The unconventional Mr. Goodwin

Cast as “Fred the Shred,” a cold-hearted cost-cutter, when he joined Royal Bank of Scotland, CEO Fred Goodwin is playing against type as he brings NatWest into the fold. He may be writing a new playbook for profitable bank mergers.

Cast as “Fred the Shred,” a cold-hearted cost-cutter, when he joined Royal Bank of Scotland, CEO Fred Goodwin is playing against type as he brings NatWest into the fold. He may be writing a new playbook for profitable bank mergers.

By Jane Adams
August 2001
Institutional Investor Magazine

Fred Goodwin joined Royal Bank of Scotland Group in 1998 with a reputation for hard-boiled cost-cutting that he’d earned as the chief executive who in two years led the turnaround of Clydesdale Bank, the sluggish Scottish subsidiary of National Australia Bank Group. He promptly got the chance to live up to his nickname, “Fred the Shred,” when RBS bought the much-bigger National Westminster Bank after a ferocious takeover battle.

On March 6, 2000, the day that the £20 billion ($30 billion) deal closed, Goodwin rose from deputy chief executive to group CEO of a sprawling institution burdened with redundant staffing and overlapping infrastructures. Opportunities abounded for RBS to boost the bottom line - and shareholder returns - by imposing its more efficient systems and procedures on the bloated NatWest, slashing jobs and costs.

So Goodwin, who had set ambitious goals, proceeded to shred. By December 31, well ahead of schedule, the company had achieved £653 million of its £1.2 billion in targeted savings, much of it through layoffs: Of 18,000 planned job cuts (out of 99,000 employed), RBS had made 13,000 by the end of 2000. This has helped make Goodwin’s goal of £5 billion pretax profit for this year all but certain: RBS earned £2.7 billion in the first half. (It earned £4.4 billion last year before accounting for about £1 billion in amortization and integration costs.)

Goodwin’s moves followed the standard-issue postmerger playbook that enables acquirers to justify the high prices that they pay. But in other critical ways, the 43-year-old CEO is proving to be anything but conventional, refraining from attacking the usual targets: heavily staffed departments such as retail and small-business banking. Focusing on revenue growth as much as on savings, Goodwin hiked spending on customer service, which other banks have cut back. Short term, those banks sweetened their bottom lines, pleasing investors, but they stunted growth as disgruntled customers fled. Two poorly executed U.S. deals - Wells Fargo & Co.'s 1996 acquisition of First Interstate Bancorp and First Union Corp.'s 1998 takeover of CoreStates Financial Corp. - left the surviving banks reeling from massive customer defections (10 to 20 percent in some retail markets) and vulnerable to takeovers. (Wells was bought in 1998 by Norwest Corp.)

“Going against the prevailing wisdom has worked for us,” says Goodwin, who last month plunked down $2.1 billion to buy the retail banking arm of U.S.-based Mellon Financial Corp. “I don’t mind what our costs are, and I don’t mind how many people we employ, as long as they are in the right proportion to our total income.” During the 1990s, he likes to point out, RBS’s costs grew faster than any other U.K. bank’s, but its income grew even faster, improving its efficiency. “That’s the model we’re embarked on just now,” he says.

“The ‘Fred the Shred’ tag must intensely annoy him, because he would say that the whole purpose of the NatWest transaction was to extract revenue from an underleveraged NatWest franchise,” says Simon Samuels, head of U.K. bank research at Schroder Salomon Smith Barney. He praises Goodwin for taking a longer view: “The cost-cutting is a three-year freebie - nice to have, but it does not dominate the strategy.”

According to an SSSB analysis of postmerger prospects for revenue growth and cost reduction, RBS-NatWest will deliver more benefits than other recent U.K. banking deals, including Barclays’ merger with Woolwich and Bank of Scotland’s pending purchase of Halifax. Goodwin himself boasts that within a year of buying NatWest, RBS had extracted more savings than Lloyds Bank has in the five years since its merger with Trustee Savings Banks.

In addition, RBS is delivering some investor-pleasing numbers. At a recent £16, RBS’s share price was double its level when the NatWest merger closed. The company’s shares are flat this year; the Financial Express Prestel U.K bank sector index has fallen about 10 percent. With £320 billion in assets and more than 2,200 branches, RBS boasts a market capitalization of £44 billion, second among British banks only to HSBC Holdings’ £75 billion. In the U.K., RBS ranks first in corporate lending and deposits, private banking, offshore banking, supermarket banking and credit card processing for merchants. It is second to Barclays in retail market share and credit cards issued.

Pushing an agenda that he pointedly labels “another way,” Goodwin has won over skeptics who doubted that the old RBS - a solid performer but hardly world-class in terms of market cap or global reach - could bring a sprawling and troubled London clearing bank in tow. “Goodwin is extremely hands-on and extremely sales-, product- and relationship-driven,” says Anik Sen, European bank research chief for UBS Warburg. “He’s not a manager who runs the bank only by numbers.”

Now RBS seems to be setting a new standard for postmerger performance, at a time when markets have wearied of the inability of bank merger partners to meet projections. Analysts credit much of the success to Goodwin’s strategic vision, which includes four strikingly unconventional pieces of wisdom.

Bank on the branch

“Customers like branches. Even customers who don’t go into branches like the idea of there being branches where they could go if needed,” says Goodwin.

Most bankers would agree, even if many of them once thought the clicks of the Internet would lower the cost of bricks-and-mortar retail banking. In mergers, however, few would refrain from taking advantage of overlapping retail networks to close less-productive offices. RBS had far fewer branches in the U.K. than NatWest did, but it had hundreds of opportunities to consolidate when its postmerger branch total soared from 648 to nearly 2,300. (In Central London alone there are at least three sites where NatWest branches neighbor or face RBS branches, and many more where they are only a block or two apart.) As part of its vain takeover defense, NatWest itself had planned 200 branch shutdowns.

But Goodwin took the opposite tack. He halted the NatWest closings in midstream (at least 35 had been shuttered) and decreed that there would be no more. He saw great value in NatWest’s brand and feared alienating loyal customers. Even the most obvious targets for closings - when, say, RBS and NatWest had competing branches on any given High Street - were avoided.

“The last situation where you’d consider closing a branch is where you’ve got two of them side by side. That’s the clearest situation where the customer has made a choice,” says Goodwin. “If we come along and say we’re closing their branch, they are most likely to bank with someone else, because we are overturning their wishes.”

Instead, he set about improving NatWest’s level of customer satisfaction, which had fallen in surveys that ranked RBS No. 1 in the country. To repair NatWest’s reputation for poor service, Goodwin dispatched 1,000 “customer advisers” to thinly staffed branch offices. And he budgeted £150 million to refurbish the locations.

The moves fit the RBS vision, set out by Goodwin’s far-sighted predecessor, Sir George Mathewson, of promoting multiple brands and identities. Mathewson’s “strategic options” approach assumed that no single bank could be all things to all customers but that it could gain leverage through a varied portfolio of corporate structures and brand names. So RBS kept the NatWest identity, as it has those of NatWest’s Coutts & Co. and Ulster Bank subsidiaries. Its joint venture with the Tesco supermarket chain doesn’t display the RBS name at all.

“Customers like different things. And brands do have power,” says Goodwin. “For us as a group to have one brand and to try and fit everyone into that seems to be a much more difficult model to implement.”

Keep ‘em calling

“Banks get so wrapped up in their own view of the world that things get done in the perceived interests of the organization and not in the interests of the customer,” says Goodwin. “We view ourselves as being in the customer-satisfaction business.”

Consider RBS’s approach to phone calls. Many banks, in their drive to cut costs, have pushed customers out of branches and onto the phone or the Internet, to automate as many contacts as possible. Inquiries are now routinely answered by automated voice response systems, which lower personnel and related overhead costs.

Smart idea? Not to Goodwin. He worries about skimping on contact with customers and says he is adding staff to RBS call centers. That helps to explain why RBS spent £12 million more last year than in 1999 on customer-support operations, bringing the total to £350 million, while other expense categories, including information technology and companywide staffing, were down. (Total costs, inflated by the merger, rose 1 percent in 2000, but they fell 1 percent in the first half of this year.)

“We want telephone banking that customers like, as opposed to something they endure,” Goodwin says.

Unlike competitors with centralized call-in departments, RBS publishes the phone numbers of its branches so that customers can contact them directly. Before the merger, Goodwin says, “NatWest was the worst” at allowing callers access to their branch bankers.

To underscore the importance of service and revenue, Goodwin says he’d like to come up with a measurement of “income per call” rather than relying on a cost metric. “Customers are telling us that they’d like to talk to a person. We have to make sure we do what the customers want and not be driven by technology,” Goodwin adds.

Don’t panic in downturns

“You can’t just roll along with the good times, do lots of business and then go back into your burrow,” says Goodwin. “You’ve got to be looking for business all the time.”

That, of course, is more easily said than done. Although the premerger RBS was principally a retail bank, Goodwin sees big opportunities in NatWest’s commercial banking. It’s a huge business: Last year the unit contributed £2.7 billion of gross profit, about equal to what RBS earned from U.K. retail activities. With the merger, RBS combined corporate banking and capital markets into a single unit that has relationships with one third of the country’s medium- and large-size businesses.

RBS puts 5,000 corporate loan applications per month through a credit committee process for approval. Most large banks - NatWest was among them - don’t go to this trouble, sending only a relative handful of large credits up to a senior-level committee. This demonstrates RBS’s desire for hands-on customer contact even in the risk-assessment process; the bank commits to getting most answers back within days.

“It’s relationship-driven,” UBS Warburg’s Sen says of the merged corporate bank’s approach. “It’s an understanding of the customers, a willingness to work with clients and take each proposition one by one, rather than running it on a top-down, macro view, which is how NatWest used to run their business.”

At a time when many banks are moving assets off their balance sheets, RBS is taking on more - one reason it sustained a 14 percent rise in loss provisions for the first six months of this year. And while other venture investors are licking their dot-com wounds, the bank is stepping up its commitment to private equity and venture capital. In January RBS earmarked £150 million over three years for second-stage technology, media and telecommunications investments, through newly created Royal Bank Ventures.

RBS is also adding U.S. assets: The Mellon Financial acquisition will add $6 billion in loans to the $32 billion balance sheet of RBS’s Providence, Rhode Island-based subsidiary, Citizens Financial Group.

Focus on the factory

In many mergers the back office provides easy pickings for expense reductions. But there is always a risk of moving too quickly, alienating employees and, in the worst case, customers.

With NatWest, Goodwin followed accepted postmerger principles for back-office consolidation, but with a twist. Like many acquirers, RBS quickly determined which of the two banks’ systems to adopt - almost always its own - and set a goal of having a single operating platform. (Some banks never get there: The integration of Lloyds TSB is still a work in progress, and U.S. institutions like Bank of America Corp. and Bank One Corp. have spent years wrestling with disparate systems.)

But Goodwin and RBS didn’t just commit to a single technology platform with common processes and products to ensure economies of scale. They formed a centrally managed processing and technology unit and gave it an unequivocal mandate to do whatever was necessary to combine and streamline everything from check and ATM processing to telecommunications management to purchasing and procurement of supplies. Goodwin dubbed this division “manufacturing” - an unglamorous title found nowhere else in banking. Despite his utilitarian terminology, he regards manufacturing as a competitive weapon, improving efficiency and the bank’s ability to make more acquisitions.

Goodwin’s factory enabled him to exceed his schedule for laying off workers and racking up savings from what he calls “deduplication” of overlapping expense categories. Seven NatWest and two RBS processing centers (out of 89 total back-office sites) were closed, accounting for £204 million in merger-related cost reductions - almost one third of the savings identified through December 31. Deduplication benefits are expected to add up to £600 million within three years of the merger.

Headed by NatWest veteran Mark Fisher, the manufacturing division took control of NatWest’s branch operations in about seven months, five months sooner than originally scheduled. It also took charge of the 550-employee call-center operation. And it tamed a costly beast: NatWest’s premerger efficiency ratio was an astoundingly high 69 percent. In other words, it cost 69 cents to produce $1 of revenue - at least 15 cents more than what most analysts consider acceptable for big banks. The cost-to-income ratio of the postmerger RBS stands at 48 percent, down from 56 percent a year ago.

RBS’s Citizens subsidiary will apply the same manufacturing approach to Pittsburgh-based Mellon, which has been running at a 63 percent cost ratio. Expanding from New England, Citizens will double its branch network, taking on 345 Mellon offices, 4,100 employees and $13.4 billion in deposits. RBS projects that Citizens’ 54.9 percent ratio will drop to 51.8 percent - without branch closings.

Centralization brings an added financial-reporting benefit: a clean accounting of expenses. In 2000, RBS manufacturing costs totaled £1.7 billion, down a pro forma 11 percent from 1999. That goes straight to the corporate bottom line, and business units aren’t charged - or blamed - for things that are beyond their ability to control.

Says UBS Warburg’s Sen: “Goodwin is unique in U.K. banking in terms of not allocating manufacturing costs to various divisions. It reflects a willingness not to overload the businesses with costs that are not directly allocable.”


Goodwin’s blend of cost-cutting toughness and customer friendliness. Previewing its midyear earnings report, due this month, RBS said in July that its first-half profit before taxes, amortization and integration costs would be up 37 percent. Net income would increase 14 percent.

Goodwin declines to ascribe his views and approaches to any specific personal qualities - or to any special corporate strategy. He says that his modus operandi comes down to putting himself in his customers’ shoes, which means regularly getting in his managers’ faces. “It’s hard for me to do my job if I don’t have an understanding of how our businesses work,” he says.

With that detail-oriented, nonconformist style, Goodwin may be proving that bank mergers do not make sense because of cost cuts alone.