When Two Titans Merge: Management, Organization, and Technology Challenges at Citigroup The financial world was shaken on April 5, 1998, when Citibank Corp. (Citicorp) and the Travelers Group announced they would merge. The size of the merger is stunning. It is the largest in history, with a market value of over $83 billion on the day it was announced. In addition, the merger is historic; it directly challenges United States laws that have governed the American financial industries since the days of the Great Depression by keeping the banking and insurance businesses separated. The new company, named Citigroup, Inc., is being characterized as a financial supermarket. The chief executives of the two companies are co-chairmen and co-chief executive officers of Citigroup. The merger was approved and went into effect in October 1998. The Citigroup merger reflects a late 1990s desire to increase market share through merging. The two companies bring very different financial businesses to Citigroup. It thus is strong in traditional banking, consumer finance (including home mortgages), credit cards, savings and IRA plans, investment banking, securities brokerage, asset management, and property, casualty and life insurance. A financial company embracing such a broad business spectrum is common in other parts of the world but had not existed in the United States due to regulatory restrictions dating from the 1932 Glass-Steagall Act. By combining the two companies, Citigroup has a dramatically enlarged client base and extensive domestic and international distribution channels. The new company is massive. In 1997 Citicorp and Travelers had combined assets of $700 billion, net revenues of nearly $50 billion, a combined equity of more than $44 billion, and an operating income of approximately $7.5 billion. Citigroup is starting with about 150,000 employees and over 100 million customers. It is the largest financial services company in the world. The Merging Companies: Citicorp and Travelers Citicorp is one of the largest banks in the world and is the world's largest issuer of bankcards with over 60 million active cards in 1998. In addition it has a major global reach, with more than 1000 bank locations in over 40 countries around the world, plus banking services in about 60other countries. The bank also specializes in transaction and funding services both for global corporations and for growth companies in emerging market areas. Citicorp's CEO, John S. Reed, combines a thorough understanding of business with a broad knowledge of information technology. Reed was involved with the development of Citibank's highly successful ATM machines and was responsible for pushing Citibank into the credit card business. As a result, in 1984, at age 45, he became Citibank's CEO. In 1991, when Citibank stock price fell to single digits, Reed was almost unable to hold on to his job. It was during this crisis that he made the decision to change Citibank's focus from large corporate customers to individual customers in order to achieve more growth. The Travelers Group is best known as an insurance company, but it is much more. Among its subsidiaries is Salomon Smith Barney, a major Wall Street brokerage firm. It is also the parent of Salomon Smith Barney Asset Management, Travelers Life & Annuity, Primerica Financial Services, and Travelers Property Casualty Corp. The Travelers Group specializes in investment services, asset management, consumer lending, life insurance, and property casualty insurance. The Travelers we know in the 1990s is actually the creation of its current CEO: Sanford I. Weill. He has an extensive and very successful brokerage industry background. In 1993 Weill bought the ailing Travelers Insurance Company, and through new management and severe cost cutting, turned it around. He then bought various companies including Shearson Lehman and Smith Barney, the stock brokerage firms. In 1997 he bought Salomon Bros., merging them all. Today Travelers is a huge and very successful company.
A Study in Contrasts Citicorp and Travelers have two fundamental principles in common: First, both have a core commitment to customer service; and second, in this age of globalization both companies have a desire for a major global reach. However, their differences are numerous. O Global reach: Citibank is a leader in electronic commerce, using it as a basic underpinning of its strategy to offer round-the-clock service all over the globe. As Ed Morowitz, Citibank executive vice president, explains it, "In essence, our goal is to be within one click, one call, one mile from our customers, no matter where they are around the world." On the other hand, Travelers has only a relatively limited reach globally. O Domestic reach: Despite Citicorp's great international product and service distribution systems, within the United States, Citicorp is just another important bank that falls far short of achieving nationwide coverage. Travelers, on the other hand, has 80,000 people selling its products in homes and offices throughout the United States. O Customer base: Citibank has a younger, less affluent customer base, while Travelers' customer base older and more affluent. O Sales channels: Citibank is strong at mail, telephone, bankcards, and branches, while Travelers' strength is in personal, often home, sales staff selling. O Product offerings: While both corporations are part of the financial industry, they offer very different products, with little overlap, as you can see in the previous section describing the two companies. O Customer asset management: Although Citicorp is a bank, it is weak in asset management, while Travelers is a major asset manager, with more than $200 billion in mutual funds. O Technology: Citicorp stresses the development and use of advanced, innovative technology and is a leader in electronic banking services. Travelers, on the other hand, has a decided preference for low-cost no frills systems. For example, Travelers forced Smith Barney to abandon its technologically advanced trading systems and instead use Travelers' older, simpler systems inherited from Shearson Lehman. O Centralization and standardization: Finally, while both companies are working toward centralized information systems, Travelers, particularly Salomon Smith Barney, is much more advanced in standardizing and integrating its systems than is Citicorp. Why the Merger? The basic concept driving Citigroup is that it is to be a financial one-stop supermarket. That is, it will be a customer-centered organization that offers a wide variety of product lines that can be cross-marketed and cross-sold to its customers. At a congressional hearing on the proposed merger, Charles 0. Prince, General Counsel of the Travelers Group, and John J. Roche, Citicorp General Counsel, jointly declared that "The ultimate test for our new company will be simple: Will we provide a high level of value and convenience to our customers?" They stressed the cross-selling synergies that are created by the merger, and emphasized their belief that Citigroup will succeed due both to the quality and to the breadth of their joint products. They also stressed their greatly expanded and innovative distribution channels that will include branch office locations in over one hundred countries around the world, individualized in-home service, and the Internet. The complementary nature of the two companies' outreach strengths is the key. A major reason both companies became interested in this merger is that most people purchase different financial services from different companies. A person will bank with one company, buy life insurance elsewhere, handle her investments with a third company, and may even have her home mortgage with a fourth company. Once the two firms have become more integrated, Travelers agents will be able to offer a whole set of Citicorp products to their current customers, and Citicorp employees likewise will have a new set of Travelers products to offer. For example, Travelers agents could sell mutual funds, and auto and life insurance to Citicorp customers, while Citicorp could sell home equity loans and bankcards to Travelers customers. Reed offered this comment: "The revenue has to come from enhancing each other's businesses. I 2
know how Salomon Smith Barney can enhance our banking business: It will greatly enhance our ability to service customers around the world in an area where we were relatively weak-capital markets." Combining the market strengths of these two firms is another reason for the merger-Travelers gains globalization while Citibank secures an expanded presence in the United States. With such worldwide coverage, the two CEOs believe the merger will I give them cross-selling opportunities throughout the world. In addition both CEOs are concerned about competition from foreign companies who do not face the United States legal restrictions against combining banking with insurance. "U.S. financial services companies must be able to offer customers the same array of products and services that their international competitors are now free to provide," they stated. The two companies see other advantages as well. For example, Weill stresses the reduced risk that comes with greater diversity, saying, "Our company will be so diversified and in so many different areas that we will be able to withstand these storms [future market collapses]." Both companies believe that as a single company, they will be able dramatically to expand their customer base. In April 1998 Citibank executive vice-president, Edward Horowitz, announced a goal of one billion customers worldwide for Citigroup by 2010, a ten-fold increase. They will rely heavily upon electronic connections such as home banking and electronic commerce. Management also sees opportunities for cost savings through improved and more efficient customer service, and reduced overhead and distribution costs. Citibank claims its Asia-Pacific credit and bankcard costs per transaction have fallen dramatically through centralized backroom processing. Some also see vast savings by standardizing and integrating their information technology. Diogo Teixeira, president of Tower Group, estimates that the combined organizations can save about $700 million annually in IT costs. He believes the one-time cost of the IT merger will be about $100 million, thus leaving vast funds available for new IT investment. Will Cross-Selling Be a Successful Business Strategy? Many observers have raised questions about the theory behind the merger. They point to repeated past cross-selling failures, including attempts in the 1980s by Sears and American Express. Studies indicate that only about 20 percent of all financial services customers bundle their services with one provider. They cite an interesting statistic, that 80 percent of life insurance agents have never even sold an auto insurance policy. According to Paul Newsome, [IBC Oppenheimer analyst who follows Travelers, "The basic risk is that they put these [consumer operations] together and nothing happens. Something will happen there, but it could be very small." Today the conditions for cross-selling may be worse than ever before because customer choices have multiplied. The Internet is now making comparison shopping for financial services quick and easy. Potential customers shop on-line from the comfort of home, comparing services and costs, making decisions, and even entering transactions. On-line banks are beginning to appear, and brokerage houses with online facilities, such as Charles Schwab and E*Trade, are taking business from traditional brokerage houses. In addition, computer financial packages such as Intuit's Quicken offer similar services that customers can also use with relative ease. The question analysts ask is, why would most people buy their financial products from one place when they can easily do better by selecting the best products for themselves? Merging Two Cultures The process of merging two such large organizations is fraught with dangers. Cultural differences are fundamental and must be addressed if the merger is to succeed. Citibank and Travelers concepts and practices regarding pay structure are quite different. Citicorp compensates its bank officers and executives much as other banks do. It has about 1100 corporate calling officers of whom only three earned more than $1 million in 1997. Citicorp uses grants of restricted Citicorp stock to reward and hold onto its high level people, although once the employees have purchased their shares, Citicorp imposes no general requirement that they hold on to those shares. In addition, Citicorp does not require its officers and board members to be significant shareholders. As a result the officers and directors combined owned less than one-half of one 3
percent of the company's stock, giving them only a minimal financial stake in the future success of the company. Travelers views compensation very differently. First, Salomon Smith Barney, its brokerage and investment banking company, has about 1000 investment bankers of who about 150 were paid over $1 million in 1997. In addition, Travelers offers bountiful stock option grants and binds its executives' fortunes tightly to that of the company by including stringent restrictions on their right to sell their stock. Weill personally owned 1.3 percent of Travelers' shares, and the other officers and directors combined owned another 1.1 percent. The two companies also differ on compensation for back-office operations. Back-office pay traditionally is high in investment banking firms like Salomon because the staff works on sophisticated, highly speculative derivative products. At Citicorp the back-office pay is much lower because they work on much less intricate products such as check processing. Many analysts fear that such different pay structures will destroy the morale of many employees, and so they believe it is essential to achieve a unified approach. But this may not be possible. Citicorp vicepresident Robert McCormack defends the bank's compensation policy, arguing that Citicorp's corporate banking business "is the most profitable corporate banking business on earth. We don't do that underpaying people." Yet Travelers can hardly cut its investment banking salaries and still compete in hiring and retaining top employees. Executives at Travelers believe that its stock options policy has resulted in a very strong sense of teamwork. As they see it, executive compensation has been heavily tied to Travelers stock price, which reflects the profitability of the entire company, not just one's own area. Yet Reed argues that stock options are not appropriate for a global organization with many foreign senior managers because options are strange to most foreigners. Interestingly, Citicorp's culture is reputed to be much more "go-it-alone" than is Travelers', and even Reed says he would like to see more teamwork at Citicorp. Risk-taking is another area of sharp cultural contrast. Citicorp has been much more risk-averse than Travelers. Citicorp trades stocks, bonds, and currencies for its clients but not for its own account while Salomon takes large trading positions for its own account. Other Nontechnical Merger Problems Still other problems exist. History at both companies shows that their business units have been unwilling to share proprietary customer data for cross-selling even within their own companies. This has made integration of its own units very difficult. For instance, while Travelers acquired Shearson Lehman Brothers in 1993 and Salomon Brothers in 1997, the two units continue to operate separately. Citicorp also "has struggled for years," according to Larry Tabb, to integrate its disparate financial systems in order to develop cross-selling opportunities. (Tabb, an analyst at The Tower Group, Newton, Mass., was the head of back-office operations at Citicorp's U.S. government securities unit during the mid-1980s.) In addition, bankers on both sides of the merger appear concerned about sharing customers in case the merger does not work out. Another possible roadblock is the need to alter the legal environment. The 1932 Glass-Steagall Act separated commercial banking (Citibank) from investment banking (Salomon). It also bars commercial banks from engaging in most forms of insurance underwriting, a major Travelers business. The Bank Holding Company Act, 1976 does allow a nonbank company such as Travelers to own a bank for two years as a bank holding company while it is bringing itself into compliance with Glass-Steagall. At the end of that period, the Federal Reserve could grant three one-year extensions before the company must bring itself into compliance. However, after that, Glass-Steagall will rule and the company will have to be broken apart again unless the law is changed. The Federal Reserve has now given its approval, and in essence the merger is now a giant bet that Congress will radically change or repeal the Glass-Steagall Act by October 2003. Power sharing at the top is yet another minefield that Citigroup will have to navigate. Weill and Reed are known for their strong personalities and egos, and any differences between the two might be difficult to solve. Commentators believe the merger would not have happened if either had insisted on being the boss in the new company, given their strong egos. The co- EO arrangement will have to last several years while the two parts of the company are welded together; Reed and Weill have agreed that neither will retire until the two companies are genuinely merged. 4
Integrating Information Technology Infrastructure It is clear that IT also is critical to the success of the merger. Some analysts even say that success or failure of the financial services supermarket will depend upon how well the two companies' information technology infrastructures and information architectures can be integrated. Creating a financial services supermarket requires integrating information systems, customer databases, product lines, and multiple transaction types. Yet both Citibank and Travelers have very different information architectures, with applications, databases, and processes that are based on very different business models. Over the years, Citicorp built up a very decentralized information architecture by allowing its business units to have a great deal of local autonomy. Many of its information systems are very fragmented, with traders and their offices worldwide allowed to use different servers and applications. Citicorp's information technology infrastructure has about 20,000 different pieces of technology and it is spread throughout many locations throughout the world. Salomon Smith Barney's systems are somewhat more integrated and centrally managed, although they are smaller and locally based. Experts point out two ways of handling the information technology issues associated with the merger. One is to emulate Morgan Stanley and Dean Witter, which did not integrate their businesses and services when they merged, keeping two primary dealers, sales forces, and trading desks. The other alternative is to integrate both companies as tightly as possible. The question is whether Citigroup could cross sell products and become a financial supermarket without this full IT integration. All financial service organizations are very information-dependent because they generate and store immense quantities of data that have been described as "the jewels of the company." Such data are vital not only for customer sharing, but also for data mining to create tailored marketing and sales efforts. By pooling customer data from all of its business units, Citigroup could target banking customers, who for example, might be interested in insurance or investment services. In 1997, combined Travelers and Citicorp IT spending amounted to $6.8 billion, an enormous expense. The payoffs from integration could be significant. For instance, once the systems are merged, future development costs for Internet-based marketing and transaction systems or other capabilities would be shared. In addition to product-related systems, it is likely the two companies could combine other systems, such as accounting and billing systems, marketing and sales, in order to achieve even greater savings. In addition, both Citicorp and Travelers have been experiencing a growing reliance on wide area networks, an essential factor in the success of any globalized business that is centrally controlled and managed. Some experts also claim that bank regulations require that their balance sheets, credit risk assessments, and settlement procedures be integrated. Citicorp has been trying to centralize many of its systems for years and only now is achieving some success. For example, the bank has only recently succeeded in centralizing the processing of bankcards in AsiaPacific after many years of effort. (International Case Study 4 explores this topic.) Citicorp has also spent years trying to reduce its wide area networks (WANs), down to the current 11 regional networks. To finally unite them into one centrally managed network, Citicorp recently had to resort to outside help, signing a five-year $750 million contract with AT&T to outsource its networking in 98 countries worldwide. Travelers is further along with integrating its systems, although key systems of Salomon Brothers and Smith Barney will not be integrated until well into 1999. Citigroup could opt for total systems integration, creating a common hardware and software platform, servers, risk management software, and back-office operations. But building a standard information technology infrastructure serving all of its organizations would require both massive expenditures and organizational changes. Alternatively, it could keep separate information technology infrastructures but create a data warehouse for customer information that could be used for cross-selling. (Citicorp already has a project in process to create a data warehouse to store data on its largest customers.) The expanded data warehouse would be populated with customer data from both Travelers and Citicorp units, but both organizations could continue with their own systems and business processes. The data warehouse approach is more expedient and less disruptive to the organization, but analysts suggest that complete system 5
integration would be required to realize the full range of benefits of a financial supermarket and efficient management of risk. Merging trading floor technology poses difficult technical questions. The two companies use technologically disparate trading systems. Citicorp uses Reuters' Triarch 2000 whereas Salomon Smith Barney relies primarily upon TIB (Tibco Finance) systems (also owned by Reuters but operated independently). Salomon also makes some use of Triarch as well as FS Partner, a mixture that is the result of the 1997 Salomon Smith Barney merger. Triarch and TI B are both important systems in the industry, but they are fundamentally dif- is highly configurable-"a tinkerer's paradise," according to Ed Miller, the president of MarketNet, a New York company specializing in trading room technology support. It is easily customized for individual users. On the other hand, Miller calls Triarch "highly resilient, bullet-proof, shrink-wrapped, easy to maintain." However, the price of this resiliency is its lack of ability to be customized. The technology issue is confused in other ways as well. Salomon Bros. has a huge investment in UNIX and Sun Microsystems' UNIX-based servers and workstations, while Smith Barney uses both UNIX and Windows-based IBM-PCs. Citicorp uses Windows NT on PCs as well as UNIX-based Sun and Digital Equipment Corp. servers and workstations. Rationalizing all of this will be difficult and costly. Questions being asked include: Do the various units have the short-run will to move to a single technology in order to bring about major long-run cost savings? If so, how much money are the two companies willing to spend on the transition? And perhaps more difficult, how much valuable trading room equipment and software that has not yet been depreciated are they willing to write off in order to achieve integration? And, of course, can they overcome cultural differences relating to centralization and the use of cutting-edge technology? The federal and state regulatory environment is another key issue because banks and insurance companies are regulated differently. Citibank has been under much stricter regulations that was Travelers because of its need to meet regulatory banking standards. The surviving Citigroup may now come under some of those regulations, forcing changes in Travelers' IT systems. Since the merger was announced, Citigroup information system efforts have focused primarily on solving Year 2000 problems and modifying systems to handle Euro currency conversion (see Chapters 3 and 7). If the two companies do move to standardize their systems, power struggles and personnel problems will surely emerge. The dynamic between the IT department's desire to standardize and the desire of the business groups to customize is complex and difficult to deal with. IT personnel problems also are a real possibility due to a fear of layoffs. As pointed out by Bob Harman, bank technology consultant for Deloitte & Touche, "When you rationalize the merger [i.e., integrate strategies and systems], you know that somebody's team wins, someone's loses." Both companies announced massive layoffs just a month prior to their legal merger and more are being planned. Many are wondering whether an IT merger can or should ever take place. Bill Burnham, senior analyst at Piper Jaffray Cos., of Minneapolis, believes Citigroup would "have to stop the business for three years" to effectively merge the databases and systems of the two companies. Other analysts conclude that the risks of a full IT merger outweigh any possible benefits. Larry Cone, a banking analyst with the Ryan Beck & Co. investment bank, says he "can't imagine why they would merge them. That is a very low order of business." Sources: Tara Seigel, "Citigroup Is Ready to Realize Benefits of Cross-Selling," The Wall Street Journal, March 15, 1999; Paul Beckett, "Citigroup Revamps Derivatives Business," The Wall Street Journal, January 21, 1999 and "Citigroup Unit of Bankers Begins to Meld," The Wall Street Journal, January 11, 1999; Thomas Hoffman, "Citigroup Cuts to Pinch IT Support Staff," Computerworld, December 21, 1998; Erik Helland, "Can Citigroup Reign in Citicorp's Decentralized Strategy," Wall Street & Technology July 1998; Robert Sales, "A Battle Brews on Citigroup Trading Floor," Wall Street & Technology, July 1998; Ivy Schmerken, "The Big Gamble: Mergers & Technology," Wall Street & Technology, July 1998; Saul Hansell, "Clash of Technologies in Merger," The New York Times, April 13,1998 and "Citibank Sets New OnLine Bank System," The New York Times, October 5, 1998; Michael Schrage, "IT and the Citigroup 6
Gamble," Computerworld, April 27, 1998; Thomas Hoffman and Kim S. Nash, "Titanic Tangle," ComApril 13, 1998; Jennifer Bresnahan, "Someone to Watch Over IT," Enterprise Magazine, May 15,1998; Bruce Caldwell, "Citibank Outsources Data Networks to AT&T in $750 Million Deal," InformationWeek, March 10,1998; Charles Pelton, "Redefining Scalability," InformationWeek, April 20,1998; Lawrence Quinn, "If the Systems Fit, So Must the Corporate Cultures," Wall Street & Technology, July 1998; "Citicorp and Travelers Group to Merge, Creating Citigroup: The Global Leader in Financial Services," Citicorp press release, April 6, 1998; Beth Davis and Rich Levin, "Bank Shot," InformationWeek, April 20, 1998; Stephen E. Frank, Anita Raghavan, and Matt Murray, "Travelers and Citicorp Agree to Join Forces in $83 Billion Merger," The Wall Street Journal, April 7, 1998; Mary Kelleher, "Citigroup Faces Cross-selling Hurdle," Pathfinder Chttp//www. pathfinder.com/money/I July 2, 1998; Mark Landler, "Bold Step for Citigroup on Shaky Asian Ground," The New York Times, April 9, 1998; Carol J. Loomis, James Aley, and Lixandra Urresta, "One Helluva Candy Store," Fortune, May 11, 1998; Kim S. Nash, "Reed Shifts from Programmer to CEO," Computerworld, April 13, 1998; Anita Raghavan and Rick Brooks, "CitiBankAmerica's Goals Differ," The Wall Street Journal, April 14, 1998; Anita Raghavan and Stephen E. Frank,"Making Oil and Water (Citicorp TravelersGroup) Mix, "The Wall Street Jour- Dal, April 17, 1998; Leslie Scism, Anita Raghavan, and Stephen E. Frank, "If Weill, Reed Merge Their Firms, Can They Also Merge Their Egos?" The Wall Street Journal, April 7, 1998; Richard W. Stevenson, "In Largest Deal Ever, Citicorp Plans Merger with Travelers Group," The New York Times, April 7,1998; Patrick Thibodeau, "AT&T Snags $750M Citibank Outsourcing Job," Computerworld, March 10, 1998; Peter Truell, "Travelers Deal with Nikko Expected Today," The Wall Street Journal, July 1, 1998 and "Travelers and Citicorp Plan to Cut Jobs," The New York Times, September 18,1998. CASE STUDY QUESTIONS 1. What will be the business strategy of Citigroup? How is the merger of Citicorp and Travelers related to this business strategy? 2. How is information technology vital to the success of Citigroup's strategy? 3. What options does Citigroup have in building an information technology infrastructure to support its strategy? What management, organization, and technology issues must be addressed by each option? 4. List each of the factors that will be key to a successful integration of Citicorp and Travelers. Explain why each is so important. 5. Develop a strategy for integrating the IT systems of the two companies. Be certain that your strategy handles all the key factors you listed in question three.