Successful Change: Managing Human Capital Risk During Implementation


risk-3-26-18.pngMany financial services companies are in the process of implementing significant change initiatives or poised on the brink of doing so. As discussed in our previous article, many such efforts fail to meet expectations because leadership has underestimated the human capital risks that threaten strategy execution. But effective implementations can mitigate critical people-related risks while building employee understanding, commitment and resiliency.

The Typical Transition From the Past to the Future
Regardless of the type of change—for example, a consolidation, acquisition or new business model—employees must go through a process of transition. A transition that is smooth reduces the depth and duration of lost productivity, as well as unwanted turnover, and expands the organization’s capacity for future changes.

Employees often initially focus on change as an ending to what they know as familiar, which can foster uncertainty and negative attitudes, such as assuming the change won’t work. Leadership must help employees move first to a mindset that is more neutral and accepting, so employees are willing to give the change a try. From there, management can help employees begin to see the change as a new beginning and understand that the new organization can do better or more.

With most change initiatives, almost every employee is affected to some degree. Employees might need to adapt to a new technology system or move to a different facility. They could find themselves in a much larger department or with a different level of authority. Some of the changes in employees’ individual experiences will play a greater role in the potential for project success than others and therefore warrant greater change management attention. For example, leadership could expend more energy dealing with how managers react to having their authority altered than on employees who merely need to learn new procedures for approvals.

Note that it is not only reductions in authority that require leadership attention. Managers in a smaller bank where the president made all of the salary and promotion decisions might find it difficult to adjust after being acquired by a larger institution where they are expected to be more actively involved in such matters.

Transition Monitoring and Management
Financial services companies should create a change effectiveness scorecard to evaluate the impact, readiness, adoption and benefits realization of each change initiative. Metrics might include the percentage of business results achieved, individual or department change readiness (at project launch and quarterly intervals going forward), training completion rate, key employee retention, client satisfaction, quality of production and employee engagement.

Employee engagement can be measured through responses to pulse surveys conducted on a regular basis to track and improve employee understanding of and buy-in on the change project. These short surveys ask respondents to rank from 1 to 5 the accuracy of statements such as:

  • I understand how this transformation can benefit our employees, customers and community.
  • I believe the communications I receive from the transformation team.
  • I feel that I have enough opportunities to learn about the transformation.
  • I know where to go when I have questions about the transformation process.

When it comes to change projects, individual leaders or employees typically fall into one of four categories based on their level of engagement, performance and impact on project success. Each category calls for different management strategies during project implementation:

  • Advocate (high impact, high engagement): Leadership should recognize and reward high-impact employees who are actively and vocally on board and performing well, and consider increasing their project responsibilities.
  • Supporter (low impact, high engagement): These employees demonstrate their high level of commitment to the project by effectively providing assistance or resources, even though they are not critical to satisfying high-impact project objectives. Leadership should consider increasing their project-related roles and responsibilities.
  • Laggard (high impact, low engagement): These individuals have a low level of commitment to the project—even if they are performing well—but are essential to meeting the project objectives. Leadership should address their low engagement in hopes of moving them to advocate status. For example, the management team could consider demonstrating what’s in it for the employee if the project succeeds. If that effort fails, leadership should consider reassigning these employees from high-impact areas where they could negatively influence others and project success.
  • Bystander (low impact, low engagement): These individuals demonstrate a low commitment level, and their impact is not vital to meeting project objectives. Leadership might consider their potential for greater project impact and address reasons for low engagement.

The human capital risks associated with change initiatives could prove the difference between ultimate success or failure. Particularly when change affects customers, the employee experience has a direct effect on customer experience. By properly managing employees throughout the transition, bank leadership can help employees see change not as a negative ending, but as a positive beginning.

Human Capital: An Underestimated Element of Successful Change


capital-2-26-18.pngFinancial services companies of all sizes are modifying their business models to stay competitive. But managing organizational change is a major business challenge, as evidenced by the fact that 70 percent of critical change initiatives fail to meet management expectations. One reason for the high failure rate is that leadership often underestimates the effort necessary to properly handle the human capital element—that is, the employee awareness, understanding and commitment required to achieve success.

When a change initiative is a bank consolidation, acquisition, turnaround or the implementation of a new competitive business model, there is little margin for error. Directors typically focus on the financial or operational risks associated with the resulting organization, but they would be wise to expand their oversight to the potential effects on people and culture, which in turn affect how well the organization can serve customers, its perception in the community and its sustainability.

The Role of Human Capital in Change Initiatives
It’s understandable that bank directors and management tend to concentrate on the risks that can be expressed in spreadsheets and financial statements, but ultimately, it is the people of the organization that create—or impede—success.

An organization’s staff should be well prepared to use the new business processes and systems going forward, for example. Employees also should be prepared for changes to job roles and responsibilities that frequently occur due to business process improvements and new technology integration. Importantly, staff must understand not just the “how” but also the “why” behind the change if they are going to buy in.

The extent of the risk associated with a change initiative is generally driven by the extent of the impact on employees, and their readiness and ability to change. This risk increases when changes:

  • Affect more employees;
  • Affect more aspects of work;
  • Affect more locations;
  • Represent a large departure from the status quo;
  • Or represent a disruptive change, as opposed to an incremental change.

Common changes may include changes in employee roles, culture, staffing, relationships, competencies, authority, information, training, expectations and facilities. The changes that have a greater potential impact will require more active change management, while those that are less likely to cause significant waves simply can be monitored.

Once a bank’s leaders understand the change risk associated with an initiative, they can devise a plan for managing the change and communicating with employees about it.

Four Critical Transitions
An effective plan for managing business change accounts for several essential staff and culture transitions, each of which comes with its own change risks. Fortunately, each transition can be managed if leaders analyze and address the relevant issues in advance.

  1. Organizational transition: Leadership must determine the strategies, structures, processes, employee reward systems and people tactics (for example, hiring, development and retention) that will be affected or that must change.
  2. Employee transition: What changes will be required of individual employees and departments, and are they ready and able to do so? Changes may involve job roles, responsibilities, workflows and expectations. In times of change, employees naturally wonder, “what’s in it for me, and what’s needed from me?” Leadership must be able to clearly answer these questions.
  3. Cultural transition: Bank leaders need to determine how the current culture (in the case of consolidations, turnarounds or realignments) or the new culture (in a merger or acquisition) will accelerate or delay achievement of the organization’s goals. They also should analyze whether current behaviors in the organization are the optimal behaviors and how the culture will need to change (for example, leadership style, decision making or authority).
  4. Infrastructure transition: Leadership must understand if desired business changes will require changes to the processes and systems that support employees, such as performance reporting or payroll and benefits systems and, if so, the cost, timing and resource implications.

Bank leaders must act as influencers and role models during the execution of change, but their effect on results, and employees’ levels of commitment and performance, will vary depending on a few factors. Do the bank’s leaders possess the necessary skills, knowledge and abilities to perform the requisite responsibilities? Do bank leaders have the required level of commitment to perform the necessary roles and responsibilities? And finally, is their management style a cultural fit for their organization?

The ability to accomplish successful change depends on a range of factors, including some that might not traditionally be considered. Bank leaders must identify and manage their people and culture risks to maximize the odds of obtaining the desired results.

What Skills and Expertise Will Banks Need in the Next Five Years?


As new regulations and slim profit margins challenge the banking industry, the skills and backgrounds of the employees who work in banking must change as well. Bank Director asked legal experts to address the question of how the talent needs of the industry will shift in the next five years.

How will the banking industry’s personnel needs—including executives within the C-suite—change over the next five years?

Stanford_Cliff.pngWhile banks will continue to rely on service providers for efficiencies, expect a premium to be placed on those middle managers who can negotiate and manage third-party relationships. Encouraged by the regulators, banks have become increasingly attuned to the risk management burdens of outsourcing, particularly with regard to consumer-facing services and information technology. In the bank C-suite, expect to see continued strong demand for those with risk management, compliance, technology, information security and credit risk backgrounds.

—Cliff Stanford, counsel, Alston & Bird LLP

fisher_keith.pngIn recent years, we have already seen the need for dedicated Bank Secrecy Act/Anti-Money Laundering compliance officers and Community Reinvestment Act officers. In the information technology area, there will be a need for a chief information officer and possibly a separate chief information security officer. Both the C-Suite and the boardroom will also have a need for individuals with extensive, detailed regulatory and compliance experience to assist with policymaking and strategic planning, especially to keep the compliance burden cost effective.

—Keith Fisher, Ballard Spahr LLP

Sharara_Norma.pngMore bank consolidation is expected in the next five years, so executives in the C-suite need to be prepared to be leaders of change. Along with the board, they need to create and implement a vision that reflects the bank’s brand and corporate culture. Recently, some banks have created a position of chief culture officer that reports directly to the CEO. That position involves much more than simply training the new people on how your systems work. Rather, the focus is on moving the bank forward as one family with one voice and one mission, and overcoming the natural tendency for an “us versus them” culture that often follows an acquisition.  

—Norma Sharara, Luse Gorman Pomerenk & Schick, P.C.

Lamson_Don.pngThe risk management expertise needed by a bank is increasingly dictated by regulatory standards. In addition, regulatory reform and legislative developments will continue to be important on both sides of the Atlantic. Thus, it will be important for banks to maintain personnel, including C-suite personnel, who can maintain relationships with regulators and other relevant policymakers, and effectively communicate with the public about the positive role of banks in the economy. Implementation of new rules and enforcement actions will continue, and therefore compliance and legal staff will continue to play key roles as new policies and systems are designed and banks respond to regulatory inquiries.

—Don Lamson, Shearman & Sterling LLP

Peter-Weinstock.jpgRisk management and technology will continue to require executive oversight. Institutions that do not have C-level talent addressing such areas will be expected to add them as they grow. The bigger question is what level of committee and task force infrastructure will be needed to respond to the increasingly interdisciplinary nature of banking? We are getting to the point that bankers are unable to schedule time with customers among the jumble of committee and task force meetings. Unfortunately, I do not see a quick change to such meeting proliferation.

—Peter Weinstock, Hunton & Williams LLP