performance. We’ve tightened up a lot of our control mechanisms and we’ve made people the number one objective,” he says.
The bank set up a dedicated Breakout and cultural transformation team to drive three major initiatives: Breakout workshops, Breakout charters and Breakout consulting. Breakout workshops focus on emotional and personal development, whereby participants examine the thoughts and values that drive their behaviour, explore the impact of these interactions in the workplace and develop a shared understanding of the bank’s values in action. More than 20,000 employees have now attended Breakout workshops.
Breakout charters are a set of ANZ-wide business projects focussed on process changes that support cultural transformation. To date, more than 40 charters have been successfully completed. The Breakout team is responsible for setting up and nurturing the initial growth of charters that are then transferred to appropriate teams within the bank for ongoing management.
Breakout consulting provides a range of diagnostic and consulting services to assist business units and teams in living the desired culture. The bank has developed a range of diagnostic processes to give teams a snapshot of their cultural climate and to assess this against key Breakout principles. This allows units and teams to measure their progress and provides them with a roadmap to the desired culture.
Performance management
Culture change is a notoriously amorphous concept. In order to achieve any real meaningful change, McFarlane recognised the need to measure and track the success of Breakout. Performance management is integral to this, according to Shane Freeman, group general manager, people capital and Breakout for ANZ. “We’ve got a great track record as an organisation, so when we set goals and targets we achieve them. This starts at the very top of the organisation in terms of commitments we make to analysts, to investors and our shareholders. We’ve not missed a set target in the last eight years, so that sense of commitment is held very strongly right through the organisation,” he says.
Performance management is based on a balanced scorecard with very clear key result areas (KRAs) across financial, customer, people and community measures. All staff undergo performance management from divisional managing directors and business unit managing directors, down to front line support and customer facing staff. Rewards are also aligned with performance. Up until 12 months ago the bank paid half yearly bonuses in order to sharpen the focus on performance in the first stages of culture change, but this has now reverted back to yearly bonus payments.
Talent management
ANZ has also set up very rigorous processes that are designed to identify, assess and develop talent. The bank’s top 100 people, for example, are assessed externally every two years. From that, the bank puts development plans and actions in place for providing its top talent with new opportunities. To assist in this process across the organisation, line managers are trained to lead the assessment processes at senior management and management levels. Furthermore, internal talent management is backed up by external assessments every two years to ensure quality control. “It’s got some real bite to it and we’ve replicated that process through the organisation, but in a way that has very strong line management engagement with it,” says Freeman.
Individuals in senior management, for example, are assessed against five key criteria: strategic orientation; getting results; the quality of their credentials; change leadership; and their people management and leadership. Individuals are assessed on each criteria and ranked on a scale of five, taking into account their management responsibility. On strategic orientation, for example, McFarlane is expected to come in at level five, while a lower level manager might rank at level three. Individuals are also assessed against a matrix that examines their fit with the five key values of the bank, both currently and in the future. “We then have what the individual’s strengths are, what their weaknesses are, a commentary on their style against the values of the organisation and a summary. It’s actually quite rich,” says McFarlane.
The bank plots everyone on a curve whereby 20 per cent of staff are at the top, 70 per cent are in the middle and the remaining 10 per cent at the bottom. Compensation is benchmarked accordingly. McFarlane says this demands a philosophy that the bank balance pay for performance. “In order to manage our people costs, we actually may aim to increase the productivity of our employees, which means we have less of them. So rather than control the price of staff we actually control the volume of staff. In other words, we want them to be more productive but pay them better.”
Building employee engagement
In a bank the size of ANZ, building organisation-wide engagement and support for cultural change is probably one of the biggest challenges faced by McFarlane and his leadership team. Rather than just pushing change down from management, the bank set itself the task of building engagement at both the top and bottom levels of the organisation and “then kind of get it to meet in the middle”, says McFarlane. “And that’s what happened. We built a lot of trust between me and the senior team as well as the lowest levels of people in the organisation.”
In Hewitt Associates’ 2004 best employer study, ANZ achieved equal highest score among other large Australian corporations. The bank achieved an engagement level of 58 per cent in 2004, and in the 2005 study engagement rose to 63 per cent, placing the bank in the high performance best employer’s zone. Internal staff surveys have also registered a significant improvement in staff satisfaction. In 1997, this sat at 50 per cent, climbing to 62 per cent in 2001, 78 per cent in 2002 and 85 per cent in 2004. Furthermore, overall knowledge of ANZ values hit 87 per cent in 2004 – up from 46 per cent in 2001.
In terms of business results, Freeman says analysts look at overarching efficiency measures such as cost to income ratio. For many years, he says, ANZ has been in the top three banks globally in this area. ANZ’s current cost to income ratio is 45.6 per cent, however, this has increased over the past year as ANZ has invested for growth. McFarlane recently announced he is targeting a cost to income ratio of 40 per cent.
He also acknowledges the challenges of educating financial markets about cultural change. He recalls visiting a shareholder in London recently and presented him with a shareholder pack, which included information on Breakout and developments in culture change. “This young guy said to me, ‘Look, I realise you’ve put all this stuff in here just to fill out the report, but why don’t we get down to the real stuff?’”
For the first time this year, McFarlane believes investors and analysts have begun to recognise that the “soft stuff” really does matter. For example, Macquarie Research recently issued a report on employee engagement, which found that revenue, profit and shareholder returns are linked to high engagement levels. At the time of the report, it found ANZ’s engagement levels were “in the zone” at 60 per cent while National Australia Bank’s 39 per cent was “seriously deficient”.
Challenges and lessons learned
As with any major organisational transformation initiative, ANZ has learned some lessons in the process. McFarlane believes that every CEO who retires looks back and wishes they’d been more decisive, particularly when it came to leaving wrong people in roles too long. “Certainly when I look back, that would be one thing. In the early days I probably didn’t act on a more marginal senior management quick enough,” he says.
Problems around having wrong managers in the job tend to cascade all the way down the organisation, he says, while the gain realised through having the right manager who is passionate about their work is exponential. “We’ve become much more disciplined now around that dimension. We even rank the people reporting to me, and we systematically make sure that the weaker people actually get managed out.”
In hindsight, McFarlane also says he would have liked a closer relationship with the Finance Sector Union of Australia. In the past, the problem was that the union saw its mission as increasing membership rather than looking after bank employees, but McFarlane says this has now improved. “So I think finding a more constructive relationship with the union helps.”
In looking back, Freeman says the bank should have focused much earlier on having better HR management information for the organisation. For example, making information about the bank readily available to managers on their desktops can improve effectiveness, efficiency and workplace culture issues. “We’re focusing on it now, but if we had that time over again, I think that would have given us some much more powerful diagnostic tools that would have helped us focus some of our initiatives a little more clearly.”
But overall, McFarlane acknowledges that ANZ has learnt from its experience and is able to further refine Breakout as a result. “Building long-term creativity and competitive advantages inside the company takes time. It’s only now that we’re getting any form of recognition that these things actually contribute to long-term value.”
The cultural challenge
From bureaucracy and hierarch to meritocracy
From controlling information to openness and trust
From silo mentality to collaboration
From cost reduction to focus on customers and values
From cost-cutting to growth through innovation (including cost management)
Source: McKinsey & Co
Keys to ANZ’s cultural transformation success
• Leadership of the CEO
• One hundred per cent ownership and commitment from executive management
• Compelling aspiration and meaningful values
• Recognition that transformation is a journey, not a program
• Having the courage to take risks and being prepared to learn from mistakes
• Aligning mindsets, behaviours and the underlying processes and systems
• Recruiting people with the right IQ/EQ mix
