How Washington Mutual Smooths Acquisitions

Banks are notorious for poorly integrating the companies they acquire. The problems go beyond charging new transaction fees or startling customers with redesigned monthly statements. Customers get mad when they're forced to change the way they make deposits or when familiar options on the automated teller machines are switched around. Often, a political squabble about technology underlies the problems.

With each acquisition, many banks pick and choose which software and hardware to discard and which to meld into their own operations. This best-of-breed tactic often complicates the integration because technicians must build interfaces and middleware to bridge the systems. Battles develop as technology managers from both sides fight for their own fiefs. Work slows and gets expensive. The merged banks simply don't work as one. Bad banking integrations can drag out for years. Bank One, which has $270 billion in assets and bought First Chicago in 1998 for $29 billion, still runs seven separate deposit systems.

It doesn't have to be that way.

Washington Mutual in Seattle is widely regarded as one bank that does integration right. It has grown to $275 billion in assets mainly by buying other companies—32 mortgage houses, full-service banks and savings-and-loans since 1983. And it has a consistent framework for dealing with the information-systems part of the acquisitions—it deconstructs them into three elements: technology, processes and people. To control two of those variables, the bank moves all acquirees to Washington Mutual's technology and processes. Doing so means typical integrations take nine months or less, avoiding long debate on which systems will stay or go.

Then Washington Mutual concentrates on the people. How an acquiring company treats the people it's firing, hiring and, most importantly, asking to stay until the merger is done can make or break the critical technology conversion.

Employees on both sides of any Washington Mutual deal know that an entire suite of applications is going to die—which could leave the staff who had managed them pretty anxious. Creeping doubt about the future of career and paycheck doesn't inspire you to do your best work. But Washington Mutual tries to address that early on.

The Bank United Deal

Consider the case of Bank United, which Washington Mutual bought in February 2001 (acquisition No. 28 of the aforementioned 32), as a way to get into the Houston market for mortgages and retail banking. In August 2000, after senior executives from both banks had agreed to the $1.5 billion acquisition, Washington Mutual managers explained their merger methods to Bank United employees and told them 600 to 650 overlapping jobs would likely be eliminated.

A straightforward communication—but also a big risk because it prompted many Bank United staffers to start worrying about their job security. But this is where Washington Mutual's manner of handling new employees came into play. The acquirer held off-site conferences and meetings at Bank United headquarters and branches to get to know the managers and workers there. It identified key Bank United people needed to convert systems and offered financial rewards to those who agreed to stick around through the process. That included managers of critical applications such as deposit systems and loan processing, as well as administrators of networks, servers and databases. Many were told not to come to work but to be available should something go wrong. They continued to be paid during the integration, which took about eight months. The conversion period also gave Washington Mutual the chance to evaluate potential new hires. Essentially, you're auditioning while you're helping with the switchover.

As the conversion got started, Washington Mutual made job offers to at least some Bank United workers. Rick Hare, former director of banking applications at Bank United, had an offer in January 2001, which he accepted the following month.

"I was thinking that there might not be an opportunity for me with the new bank," says Hare, whose work in technology infrastructure, he thought, didn't make him a superstar with unique skills. But Washington Mutual liked Hare's ability to think in both business and technology terms. He moved to Seattle with his wife in the summer of 2001 and is now strategy manager for consumer banking technology at Washington Mutual. "The way they do things is quick, and in a way that answers questions quickly," he says.

"It's all about winning the trust of the new employees," says Jerry Gross, Washington Mutual's chief information officer. "We don't want this to be strung out too long because that's where you get issues and doubts."

And Bank United also took care of its own during the migration. When a local area network administrator worked through a weekend and missed his child's birthday party to prepare the network for conversion, he got lectured by Wayne Sadin, then Bank United's chief information officer.

"We got everyone together and said, 'This is not OK,'" Sadin recalls. "You can't miss your kid's birthday party. We didn't want that to happen when it was just Bank United and certainly not now." The network administrator was also given $150 to pay for another party.

Weeding out Systems

Before Washington Mutual will consider seriously any potential acquisition target, a due-diligence team examines its information systems. It looks for anything too old or proprietary that would hamper a quick data conversion to Washington Mutual's infrastructure. The bank runs IBM's OS/2 and some Microsoft Windows operating systems, Token Ring networks, various mainframe systems and a green-screen report distribution system from Computer Associates.

The technology isn't state of the art, but it works and it lets the bank assimilate companies quickly and smoothly, says Guillermo Kopp, an analyst at banking consultancy TowerGroup in Needham, Mass. "You make some sacrifices," he says. The most serious is that Washington Mutual sometimes throws away more sophisticated technology that's already running at the companies it buys.

"I remember my staff was taking the [Washington Mutual] technical folks on a tour of our data center," Sadin says. "They pointed at this and that and said, 'Oh yeah, we'd been thinking about doing this.' My staff was gloating."

Bank United had spent several years setting itself up to be bought, a makeover that included some deft technology: storage area networks, Windows NT servers, Ethernet networks, and a Web site honed for Internet banking. "It looked like it was a better infrastructure at our bank," Sadin says. "But that's not how you measure a bank's success."

No, it isn't. Assets managed profitably is how it's measured. And technology can be a critical factor, even if it's not leading edge. "The absolute best practice in a merger is to use the technology you have," Kopp says. "That gives you the benefit of immediate savings."

Gross, the Washington Mutual CIO, agrees. He doesn't want to shut his eyes to an acquiree's best ideas. But the reality is, Washington Mutual adopts little but the data. "Ultimately, it's a training exercise for the employees of the acquired company," he says. "Our view is there's no successful merger of equals."

That's what soured Phil Boyer on working for Washington Mutual after Bank United was absorbed. Boyer was a senior vice president who oversaw Bank United's electronic commerce and other Web projects. Washington Mutual asked if he'd like a similar position there. "As an advanced technologist, it's not very attractive considering going to a company where the technology is extremely old," he says. "Had I even thought I could make a difference in an institution of that size, I would have gone with it," he says. "But they were going to rule."

In March, Washington Mutual completed acquisition No. 32—certain assets of HomeSide Lending in Jacksonville, Fla.—and the company isn't actively pursuing any other deals. The plan now is to taper off doing takeovers, instead growing from within and increasing efficiency. The banking industry as a whole has slowed merger activity during the two years of a down economy. There is less money to earmark for such deals, and there are fewer choice targets.

Shifting Tech Strategy

The shift in core business strategy has provoked shifts in technology strategy. Gross replaced Liane Wilson, Washington Mutual's 16-year veteran chief information officer, in May 2001. Gross plans to upgrade some key platforms—getting off OS/2 and onto Windows XP, for example. A proprietary loss-management system written in Smalltalk will be rewritten and expanded. Newer technologies, such as customer relationship management applications and storage area networks, also are in the plans.

The idea is to change the technology group from a service bureau to a business partner. The kind of self-starting spirit that Gross envisions is new for Washington Mutual's technology department. Whether the 113-year-old company, built on a no-frills approach to technology, can pull it off depends on that crucial third variable: the people. Gross has created 11 new senior technology positions since he's been there and filled seven of them with outsiders.

While the old systems department was geared to gather and synthesize data from a string of acquired companies, the group is now organized to serve lines of business. So-called "business solutions providers" are technology managers who report to Gross but are aligned with each major business unit—home loans and insurance, banking and financial services, and so on. That way, a technology expert is included in business discussions, to help guide decisions early on. "They are there when the glimmer in someone's eye comes about," Gross says.

The bank also is looking to fill 182 technology jobs, many of which are the result of Washington Mutual rearranging an outsourcing deal with IBM Global Services. The original 1996 deal with IBM—10 years, $533 million—called for the vendor to manage desktops, network services, help desk, software distribution and project management, among other tasks.

The contract hasn't been canceled, but many of IBM's tasks are being returned to Washington Mutual because, Gross says, the bank wanted a more flexible arrangement that left it, not IBM, to set strategy. "Things that we look forward to using from IBM are commoditized services" such as desktop support, he explains. "But other things that are sensitive and closer to customer interaction, we are going to in-source." For example, Washington Mutual is launching projects in data warehousing, e-commerce, help desk, and server design and implementation.

Along with new development, the technology group is now focused on finding operational efficiencies. Though Washington Mutual has been relatively staid in its computer platforms, the company runs varying versions of similar software, says John Seddon, senior vice president of the newly created enterprise program office. Seddon, a former consultant at IBM and KPMG, was hired in July, in part to oversee bankwide project management. One goal: install Windows XP, then get all eight locations that process mortgage loans on the same release of the same lending application.

Standardizing packages across Washington Mutual, even as it embarks on many new projects, will make the bank more efficient, Seddon says. "There are 50,000 employees out there using technology," he says. "There's a lot of opportunity there."

It's never easy, of course, to get a group of users to accept changes in the technology to which they've grown accustomed. But given the experience his new company has gained through nearly three dozen acquisitions over 19 years, it's not surprising that Seddon sounds confident.

Washington Mutual Base Case

Headquarters: 1201 3rd Ave., Seattle, WA 98101

Phone: (206) 461-2000

Business: Banking and financial services

Chief Information Officer: Jerry Gross

Financials in 2001: $17.7 billion in sales, $3.1 billion net income

Challenge: To make the 32 banks acquired since 1983 look and act as one

Baseline Goals (by 2004):

Achieve greater than 20% return on equity Grow earnings per share more than 13% Improve efficiency ratio—a key measure of bank profitability two percentage points

Copyright © 2004 Ziff Davis Media Inc. All Rights Reserved. Originally appearing in Baseline.