CITIBANK’S BACK ROOM

The “back room” at Citibank—the department that processed checks and other financial instruments—was in trouble when John Reed took charge in 1970 (Seeger, Lorsch, and Gibson, 1975). Productivity was disappointing, errors were frequent, and expenses were rising almost 20 percent every year. Reed soon determined that the area needed dramatic structural change. Traditionally, it was viewed as a service for the bank’s customer-contact offices, though it was structured as a machine bureaucracy. Reed decided to think of it not as a support function but as a factory: an independent, high-volume production facility. To implement this concept, he imported high-level executives from the automobile industry. One was Robert White, who came from Ford to become the primary architect of new structure and systems for the back room.

White began by developing a “phase one action plan” that called for cutting costs, putting in new computer systems, and developing a financial control system capable of both forecasting and measuring performance. In effect, the strategy retained the machine bureaucracy but tightened it. After phase one was implemented, White concluded that “we hadn’t gone back to the basics enough. We found that we did not really understand the present processes completely” (Seeger, Lorsch, and Gibson, 1975, p. 8). What followed was an intensive, detailed study of how the back room’s processes worked, laid out in a detailed flowchart that covered the walls of a room. They realized that the current structure was, in effect, one very large functional pipeline. Everything flowed into “preprocessing” at the front end of the pipe, then to “encoding,” and on through a series of functional areas until it eventually came out at the other end. Reed and White decided to break the pipe into several smaller lines, each carrying a different “product” and each supervised by a single manager with responsibility for an end-to-end process. The key insight was to change the structure from machine bureaucracy to a divisionalized form. Along with the change, White instituted extensive performance measures and tight accountability procedures—69 quality indicators and 129 different standards for time lines.

Not surprisingly, White’s demanding, top-down approach produced fear and loathing among many old-timers in the back room and nearly led to rebellion. As Mintzberg’s model predicts, the technical core strongly resisted this intrusion. Reed and White implemented the new structure virtually overnight, and the short-term result was chaos and a major breakdown in the system. It took two weeks to get things working again, and five months to recover from the problems generated by the transition. But once past that crisis, the new system led to a dramatic improvement in operating results: production was up, and costs and errors were down. The back room had unexpectedly become a major source of competitive advantage.

The revamp of the Citibank back room demonstrates again the value of managerial imagination. The basic concepts behind restructuring the back room were not new. The change from a functional bureaucracy to a divisionalized form first occurred in the 1920s at General Motors and DuPont. The key imaginative leap was to apply the concept of a divisionalized organization to the back room of a bank.

The Citibank restructuring was strongly driven from the top down and focused primarily on internal efficiencies. This has been true of many, but by no means all, reengineering efforts.