10 Points to Consider in Reducing Consolidation Risks

RMA Journal, The, Nov, 2001 by David A. Sherman

Those in the field know. An examiner with the Operational Risk Team at the Chicago Fed has identified 10 management practices that have proven to mitigate the risks inherent in consolidations. Although bank consolidations generally involve conversions and reorganizations, this article focuses on consolidations/mergers.

Confronting Y2K, banks saw operational risk splatter their radar screens like kamikaze bugs on the Autobahn. But operational risk has been around a lot longer than that, lurking, among other places, within bank consolidations. The toll of some internal mergers has included direct losses, unexpected costs, and lost opportunities. At a minimum, unsuccessful mergers have been responsible for limiting acquisition plans and the implementation of overall strategies. After all, you can't stamp out fires and move forward at the same time.

Ten procedures principally derived from examiner experience can reduce risks associated with consolidations by improving management supervision, enhancing procedural controls, enriching the management information system, and maintaining a strong internal control environment.

1. A detailed plan, including all tasks and contingencies, is key. A comprehensive plan spanning the entire consolidation/merger process is the beginning of a successful risk management program. All tasks that comprise the consolidation should be listed--for example, the determination and elimination of duplicate accounts, the training in new processes, and the purchase and implementation of new software. Tasks should be grouped into meaningful categories for supervision. Contingencies, training needs, technology requests, and staff projections should be included. Bottom-up plans, which increase staff ownership of ideas, have proven to be more successful than top-down. Gradual implementation, or a phase-in plan, also reduces risk. Merger success largely depends on the quality of the plan coupled with management's ability to implement it.

2. Consistent approval procedures and multiple approvals for each task improve the planning process. The same variables should be used to evaluate each task that will eventually make up the plan. The approval process may involve complex variables or be rather simplistic; the key is consistency. Variables that are usually covered in the feasibility phase are financial impact, staffing needs, degree of difficulty, risk, internal controls, compatibility with existing programs, process flows, contingencies, equipment and software needs, and qualitative and quantitative projections. In addition to a consistent framework, multiple management approvals for each idea add considerable control to the approval process. Multiple sign-offs improve decision making by obtaining additional viewpoints. Implementation of this procedure ensures that all tasks meet qualitative, quantitative, and managerial objectives.

3. Clear lines of accountability, an overall manager, and a senior committee provide an effective control framework. Each task should have a staff member assigned for its implementation. Clear lines of accountability for each task, culminating in a project or general manager, are practices that improve the success of the consolidation. Managers' ownership of their tasks not only increases accountability but also improves executive management's ability to monitor and supervise this complex undertaking. The principle of accountability extends to the total project. A project manager, general manager, or executive officer should be responsible for the total program. Although a project manager has responsibility for the plan's implementation, a senior management committee should review the program and its progress through completion. The senior committee is usually a highly placed Steering Committee, which meets throughout the planning and implementation process, adding a control feature to the consolidation progr am.

4. The ability of the management information system to track all tasks through completion is critical to senior management oversight. Similar to other effective risk management components, MIS (management information system) is critical to successful consolidations. The MIS should be sufficient to communicate who is responsible for each task, which tasks have been completed, which tasks are behind schedule, which tasks have been deferred, and which tasks need to be completed. Generally, a summary version of all tasks with appropriate information--task, manager, due date, progress--is available for executive management or a senior committee.

5. The use of a consultant to augment the technical expertise of the staff and to provide third-party validation of the plan adds considerable control to the risk management program. Any large merger is usually beyond the technical capacity of existing staff. The employment of an outside consultant to augment the skils set of existing employees is an efficient, and sometimes necessary component in the consolidation. Consultants not only fill in deficiency gaps, but also may assist with planning by using their knowledge of best practices and the most recent technology. In addition to providing direct assistance for planning, obtaining a third-party opinion on a company's consolidation plan is a good idea. Filtering a consolidation plan through third-party "eyes and ears" will improve the plan.