Many mergers and take-overs fail to deliver their early promises and this is often to do with failure to deal with ‘people issues’. In this article, Alan Deboo explores what made the Lloyds Bank/TSB merger so successful.

Many mergers and take-overs are launched as high profile deals that will bring benefits to the customers, shareholders and employees of the companies involved. And yet many fail to deliver the early promises made by top executives and advisers. Research shows that, even where there is a clear business rationale for two companies to join forces, the lack of a sound integration strategy and process is a major cause of disappointment in the subsequent performance of many of these ventures. And people issues should be a key element in any integration process. Companies that have made a success of mergers and takeovers have recognised the vital importance of harnessing the enthusiasm and commitment of all the people involved. But recognising the crucial importance of people issues isn’t enough – they must be identified, thought through and managed at every stage of the process if the venture is to be a success.

A well-known case study that exemplifies how to manage the people issues is the merger of Lloyds Bank and the TSB, where ER Consultants helped to develop a new integrated employee relations strategy. When the merger of the two banks was announced in October 1995 the underlying strategic rationale was sound. Both banks were already strong players in financial services; and it was felt that their differences, in a potential merged organisation, would exceed the sum of its parts. Lloyds was one of the top four high street banks, long established, with a good mix of personal and corporate customers. Its branch network was particularly strong in the southern part of England. The TSB was smaller, but innovative, vibrant and capable of rapid change. Its customer base was predominantly personal and its branch network strong in the north of England and Scotland. The combined bank would benefit from the mix of these corporate competencies and customer bases, and enjoy an enlarged branch network with coverage ‘from Penzance to Wick.’

The complementary qualities of the two banks were exploited in the merger process. Lloyds was strong on tackling challenges in project mode. This brought thoroughness of planning, prioritising and a clear sense of direction to the process. The TSB’s strengths were proactivity, innovation and speed. The combination was powerful. A senior manager said: ‘We lost the negatives and gained the positives of our respective approaches.’

Other mergers were analysed to see what could be learned and applied to the Lloyds TSB process. One result was the decision to treat and communicate it as a merger, not a take-over (Lloyds was twice the size of the TSB). Another was to communicate to employees the key principles that would guide the merger process, including:

• The good values of both banks would be respected and would form the foundations for future developments
• In bringing together strategies, policies and systems, the ‘best of both’ would prevail – one of the main objectives would be to enhance the benefits both banks brought to the party and not to lose value.

The second principle made practical sense. The larger partner in a merger may be tempted to think ‘size is right,’ and assume its methods and practices should replace those of the smaller partner. Lloyds TSB avoided this. Where choices had to be made to overcome duplication, the ‘best of both’ principle was applied. Lloyds TSB now has a combination of systems, policies and solutions that are best for the combined operation, irrespective of originating partner.

People issues were seen as critical in the integration process, alongside the imperative to maintain the business. It was recognised that the merger – if not well planned and managed – could create employee uncertainty that would be evident to customers, leading to their loss of confidence and – even worse – to the loss of their business.

Hence the decision that, within a carefully planned integration process, the immediate impact on the branch network would be minimised to avoid unnecessary interruption to the business streams. Instead, the early focus was on rationalising the top management, administrative and supporting functions to overcome duplication. Within twelve months of the merger announcement, new headquarters and functional support organisation structures were designed and staffed to meet the future needs of the combined bank. Organisation design and appointment decisions were guided (and seen to be guided) by the ‘best of both’ principle, as were the assessment and appointment processes. In the meantime, the two branch networks continued to operate in parallel.

Fear of job losses arising from the merger was recognised as another potential cause of branch employee uncertainty with adverse effects on customer service. Senior management never gave any indication of potential job losses. Instead, an assurance was given that compulsory redundancy would be the last resort. Both banks had employment security agreements with different terms. Employees were also assured that, if compulsory redundancy proved unavoidable, the terms of their originating bank’s agreement would apply. The care taken with these processes was rewarded; significant reductions in head-count were managed with minimum impact.

Communications and employee relations

From the very start of the merger process, great importance was attached to communications. Here the benefit of first sorting out the top structure of the combined bank was clear. The newly appointed senior managers and functional specialists were committed to the future success of the combined business. This commitment and leadership came through in regular, centrally generated messages delivered on special documentation under the logo of ‘Working Together.’

The merger involved a Parliamentary Private Bill, and it was necessary in this context to develop and agree a new employee relations strategy. The two banks had different employee relations backgrounds. Lloyds Bank recognised the Lloyds Trade Union (LTU), whereas the TSB recognised UNIFI. ER Consultants were asked to work on the development of a new integrated employee relations strategy. Account was taken of the likelihood of a Labour Government changing the employee relations environment inherited from the Conservatives, and of developments from Europe. The resulting strategy for the merged bank has proved its worth by enabling on-going change whilst maintaining stable relations.

An early task for pay and reward and employee relations specialists was to design and negotiate a new package of terms and conditions for the harmonised grades covering 90% of the staff in the merged bank. New conditions of service were seen as crucial to the creation of a new common culture for the future. In particular, enhanced incentives to deliver business performance and customer service standards were felt to be necessary.

Supported by rigorous project management, the main features of the new harmonised conditions were designed and implemented by January 1997, just over twelve months from the merger announcement, a time scale which many had doubted could be achieved. The outstanding issues were resolved by September 1997. At this time, the contracts of employment of staff covered by the harmonised grades proposal were still with their original employers, and so the common conditions were negotiated in parallel with the LTU and UNIFI.

With new harmonised terms in place, the scene was set for the bringing together of the branch network, which was achieved during 1999. Although some 300 branches were closed, co-locations helped to minimise job losses. The bright blue and green logo of Lloyds TSB is now a familiar feature of the high street and in sports sponsorship, and it is hard to believe that the new brand name of the merged bank was launched as recently as June 1999. The bank recognised that it would have one chance to get the new name right and did not mind taking time over the decision. The launch of the new name was also the point at which the contracts of employment of harmonised grades transferred from their original banks to Lloyds TSB Bank Plc. What would Lloyds TSB say were the main lessons from the merger? A senior manager said without hesitation: ‘Certainly don’t underestimate the sheer scale of the integration task, especially the challenge of integrating or replacing complex technologies and systems, but in the end it’s the people issues that really matter.’

By 1999, just when Lloyds TSB managers perhaps thought they could soon put their feet up from merger activity, the acquisition of Scottish Widows was announced! This is a prominent example of the current wave of mergers and take-overs in the retail financial services sector. The track record of the Lloyds TSB merger – and the valuable experience the management have gained in the process – should augur well for the integration of the bank and the Edinburgh based insurer, which formally began on 3rd March 2000.

For further information, please contact Martyn Sakol:
T +44 (0)1223 315944
E martyn.sakol@erconsultants.co.uk