(a)

The most dramatic effect for staff will be the level of redundancies. The retail network will shrink from 500 branches to about 250, suggesting that up to 50% of the current workforce will be surplus to requirements. Managerial positions will also be fewer: with around 36 super branches, each staffed by a manager and two assistant managers, only some 100 of the current managers (presumably from a total of 500) will find jobs under the new arrangements.
For those staff that do survive the change, the upheaval is likely to leave a lasting impression of insecurity, with damaging effects on motivation. This may be aggravated by changes in work practices. Since the nature of the service to be provided will change, it is likely that there will also be changes in the responsibilities of staff members. The emphasis on low-cost service and operating efficiency suggests that tasks will be streamlined and automated, allowing less personal initiative and less opportunity to work with customers on a partnership basis.
For managers, too, the changes will certainly be unsettling, but many of them may respond well to the increased responsibility. Their area of responsibility will expand from a single branch to a “super branch” at the hub of a small network of branches. They will take charge of an investment center, rather than just a cost center.

It seems clear that the focus of the changes has not been on improving services to customers, but on increasing profitability. Presumably the bank has attempted to assess the consequences, which may well include the loss of some customers to rival banks. This could happen because closure of branches makes Sunrise Bank branches less convenient for some customers than competitor banks, or because customers value the personal attention, which is now to be abandoned, or because the range of services will be reduced. (A variation of this last possibility has been seen in recent years in “real-life” banking: the range of services is not actually reduced, but customers are now required to pay for what was previously free and therefore themselves reduce the range of services they use.)

Despite an increased trend amongst shareholders towards non-financial objectives, such as social responsibility, the majority of investors are still aiming to maximize wealth, in the form of dividends and capital growth. In the short-term Sunrise Bank’s shareholders will be concerned by the very heavy costs of the re-structuring, both in terms of redundancy payments and in terms of the costs of the new super branches. However, if the long-term effect is to improve profitability by means of increased efficiency and lower costs, the reaction of shareholders may well be positive. Much will depend on the number of customers – particularly the more profitable customers – who take their business elsewhere.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              (b)

Until now, the bank has treated its retail branches as cost centers. “The managers’ remit was to operate within their expenditure budgets.” Managers apparently had no say in the level of investment, and there is no indication that their performance was appraised by reference to income earned.

Under the new system, the super branches will be investment centers and will operate with a target return on capital employed of 15%. An immediate concern about this is its very novelty. It appears that top management in the bank have little or no experience of such a system, as is evident from their inability to set targets for residual income. And the managers themselves will have to become familiar with new techniques and disciplines, with little time to do so. It must be a question whether the managers have the ability and experience to adapt. There is no reference in the question to training, but there will certainly be a need for this.

Other disadvantages reflect traditional criticisms of financial performance measures. For example, there can be a tendency to take actions which improve short-term profitability but depress long-term results. Examples might include a failure to invest in new equipment, or a decision to cut down on marketing expenditure.

Despite this, an investment center approach can improve managers’ motivation and, with time, their experience and ability. Provided that targets are set at appropriate levels, managers may relish the opportunity to operate, effectively, their own business, with a degree of independence.                                                                                                                                                                                                                                                                                                                                                                                                                                    (c)

(i) Reports needed by super branch managers
As with most operations, the level of detail to be reported, as well as the frequency of the reports, will depend on the importance of the area under consideration.
The possible reports might include the following:

• A master budget, showing expected revenues and costs analyzed across suitable headings. This should be supported by more detailed breakdowns analyzing the major cost elements, such as staff costs.
  Frequency of report: annual.
• A capital investment budget, with calculation of expected ROCE.
  Frequency of report: annual.
• Income statements for each branch within the network, and for the super branch. These should show actual as well as budgeted revenues and costs, both for the current period and for the year to date. Details of amounts invested should also be incorporated.
  Frequency of report: monthly.
• Income statements should be supported by more detailed reports showing the level of income generated by individual products (such as the insurance products mentioned in the question), and the level of key costs such as irrecoverable receivables. Analysis of the reasons for unexpected levels of revenues or costs should be included.
  Frequency of reports: monthly – in some instances, perhaps weekly.
• Non-financial indicators must also be monitored. These might include the number of new accounts opened, the number of accounts closed, staffing levels, customer complaints, and level of customer service (perhaps including such indicators as average queuing time).
  Frequency of reports: weekly.
• Ad hoc reports would also be required to monitor specific aspects such as customer profitability analysis, level of take-up of new products etc.
  Frequency of reports: variable.

(ii) A number of qualitative indicators were mentioned in the answer to part (c)(i) above, including:

• Customer accounts opened and closed during the period
  This is obviously a key indicator of the success of a branch and should be monitored particularly carefully at a time of organizational restructuring. A high level of account closures would suggest a need for action to counter perceived hostility to the organizational changes. A high level of new accounts is an encouraging signal of future growth. If the information is analyzed by type of account, it will be a good indicator of the success of particular bank products.
• Staffing levels
  Staff costs will be one of the largest expenditure items for each super branch, and this is a reason in itself for careful monitoring of staffing levels. However, other aspects – particularly the impact on quality of customer service – are also important. It is vital to have adequate but not excessive numbers of each staff grade and specialism. Recruitment and training policies will depend on adequate information in this area.
• Quality of customer service
  Again, this is particularly important at a time when organizational structure is changing. Managers need to respond quickly to any indication that the new structure will lead to serious losses of customers.
  The types of indicators that could be useful here include average queuing time, level and nature of customer complaints, and number of errors in processing transactions or appearing on customer statements.                                                                                                                                                                                                                                                                                                   (d)

  The most important stakeholders who should have been consulted have already been indicated in (a) above. They are:

  • Staff
    The importance of involving staff is that they will be seriously affected by the changes and will be responsible for delivering services under the revised structure. Unless their commitment to the changes can be secured, the effects on motivation and efficiency could be damaging. An additional point is concerned with social responsibility: as an organization providing a livelihood to large numbers of employees the bank has a duty to care for its staff. Involvement in determining the proposals for change is one aspect of this.
  • Customers
    The success of the bank depends largely on the loyalty of its existing customers, and on its ability to attract new customers. On the face of it, the changes could easily be regarded as a reduction in the level of service provided, and if this perception gains ground the effects could be damaging. The needs of customers should not be overlooked in a short-term rush to cut costs.
  • Shareholders
    As the ultimate owners of the business, it is the shareholders who will enjoy improved profits, or bear the losses, that result from the changes. Their opposition to the changes could obstruct the whole process, and it is therefore vital that they should be convinced of the soundness of the proposed strategy.