Reference no: EM132883442

Banco Mercantil: Organization Structure Case Study

Banco Mercantil is a banking giant of one of the major Latin American countries. Its branches in the country's capital city are in almost every neighborhood. And the Banco Mercantil branch office on the main square is the most imposing building in most provincial towns and cities.

Until the late 1960s its hundreds of branches outside the capital city served primarily as providers of deposits to the capital. They had little lending business of their own. Ninety percent of the lending business was in the capital. In the capital, too, was practically all the corporate business, that is, the business with large companies. There, too, was all international business - mainly borrowing money abroad, in such major centers of international finance as New York, London, and Zurich, to lend to the bank's corporate customers and investment activities, including a rapidly growing business in managing pension funds of large domestic companies. Only the mortgage business - legally organized in a separate bank but operated as a division of Banco Mercantil - did substantial business in the provinces. Even that amounted to only some 20 percent of the total, because most population growth was in the capital.

As time went on things began to change dramatically. The capital city continued to grow, but since it was badly overcrowded, more and more of the growth occurred in what had formerly been sleepy provincial towns. The mortgage business felt this first. It grew much faster outside the capital than in the capital district. Then companies began to build factories in or near provincial cities to tap their labor supply and to be closer to markets. Finally, in the mid-1970s, commercial lending began to grow very rapidly in the major provincial cities as small businesses, trucking companies, shopping centers, and local government offices grew up to serve the expanding population in the provincial towns, many of which were rapidly becoming fair-sized cities.

The organization of Banco Mercantil reflected the country's traditional economic structure. There was a big capital city division, headed by the bank's president and chief executive officer himself. Its hundreds of branches outside the capital reported through regional headquarters to the one executive vice president in charge of the "Zona Interior." He, in turn, reported to the president. Then there had been formed a corporate banking division, first within the capital city division, then as a separate division. This, too, was headed by an executive vice president who also reported to the president. International banking, mortgage banking, and fiduciary banking (investment management, especially of pension funds) also had evolved into separate divisions, headquartered in the main office in the capital and headed by executive vice presidents reporting to the president. At first, this structure worked, but with the growth of provincial cities the Banco Mercantil had clearly outgrown its structure.

When a new president took over in 1984, he ordered a business plan - the first the bank had ever had. To hardly anyone's surprise, it showed that except for international banking most future growth of the bank would take place outside the capital city. Near the end of the twentieth century, the plan predicted, the share of the capital city division in the bank's loans would be down to 30 percent (or less) from 65 percent in 1984. Corporate division loans would grow to 30 percent of total loans, of which fully one third would be to large customers headquartered outside the capital. The Zona Interior branches would have 40 percent of the loans and well over 50 percent of the deposits. Most of the new business would be centered in seven large provincial cities, each already with a population of two million or more.

How should the bank be organized for this change in its markets? The new president appointed an organization task force with himself as chairman. After a year of study it came up with a plan for decentralization. It provided for the setting up of eight regional "banks." One of these, the largest, would be the Banco Mercantil in the capital city - in effect, the existing capital city division. It would, as before, be headed by the bank's president. The other seven regional banks, each located in one of the provincial centers that had emerged as "key cities" in the country, would have full profit-and- loss responsibility and would be headed by a regional "president" who would also be an executive vice-president of the bank and who would be in full charge of all the branches in a region, in addition to being the head of the main office in his provincial capital. These seven, in turn, would report to a senior executive vice president in the capital city who would report to the bank's president. There would be vice presidents for corporate banking, fiduciary banking, international banking, and mortgage banking, each headquartered in the capital city and reporting to the president. There would be an executive vice president for bank operations - also in the capital city and reporting to the president. An executive committee of fourteen people - composed of the president, the senior executive vice president in charge of the regions, the executive VPs of corporate, fiduciary, international, and mortgage banking, the operations man, and the bank's lawyer - would be served by a small group of staff assistants: an economist, a business-development group, a planning group, and a personnel adviser.

When the plan was presented to the bank's senior executives, there was a storm of protest from the regions. They pointed out first that the plan violated the principles of genuine decentralization. The regional executive VPs were to have full business responsibility. Yet for rapidly growing parts of the business - corporate banking, fiduciary banking, and mortgage banking - they would have no direct responsibility. These activities were going to be done by headquarters divisions. The same applied to operations - that is, to the 70 percent of the bank's costs that are people. They further objected that their subordinate status was both wrong in terms of organization and contrary to the bank's strategy. "We expect the bank to grow the most in the regions outside of the capital city, yet the regions will still be treated as they were under the old 'Zona Interior' system and report to a capital city executive VP rather than directly to the chief executive officer," the regional men pointed out. Finally, they strongly objected to perpetuating the tradition under which the president ran the capital city division. "This means," they said, "that the president will have no time for us, will give us no attention, and will, inevitably, channel resources and good people to the capital city, when the growth opportunities and needs are outside."

The president had to concede that the critics had a case. He therefore asked them to come up with a counterproposal, which they did within a few weeks. Their plan provided for a president with no duties except being the bank's chief public spokesman and its chief liaison man with the country's government, with international financial institutions such as the World Bank, and with the labor unions. In addition, he would be available as a troubleshooter in dealing with the top managements of big corporate clients. But all operating work would be lodged in the heads of the regional banks - one for the capital city and one for each of the seven regions. They, with the head of the international division and under the chairmanship of the president, would constitute the executive committee. This would meet every week for at least a whole morning (and preferably not always in the capital city but at least twice a year in each of the major regions) and would make all decisions. International would remain an operating division. Corporate would become a hybrid - in part handling relations with large corporate customers itself, in part advising the regional banks on corporate business. Operations and mortgage banking would become staff departments and confined to planning policy, auditing, and training, with each region doing its own operating work and running its own mortgage business. Fiduciary, the regional men thought, should probably remain centralized for the time being. There wasn't enough fiduciary business in the regions, and anyhow, pension fund customers (the main customers of the fiduciary division) would prefer to deal with one group of professional investment managers, economists, and actuaries.

The president was appalled at this proposal - it meant, as he pointed out, that he would have almost twenty men reporting to him, since there would still be, of course, a legal counsel, an economist, a business-development group, and a planning group, not to mention personnel and public relations. He felt strongly that decision-making authority would be totally diffused under this plan: even minor matters would become "political" and would be decided by politicking and logrolling in an executive council in which the president could always be outvoted. He was troubled by the proposed ambiguity of the role and function of corporate banking, fiduciary banking, and mortgage banking - part operating divisions, part staff advisers. He felt strongly that operations should be centralized. Above all, he felt that he would not have enough to do himself and would largely become a figurehead.

It took two years and the help of a large American consulting firm to hammer out a compromise. Instead of eight regions there are five - the capital city and four regions outside. Each is headed by an executive VP who reports to the president and is a member of the executive committee. The president no longer heads the capital city division but is a full-time chief executive officer with full power to make final decisions. International, mortgage, and fiduciary banking are operating "banks" - in fact, each is called a "region," headed by an executive vice president who is a member of the executive committee and reports to the president. Corporate banking, headed by an executive VP reporting to the president and sitting on the executive committee, is a hybrid - 80 percent a "bank" taking care of corporate clients directly; 20 percent an "adviser," planner, and policy maker; and above all, a trainer, for the corporate-banking business of the regional banks outside the capital city. The status of operations was left up in the air - its executive VP (also reporting to the president, also a member of the executive committee) is both "responsible to the president for setting up, initiating, and running efficient banking operations and for the training and supervision of operating personnel throughout the system" and for "advising and counseling the regional banks in carrying out their responsibility for efficient banking operations and for training and supervising operating personnel." All other functions - economics, planning, budgeting, business development, personnel, public relations, and a new marketing function that the consultants recommended - were put under a newly created senior VP of administration who attends meetings of the executive committee without being a member, and who reports to no one quite knows whom. The lawyer is, of course, still there too.

QUESTIONS

How does each of these three alternative organization structures measure up to the criteria of decentralization? Which of them comes the closest to "federal decentralization"? Could it have worked? Which of them is "simulated decentralization"? And might any of them be perhaps not "decentralization" at all but a thinly disguised functional organization?

Decentralization means "decentralized operations with central control." The president's plan stressed "control," the regional heads' plan stressed "decentralized operations." The president's plan stressed the span of control - with only seven men reporting to the president. The regional heads' plan would have meant twenty men reporting to the president - clearly more than one man can supervise. But the second plan would have followed far more closely the logic of the business and the planned strategy, with its expectation of rapid growth in the regional centers. How does the plan that was finally worked out satisfy these conflicting requirements of "decentralization" and "central control," of the logic of organization and the dynamics of strategy?

How much sense does the new position of administrative VP make? Do the functions he heads belong together as building blocks of an organization? What can he actually do for the highly expert professionals who report to him? Would it be better to have these functions separate and working with the executive committee, as originally proposed?