Target operating model design: How and why to prepare your bank for your next acquisition

Integrating two banks can a time-consuming, expensive, and demanding process, which is why it’s important to plan early and comprehensively. It’s common for banks to experience missteps leading up to and following an integration, which can result in poor experiences for customers and employees – at worst, resulting in unwanted attrition of customers and employees.

What is a target operating model (TOM)?

Through an acquisition, both banks must work together to reconcile numerous differences, including but not limited to types of customers; customer experiences; products and services; policies, processes, and procedures; roles and responsibilities; and, physical locations.

A TOM is a visualization and description of how the integrated bank (Newco) intends to operate post-integration. It should address all the differences above.

Why is a TOM important?

A TOM can be used as a means of aligning the Newco around corporate-level goals as well as the supporting goals of the various lines of business and departments. It should answer the question of what the Newco wants to achieve. Most likely, the foundation for this is the initial investment thesis of the deal. However, it can change to some extent as the banks learn things about one another that they were unaware of during the due diligence process. Often, the big picture is understood by the executive team and the day-to-day integration team members. However, a common miss is failing to articulate and communicate it properly to employees in all areas of the bank. This, of course, should be done early and repeated if anything significant changes.

A layer deeper, a TOM can help employees up, down, and across the Newco understand what they and their colleagues are supposed to be doing and how they are supposed to be doing it. Issues often arise immediately following an integration due to errors of omission. One department, team, or employee assumes that another department, team, or employee is supposed to complete a process or task because it was never communicated clearly who was responsible. Similarly, one department, team, or employee may assume that another is doing something in a certain way or within a defined time and it is not. This can result in untimely and costly effects on customers’ experience.

A third reason to use a TOM is that it can alleviate some of the uncertainty regarding employees’ roles and where they fit into the Newco. After a transaction announcement, employees tend to go through the following thought process. First, will I have a job. Second, what will my new job be, e.g., responsibilities, title, compensation. Third, to whom will I report. Often, this is understood by the executive team and the day-to-day integration team members. However, a common miss is failing to articulate them and communicate it to employees. This should be done early and often. If not, then the risk of unwanted employee attrition increases.

On a related note, the faster the Newco articulates and communicates the reporting structure, the faster and better it can make decisions. Many decisions can and will be made by the executive team. However, many more will need to be made by managers throughout the Newco. Until there is a clear reporting structure that is broadly understood, decisions will be delayed or not addressed at all. Again, this will negatively affect employees and customers.

Lastly, a TOM can help uncover redundancies or unnecessary expenses. Typically, a TOM includes a review of vendors and licenses to highlight any contracts that can be combined or any licenses that may no longer be needed. Without this step, the acquiring bank could end up with duplicative licenses or not pursue early-terminations, which could reduce the value created from the transaction.

How to start documenting a TOM and what operating model design principles to adhere to

When designing a target operating model framework, many banks use the six-pronged POLISM method highlighted below to begin asking the important questions.

• Process: what are the processes that need to be addressed?

• Organization: who are the people who will be doing the work, and how should they be organized?

• Location: where will the work be completed, and is it sufficient for the Newco?

• Information: what information and systems will be needed to complete the work?

• Sourcing: which vendors will be needed to support the work?

• Management: who will be responsible for the monitoring the goals and health of the Newco?

When to document and communicate a TOM?

Building a sustainable and effective TOM should start at due diligence, not after the announcement or purchase is completed. In fact, for a bank considering an acquisition, it may be prudent to document its business as usual operating model. This will expedite documenting a TOM once an acquisition target is identified.

Often, banks take the steps to document a TOM yet wait too long to communicate it with employees. There tends to be a reluctance to communicate a TOM until it’s 100% accurate and complete. However, we advise following the famous words of General Patton, "I will take an 80% perfect plan today above a 100% perfect plan 60 days from now.” Businesses are changing constantly, either as part of an acquisition or otherwise. The reality is that the TOM may not ever be 100% accurate and complete. However, remember that no communication is a form of communication. If you don’t communicate some of the aforementioned principles soon enough (e.g., goals, roles and responsibilities, reporting), then employees will make their own assumptions. All too often, this leads to key employees leaving and or negative experiences for customers.

Conclusion

Those that have work on multiple integrations acknowledge that no two transactions are alike. Each is ripe with its own risks and challenges. Documentation and communicating a TOM are not full-proof methods of eliminating all risks associated with a transaction, but these steps can go a long way in minimizing or avoiding risks that lead to poor experiences of customers and employees and thereby increase the realized value of a transaction.