With reference to the last board meeting and my appointment as Director of Human Resources Management a decision was taken that the recently merged financial services organisation will a adopt a new way of doing things which will be beneficial to all its stakeholders.
This report discusses how organisation design, structure and culture can develop an approach this is capable of achieving board's strategies. It also discusses the key elements of risk management within various departments and also a process for the development of a successful new product. The findings, conclusions and recommendations are discussed and outlined in light of the research made.
The aim of this report is to ideal solution is to increase the profit by minimising the risk. Risk has always been associated with the negative because that does the most harm, but there is also the positive element of risk as taking calculated risk can often result in profit. If an organisation does not take risks it will not earn profit. Risk must be minimised but sometimes the more the risk the higher the profit will be.
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3.1.1 Findings Question A
The human resources department is key department in every organisation therefore imagine its role and importance in a merged organisation. The department will be responsible to assure that cultural issues, organisation design and structure issues will not disturb the integration between the two organisations.
The structure of the organisation is one of the first things that have to be set. Mabey, Salaman & Storey (2001) 'describe the structure of an organisation as the pattern of relationships between roles in an organisation and its different parts'. They see the aim of the structure as to serve, allocate work and responsibilities and to create a framework of order and command so that organisation's goals are achieved.
Staff redundancy is something that has to be taken into consideration since two organisations are merging and in some cases you can have two departments who before used to do the same job like for example human resources and finance departments.
Every organisation has a unique culture therefore the merged organisation will have its own values, beliefs and behaviour. Schein (1988) views culture as "a pattern of basic assumptions invented, discovered or developed by a given group as it learns to cope with its problems of external adaption and internal integration that has worked well enough to be considered valid and therefore is to be taught to new members as the correct way to perceive, think and feel in relation to these problems". In a merged organisation what Schein said is very relevant since at the beginning the organisation will have to cope with the integration of the staff from two different organisations and therefore the managers here will have a great say since they have to lead their departments out of this situation and create stability within the department.
3.1.2 Conclusion Question A
McNamara (1999) commented that "organisation change must include not only changing structures and processes, but also changing the corporate structure". Having said that, the structure of the organisation must be set in a way that it won't hinder the progress of the organisation especially in the future. For example at Banif Bank Malta plc the place where l work which started to operate in Malta at the beginning of 2008, most of the back office work such as updating of accounts, sending and receiving payments, preparing sanction letters, perfecting security related to loans and issues related to garnishees are all made through Operations Department, as this is how the structure of the organisation was set at the beginning. The consequences are that although we are employing many people and many hours of overtime are being worked, the department cannot get rid of the backlog of work and also we are not coping with the daily work which it is not a good think as it affects the image of the organisation. All this happened because the structure that was set in beginning was not good or they did not imagine the organisation will grow that fast in a short period of time.
McMillan (2002) "argued that if the structure of an organisation and the underlying design principles which construct it are not in tune with the core purposes of the organisation and its many environments then it is unlikely to successfully survive". This statement shows clearly the importance of the merged organisation having its own rules and procedures together with the terms and conditions in place as soon as possible so that the staff will be aware of the changes within the organisation, so that they adapt to changes and besides that staff can have a clearly guidance of what the organisation really wants to achieve.
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The culture within an organisation is what makes one organisation different from another. Apart from the less visible level of culture such as values and beliefs of the employees there are the visible ones such as the dress code that due to the merger the organisation must create new uniforms so that it distinguish itself from the ones the organisations had before. Job titles must also be set first of all to differentiate the employees hierarchy level between themselves and also the level of responsibility and authority that the job title that an employee is given brings with it, together with the remuneration package which must reflect the responsibility one has within the organisation.
3.1.3 Recommendations Question A
The structure adopted must enable the managers to organise, plan, direct and control their respective department within the organisation. It is recommended especially in the beginning not to have a high rate of staff turnover as besides damaging the image of the organisation it can also effect the motivation of the other employees and also the organisation working environment. Social events are also important as staff get to know each other better in such events especially in this situation were two organisations are being merged. Managers will also face new challenges and will have a lot of responsibility as besides keeping their department focused to achieve the organisations goals they must also keep their staff motivated and create a productive working environment.
As mentioned in section 3.1.1 in relation to redundancy a solution has to be found to allocate the extra personnel you have into other departments or else for example, early retirement schemes can be made for those over a certain age. Another possible solution is that instead of outsourcing some projects the organisation can use these employees to work on these projects. Another case in point is the situation were you have more than one individual capable of doing a particular job, in order not to lose good people the organisation must try to split where possible a department into two sections or else create new departments and thus eliminate the risk of losing good people. Every individual should be placed in a department were he can be of an asset to the organisation and can help achieving the board strategies.
Since both organisations before had different working styles and cultures, while developing the new set of values and the cultural change, it is recommended that both cultures are respected and taken into consideration as changing completed the culture of the new organisation might create confusion. Staff might resist change which might effect a lot the organisation and it might also hinder its progress. Therefore it is very important that the managers communicate effectively with all their subordinates, to establish a common framework and ensure that openness and equality are always adhered as these are vital to match the pace of change and get the pace right towards organisations objectives.
In relation to the visible level of culture mentioned in section 3.1.1 the new logo and the corporate colour of the organisation must be eye catching so that when customers see the logo they will immediately associate to the merged organisation. For example Banif Bank to rebrand choose a centaur with an arrow pointing upwards which means aiming high and as corporate colour the bank opted for purple and both were a great success, as they helped a lot the bank to introduce itself in Malta. This can help the newly merged organisation especially for its new brand.
It also important that customers feel welcomed and are treated the same in all the branches of the organisation and that they are given quality service and innovative products so that the customer gets a positive image of the merged organisation. The mergers between Nations Bank - Bank of America and BancOne - First Chicago NBD are examples of wider geographic spread mergers. A benefit of such mergers was the fact that the banks were in different regions and therefore more customers could be reached in different regions but the quality of the service was the same in all the regions.
Shareholders are instrumental in mergers as they must make sure that the board is driven by key people that can lead to success and this can be achieved if directors choose especially the right heads of departments as they have to manage the organisation towards success.
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3.2.1 Findings Question B
Risk management is trying to identify and manage the threats that could rigorously effect the organisation. Risk is an event that will generate loss whilst it will effect negatively on the organisation's ability to achieve its strategic objectives. A lack of clear vision of what the merged organisation should achieve, unclear targets, a deficient organisation structure and unresolved cultural issues are among the reasons for failure.
An organisations culture is important in risk management as an organisation with a positive risk culture can lead individuals to follow the rules and procedures which especially in a merged are very important as they give a clearly indication to the staff on how they can accomplish their job and what is required from them to be done and thus employees will take personal responsibility to follow them and supports risk taking decisions.
Fitch (1997) state that "credit risk is caused by the exposure of financiers to financial losses that arise from changes in the debtors' credit worthiness and their inability to meet contractual payment terms". This is very risky as if a customer defaults and is not able to repay back a loan which is unsecured this can finish as bad debts and therefore affecting the organisations profit. Concentration risk is a type of risk that can be associated with credit risk but it can also be an organisational risk in general.
Hussain (2000) defined operational risk "as any loss arising from human error, which occurs in the course of everyday business activities such as forms or data processing, data exchange, verification and transmission of transactions". Such risk can happen in various departments within the organisation as an individual can easily input something incorrectly into the organisation system by mistake.
Compliance is the risk of financial losses due to breaches of law, regulations, codes of conduct and legal contracts. This type of risks is one of the most common risks that more than one department can face. Staff working in branches faces this kind of risk daily as nowadays targets are very important, sometimes these in order to be achieved might force an employee to sell a product for example a visa credit card without assessing the individual correctly.
Technological risk can be associated to the fact of not making effective use of the technology, while information security in practice according to Fawcett (2003) is "concerned with safeguarding data because this automatically safeguards the information, this is called data protection and includes data security and data privacy".
3.2.2 Conclusion Question B
As mentioned in section 3.2.1 rules and procedures are there to be followed therefore it is of utmost importance that first of all the board assess them correctly and try to mitigate the risk as much at possible before approving them and then it is the employee responsibility to implement them. Rules and procedures can avoid that certain work is not duplicated and therefore avoid wastage of time, which is very precious for an organisation as it means money therefore if procedures are not set correctly they can result in employees working overtime and therefore extra costs being incurred by the organisation.
Credit risk can also be associated with environmental risk as a customer can finish unemployed and therefore he is not in a position to meet his repayment terms which can result in a default situation. In relation to concentration risk in section 3.2.1 this can be very risky for an organisation having all its risk concentrated in one sector like for example what happened in Malta a lot of banks are not lending on property developments since property is not being sold due to the economic crises and a lot of business are not repaying back in the stipulated period.
Staff turnover is an operational risk which a merged organisation especially in its early stages due to lack of communication and uncertainty can have a high rate of turnover and also there is the risk of losing good people that could be of an asset to the organisation.
Confidentiality is compliance issue that must be adhered as confidential information leaking out of the organisation can seriously affect the image of the organisation and this is a reputational risk that should be avoided as it can lead to the public not having anymore trust in the organisation especially in the situation of a merger were customers will increase.
In relation to section 3.2.1 regarding Technology and Information security in other words it is protecting the organisation from loss or damage of data and ensuring that it can be accessed when required and that the data held on the system is accurate, consistent and up to date. Data privacy is another important factor to prevent hackers and viruses from gaining access to the system or also employees using each others work station is also risky. Technological risks can also be associated with the fact of the organisation making inadequate and/or excessive investment in computer systems.
3.2.3 Recommendations Question B
If the organisation does not take it decisions professionally with a robust management structure, risks which are not calculated and evaluated correctly can often turn into loss therefore the rules and procedures of an organisation are of utmost importance and these besides being implemented the organisation must make sure through internal audits the procedures are being followed and applied by the respective department and also if needed updated or even changed for the benefit of the organisation.
Credit Risk is reduced if the credit risk policy ensures clear guidelines on the exposure that customers can have, for example monthly repayment cannot be higher than 25% of the gross monthly income and if credit risk limits are reasonably and finally if customers offer securities like for example a fixed deposit as collateral. Risk managers assessing loans of substantial values have to make sure to assess attentively the loan proposal especially repayment feasibility and also check customers past track record by checking the statements to see whether the accounts were conducted satisfactorily.
Concentration risk can be reduced through diversification, mainly by spreading the risk for example of loans between personal, mortgages and property development and of the organisation by offering various types of products such as insurances, loans and investment products so that if one products it not so profitable the organisation still has other products from which it can make profits.
Operational risk can be decreased if employees are concentrated on the job they are doing and follow the organisations rules and procedures and also be aware of what is happening in the market. For example Banif Bank has a procedure that before an employee opens an account in order to mitigate the risk if the customer is fraudulent he checks on Credit Info (this is a system that gives all the names of people that have garnishees in Malta) and on World Check (this is a system that gives all the names of criminals or fraudulent people in the world). Double checking and four eyes principle are also important so that human errors can be identified and arranged.
In order to mitigate compliance risk employees have to be sensitive to the need for information on the clients and one of the tools that can be used is know your customer, which requires the responsibility on the organisation to become familiar with the financial affairs of the customer. For example at Banif Bank a customer before opening an account has to fill various forms one of them is the statement of affairs, in which the customers declares all the assets and liabilities that he holds. Thanks to this the employee can prevent from selling inappropriate products or investments to the customer such as a visa card to a customer that has high monthly commitments. Know you customer is also related to legislation matters such as money laundering.
Information security risk prevention methods include fault tolerance were important components are duplicated to limit the risk of hardware failure and encryption, passwords and access security so that the risk of malicious action such as staff using each other's working station is limited and access to organisations system is restricted. Backups and checkpoints are also important as they allow the recovery of data and software in case that organisation has to recover lost information.
3.3.1 Findings Question C
Financial services organisations nowadays have to constantly keep updating their product portfolio and they must also be innovative and develop new products in order to satisfy their existing customers but also to attract new customers. A newly merged organisation in relation to product portfolio and the development of new products has various decisions to make.
First of all the organisation has to decide which products to keep from the product portfolio that both organisations had before since the organisation will have a duplication of products in certain departments therefore product planning and development priorities should be heavily weighted toward integration across product lines. This decision will be effected a lot by the decision made before in relation to the organisation information technology system chosen between the systems both organisation had before. Sometimes financial organisations have many ideas to develop existing products but not always the innovative ideas are possible unless certain enchantments are made to the system.
Another factor to keep in mind as already mentioned in section 3.1 is the fact the organisation will be faced with cultural differences resulting from the merger between the two organisations that will affect the existing product portfolio and also the launching of new products .
3.3.2 Conclusion Question C
The organisation after confirming which products it will retain in its new product portfolio must make sure to tackle the problems that every organisation is faced when developing a new product especially after a merger.
One of the problems that a newly merged organisation faces in relation to product development is communication. Many organisations face this problem as higher managerial levels don't communicate effectively with their subordinates the key elements of the products. The products have to be explained well to the employees since they are intangible and therefore in order to sell the product in the appropriate way employees have to understand the key features of the product. This problem could easily lead to another problem which is the selling of the product as employees will find it hard to explain the product key features to customers especially those employees which are not familiar to the new or existing product.
Another issue is staff resistance to change especially changes related to the new product portfolio. The organisation must handle this situation with great care as employees especially those who have direct contact with clients can affect the image of the organisation in a negative way. In addition customers can also get confused because they no longer know who their main contact person is following the merger. This can be big issue for the organisation especially if both organisations before built their reputation on quality service and innovative approach to its customers.
3.3.3 Recommendations Question C
It is recommended that before that the organisation starts to discuss a new product development first of all the organisation must have an organisation structure and culture together with a flexible management structure that supports a new product development. It is also very important for organisation to have a diversified product portfolio therefore before developing the product the organisation must go through its existing portfolio and target a sector in which it is not so competitive or else target a sector in the market according to the needs of the organisation by developing a differentiated product.
After having identified the targeted sector the first stage of the process is idea generation. These ideas can be internal ones such as ideas by employee suggestions or informal management suggestions or else an idea by the marketing research department, but they can also be external ideas such as ideas by customers, or through suggestions from market research agencies or even copying competitors products. For example many retail banks here in Malta their main idea generation is by modifying a competitor's product in the market which is very competitive such as what happens yearly with term deposits products.
The second stage is the screening process of ideas which is divided into two stages. The first stage is primary screening, which will eliminate the ideas which are not compatible with board strategies. The secondary screening is a detailed evaluation of the product idea such as costs involved, evaluation of competition, length of the product life cycle, if the product can easily be copied and how long it will take for the product to generate the projected profit.
After the screening process only a small percentage of the original ideas will proceed to the next stage which is concept development. This stage involves the transfer of the product idea into features and attributes that the consumers will be offered through the new product and how it will be marketed to the public.
The next stage is testing. Through this process the organisation will be able to identify any modifications that the product needs and it will also provide indications if the product will be successful in the market. For example Banif Bank Malta tested its credit and debit cards by distributing the cards to the managers and heads of departments to test them in the market. After a week all transactions were verified and checked and the end result was satisfactorily.
Comprehensive business analysis is the next stage. The organisation already has an exact product concept, together with an identified market segment that can lead to a full business analysis being undertaken. In this stage the organisation can look into greater detail those points mentioned in the secondary screening stage such as product growth rate and competitors with more accuracy. For example during this stage Banif Bank before launching its Visa cards calculated its sales forecasts, cost estimates and calculated its break-even point which was that 75 cards had to be sold weekly.
The final stage is the product launch of the newly developed product. In this stage the product moves from the development stage into the introduction stage of the product life cycle. Here it is very important the timing of the launch, and also that it is supported by the necessary promotion to support the launch. For example Banif Bank in Malta introduced the Visa cards concurrently with the opening of a new branch and people applying for Visa cards from this particular branch were given the Visa free of charge without paying the usual processing fee.
The Organisations risks of failure are minimal by complying with the mentioned process and it can look forward for a successful launch of the new product.
A Deloitte & Touche study (2002) "found that only one third of companies could say that the merger was successful. Mainly the reasons for failure were people and cultures being ignored, slow integration, lack of communication and failure to clearly define roles, responsibilities and incentives and a clear structure". Therefore in a merged financial services organisation structure, culture and organisational design are essential together with a clear marketing strategy, innovative products and calculated risk in order for board's strategies to be achieved.