Grupo Financiero Inverlat Article Questions

Q1: How would you describe the communications climate at Inverlat?

Q2:If you were Jim O’Donnell, what would you do to show that you are trustworthy for the short term and the long term ?

97L001
GRUPO FINANCIERO INVERLAT
Daniel D. Campbell prepared this case under the direction of Professors Kathleen Slaughter and Henry W. Lane
solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective
handling of a managerial situation. The authors may have disguised certain names and other identifying
information to protect confidentiality.
Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission.
This material is not covered under authorization from CanCopy or any reproduction rights organization. To order
copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o
Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone
(519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca.
Copyright © 1997, Ivey Management Services
Version: (A) 1997-02-15
By October 1996, it had been four months since management at the Bank of Nova Scotia
(BNS) increased its stake in the Mexican bank, Grupo Financiero Inverlat (Inverlat),
from 8.1 per cent, to an equity and convertible debt package that represented 54 per cent
ownership of the bank. A team of Canadian managers had been sent to Mexico to
assume management of the ailing financial institution immediately after the deal was
struck. Jim O’Donnell, now Director General Adjunto (DGA)1 of the retail bank at
Inverlat, had been there from the beginning.
Jim was a member of the original group that performed the due diligence to analyze
Inverlat’s finances before negotiations could begin. Later, he and his wife Anne-Marie
(also an executive with the bank) were the first Canadians to arrive in Mexico in May
1996. Since then, 14 additional Canadian managers had arrived, and restructured the
four most senior levels within Inverlat. The pace of change had been overwhelming. Jim
now wondered how successful his early efforts had been and what could be done to
facilitate the remaining restructuring.
A BRIEF INVERLAT HISTORY
In 1982, in his last days as leader of the Mexican Republic, President Lopez Portillo
announced the nationalization of Mexico’s banks. They would remain government
institutions for the next 8 to 10 years. Managers characterized the years under
1
Director General Adjunto is the Mexican equivalent of an Executive Vice President.
This document is authorized for use only by summia alabdulkarim in TGM 506 Communicating & Negotiating Across Cultures (MGM SP23) taught by DENIS LECLERC, Thunderbird School of
Global Management from Jan 2023 to May 2023.
government control as a period of stagnation in which the structure of the Mexican
financial institutions remained constant despite substantial innovations in technology and
practice in the banking industry internationally.
Many Inverlat managers claimed that their bank had generally deteriorated more than the
rest of the banking sector in Mexico. Managers believed that there was no overall
strategy or leadership. Lacking a strong central management structure, each of the bank’s
geographic regions began to function independently, resulting in a system of control one
manager described as “feudal”. The eight regions developed such a level of autonomy
that managers commonly referred to Inverlat not as a bank, but as eight small banks. The
fragmented structure made new product development almost impossible. When the
central corporate offices developed a new product, they had no guarantee that it would
be implemented in the regions and ultimately, the branches. The power struggle within
the regions demanded such loyalty that employees often had to say: “I cannot support
you (in some initiative) because my boss told me not to.”
In 1990, an amendment to the Mexican constitution allowed majority private sector
ownership of Mexican commercial banks. Between 1990 and 1992, eighteen banks were
privatized by the Mexican government including Inverlat. BNS, looking to expand its
interests in Latin America, purchased 8 per cent of the company in 1992 for C$154
million.
Under the structure of the newly privatized bank, there were three corporate cultures:
that of the original bank; that of the Casa de Bolsa, the bank’s brokerage house; and that
of the new chair of the bank, an executive from Banamex, Mexico’s largest financial
institution. Many senior Banamex executives were invited to join Inverlat, some even
came out of retirement to do so. The Banamex culture soon dominated the organization,
as senior management tried to create a “Little Banamex”. Inverlat managers without a
history in Banamex said that the strategy could never function because Inverlat did not
have the clients, technology, or financial resources of Banamex.
Inverlat’s leaders did recognize, however, that the years of stagnation under
nationalization had created a bank that had failed to create a new generation of bankers
to reflect the changing times. They realized that the bank required a rejuvenation, but the
managers did not have the knowledge or the capacity to effect the change.
Nowhere was the lack of development more prominent, and ultimately more devastating,
than in the credit assessment function. The banks pursued a growth strategy dependent
on increased lending but, unfamiliar with the challenges of lending to the private sector,
failed to collateralize their loans properly or to ensure that covenants were being
maintained. In early 1995, following a severe devaluation of the Mexican peso,
Mexico’s credit environment collapsed; so did the bank. The Mexican government
assumed responsibility for the bank, and BNS was forced to write down its original
investment by almost 95 per cent to C$10 million.
NEGOTIATIONS WITH BNS
Management at BNS chose to view the loss in value of their investment as a further
buying opportunity and, in early 1996, they began negotiations with the Mexican
government. BNS contributed C$50 Million for 16 per cent of new stock in the bank
and C$125 Million in bonds convertible on March 31, in the year 2000 for an additional
39 per cent of equity. If, in the year 2000, BNS decided not to assume ownership of the
bank, they could walk away without converting the debt and retain a much smaller
portion of ownership.
As the majority shareholder until the year 2000, the Mexican government contracted
BNS to manage the bank. A maximum of 20 BNS managers would be paid by the
Mexican government to manage Inverlat on the government’s behalf. If BNS wanted
more Canadian managers to work in the bank, BNS would have to pay for them. It was
intended that the Canadian managers would remain at Inverlat only until the Mexican
managers developed the skills to manage the bank effectively on their own.
With the exception of a handful of the most senior officers in the bank, employees at
Inverlat had no direct means of receiving information about the progression of the
negotiations with BNS. Instead, they were forced to rely on often inaccurate reports
from the Mexican media. As the negotiation progressed, support among Inverlat
employees for a deal with BNS was very strong. Inverlat employees did not want to
become government bureaucrats and viewed BNS as a savior that would bring money,
technology and expertise.
EMPLOYEE EXPECTATIONS
Soon after the deal was completed with BNS, however, the general euphoria was
gradually replaced by the fear of actions the Canadians were likely to take as they
assumed their management role. Senior managers were worried that they would be
replaced by someone younger, who spoke English and had an MBA. Rumors, supported
by inaccurate reports in local newspapers, ran rampant. One newspaper reported that as
many as 180 senior level managers would be imported to Inverlat from BNS in Canada.
Anxiety mounted as speculation increased about the magnitude of downsizing that BNS
would implement as it restructured the bank in its turnaround. Although BNS had
purchased banks in other Latin American countries, few Inverlat employees, including
the most senior management, had any knowledge about the strategies that BNS
management had used. Inverlat managers felt that their employees viewed BNS as a
“gringo” corporation, and expected them to take the same actions other U.S. companies
had taken as they restructured companies they had purchased in Mexico. Most believed
that if any foreign bank purchased Inverlat, most of the senior management team would
be displaced and up to half of the bank staff would be let go. Similarly, very few
managers knew the details of the contract that limited the number of managers that
could come to the bank from Canada.
Very few of the Mexican employees had had any significant contact with Canadian
managers, but the majority expected behavior similar to that of U.S. managers. Only a
handful of senior level managers had been in contact during the due diligence and the
Canadians realized that they required greater insight into the Mexican culture if they were
to manage effectively. As a result, the members of the senior team that were going to
manage the Mexican bank arrived in Mexico one month in advance to study Spanish.
The Canadian managers studied in an intensive program in Cuernavaca, a small city 80
km southwest of Mexico City. During the three-week course, lectures were available on
the Mexican culture. Mexican managers were extremely impressed by this attempt by
the Canadians to gain a better understanding of the situation they were entering and
thought the consideration was very respectful. One manager commented that:
At the first meeting, the Canadians apologized because it would be in
English, but promised that the next would be in Spanish. The fact is,
some are still in English, but the approach and the attempt were very
important.
Four months later, the Canadian team was still undergoing intense tutorial sessions in
Spanish on a daily basis with varying levels of success.
Canadian managers said they were trying to guard against putting people into positions
simply because they were bilingual. A Canadian manager, expressing his commitment
to function in Spanish, commented that:
There are 16 Canadians down here and 10,000 Mexicans. Surely to
God, the 16 Canadians can learn Spanish rather than trying to teach the
10,000 Mexicans English or having people feel that they are being left
out of promotions or opportunities just because they don’t speak English.
This is a Spanish-speaking country and the customers speak Spanish.
INVERLAT AND BNS CULTURES
In Canada, BNS was considered the bank with the most stringent financial control
systems of the country’s largest banks. Stringent, not only in deciding not to spend
money in non-essential areas, but also in maintaining a tough system of policies and
controls that ensured that managers held to their budgets.
Inverlat executives, on the other hand, were accustomed to almost complete autonomy
with little or no control imposed on their spending. Very little analysis was done to
allocate resources to a project, and adherence to budget was not monitored. Mexican
managers believed that greater controls such as the ones used by BNS should be
implemented in Inverlat, but they also felt that conflicts would arise.
An early example experienced in the bank was a new policy implemented by BNS
management to control gifts received by managers from clients. BNS managers imposed
a limit of 500 pesos2 for the maximum value of a gift that could be received by an
executive. Gifts of larger value could be accepted, but were then raffled off to all
employees of the bank at Christmas. Some Mexican managers took offence at the
imposition of an arbitrary limit. They felt that it was an indication that BNS did not trust
their judgement. Managers thought that it would be better if the bank communicated the
need for the use of good judgement when accepting gifts and then trusted their managers
to act appropriately.
MANDATE OF BNS
Two months after the arrival of the Canadian executive team, the new bank chairman,
Bill Sutton gave an address to 175 senior executives within Inverlat. The purpose of the
address was threefold: to outline management’s main objectives in the short term; to
unveil the new organizational structure of senior level managers; and to reassure
employees that no staff reductions would be undertaken for the first year.
The primary objectives, later printed in a special company wide bulletin were the
following:
1.
2.
3.
4.
5.
6.
Identify all non-performing loans of the bank.
Develop an organization focussed on the client.
Improve the productivity and efficiency of all operations and activities.
Improve the profitability of the 315 branches.
Develop a liability strategy.
Improve the integrity of the financial information.
These objectives were generally well received by the Mexican managers. Some
criticized them as being too intangible and difficult to measure. Most, however, believed
that the general nature of the objectives was more practical, given the type of changes
that were being made in the first year. They did agree that the goals would need to be
adjusted as planning became more focussed during the 1997 budget planning process.
The new management structure differed sharply from the existing structure of the bank.
The original eight geographic regions were reduced to four. Managers were pleased to
2
In late 1996, one Mexican Peso was valued at approximately US$0.0128
see that the head of each of these divisions was Mexican and it was generally viewed as
a promotion for the managers.
The second change was the nature in which the Canadians were added to the
management structure. The senior Canadian managers became “Directores Generales
Adjuntos (DGAs)” or senior vice presidents of several key areas, displacing Mexican
managers. The Mexican DGAs not directly replaced by Canadians would now report to
one or more of the Canadian DGAs, but this was not reflected in the organization chart
(see Exhibit 1). Mexican DGAs retained their titles and formally remained at the same
level as their Canadian counterparts.
Mexican managers later reported mixed feelings by employees about whether or not they
worked under a Canadian or Mexican DGA. Many felt that a Mexican DGA and his
(there were no female DGAs working within the bank) employees were more
“vulnerable” than a Canadian; however, senior managers also felt that they had an
opportunity to ascend to the DGA position when it was being held by a Mexican. Many
felt that Canadian managers would always hold the key positions in the bank and that
certain authority would never be relinquished to a Mexican. This was not the message
that BNS management wanted to convey. One of Jim O’Donnell’s first comments to his
employees was that he would only be in Mexico until one of them felt confident that they
could fill his shoes.
The last message was the new management’s commitment not to reduce staff levels. A
policy of “no hires, no fires” was put in place. Employees were able to breathe a sigh
of relief. Many had expected the Canadian management team to reduce staff by 3000
to 5000 employees during the first several months after their arrival.
THE COMMUNICATION CHALLENGE
Canadian and Mexican managers already experienced many of the difficulties that the
two different languages could present. Many of the most senior Mexican managers
spoke English, but the remaining managers required translators when speaking with the
Canadians. Even when managers reporting directly to them spoke English, Canadians
felt frustration at not being able to speak directly to the next level below. One manager
commented that “sometimes, I feel like a bloody dictator” referring to the need to
communicate decisions to his department via his most senior officers.
Meetings
Even when all managers at a meeting spoke English, the risk of mis-communication was
high. A Mexican manager recalled one of the early meetings in English attended by
several Mexicans. Each of the Mexican managers left the meeting with little doubt about
what had been decided during the meeting. It was only later, when the Mexicans spoke
of the proceedings in Spanish, that they realized they each had a different interpretation
about what had transpired. What they found even more alarming was that each manager
had heard what he had wanted to hear, clearly demonstrating to themselves the effect of
their biases on their perception of events.
This problem might have been exacerbated by the way some of the Canadians chose to
conduct meetings. Mexican managers were accustomed to a flexible atmosphere in
which they were free to leave the room or carry on side-conversations as they saw fit.
Canadian managers became frustrated and changed the meeting style to a more
structured, controlled atmosphere similar to what they used in Canada. The Mexican
managers were told that breaks would be scheduled every two hours and that only then
should they get up from the table or leave the room.
Canadian managers believed that the original conduct of the Mexican managers during
meetings was due to a lack of discipline and that the new conduct would lead to higher
productivity. The Canadians did not recognize the negative impact that could result from
the elimination of the informal interactions that had occurred in the original style.
Beyond Language
Despite the cross cultural training received in Cuernavaca, some Canadians still felt they
had a lot to learn about the cultural nuances that could create major pitfalls. Jim
O’Donnell recalled a meeting at which he and several Mexican managers were having
difficulty with some material developed by another Mexican not present at the meeting.
Jim requested that this manager join them to provide further explanation. Several
minutes later, as this person entered the room, Jim said jokingly, “OK, HERE’s the guy
that screwed it all up.” The manager was noticeably upset. It was not until later, after
some explaining, that Jim’s comment was understood to be a joke. Jim said it brought
home the fact that, in the Mexican culture, it was unacceptable, even in jest, to be critical
of someone in front of other people.
This was easier said than done. Often, what the Canadians considered a minor difference
of opinion could appear as criticism that Mexican managers would prefer be made
behind closed doors when coming from a more senior manger. One Mexican manager
commented on the risks of disagreeing with an employee when others were present:
When someone’s boss is not in agreement, or critical of actions taken by
an employee and says something during a meeting with other employees
present, other managers will use it as an opportunity to also say bad
things about the manager. Instead, when a disagreement arises in an
open meeting, the senior manager should say ‘see me later, and we will
discuss it’.
To the contrary, the Canadian managers were trying to encourage an environment in
which all managers participated in meetings and positive criticism was offered and
accepted.
Mexican Communication Style
On verbal communication, one of the original Inverlat managers commented:
In Mexico, interactions between individuals are extremely polite.
Because Mexicans will make every effort not to offend the person they
are dealing with, they are careful to “sugar-coat” almost everything they
say. Requests are always accompanied by “por favor”, no matter how
insignificant the request.
Mexicans often speak the diminutive form. For example: Esperame
means Wait for me. Esperame un rato means Wait for me a moment.
A Mexican would more often say Esperame un ratito. “Ratito” is the
diminutive form meaning “a very short moment”. It is not as direct.
This politeness is extended into other interactions. Every time a
Mexican meets a coworker or subordinate, a greeting such as “Hello,
how are you?” is appropriate, even if it is the fourth or fifth time that day
that they have met. If you don’t do this, the other person will think you
are angry with him or her or that you are poorly educated.
One Canadian manager explained that some of the Mexican managers he dealt with went
to great lengths to avoid confrontation. He was frustrated when the Mexicans would
“tell him what he wanted to hear”. Often these managers would consent to something
that they could or would not do, simply to avoid a confrontation at the time.
Other Messages: Intended or Otherwise
Due to the high level of anxiety, Mexican managers were very sensitive to messages they
read into the actions taken by the Canadians. This process began before the Canadians
made any significant changes.
As the Canadians began to plan the new organizational structure, they conducted a series
of interviews with the senior Mexican managers. The Canadians decided who they
would talk to based on areas where they believed they required more information.
Unfortunately, many managers believed that if they were not spoken to, then they were
not considered of importance to the Canadians and should fear for their positions. Even
after the organizational structure was revealed and many Mexican managers found
themselves in good positions, they still retained hard feelings, believing that they had not
been considered important enough to provide input into the new structure.
Similarly, at lower levels in the bank, because of the lack of activity in the economy as
a whole, many employees were left with time on their hands. Because many employees
feared staff reductions at some point, they believed that those with the most work or
those being offered new work were the ones that would retain their jobs.
Communications as an On-going Process
When Jim held his first meeting with the nine senior managers reporting to him, he
began by saying that none of them would have their jobs in two months. Realizing the
level of anxiety at that point, he quickly added that he meant they would all be shuffled
around to other areas of the retail bank. Jim explained that this would give them an
opportunity to learn about other areas of the bank and the interdependencies that needed
to be considered when making decisions.
Jim stuck to his word, and within two months, all but one of the managers had been
moved. Some, however, had experienced anxiety about the method by which they were
moved. Typically, Jim would meet with an employee and tell him that in two or three
days he would report to a new area (generally, Mexican managers gave at least a month’s
notice). When that day arrived, Jim would talk to them for 30 to 45 minutes about their
new responsibilities and goals, and then he would send them on their way.
For many of the Mexicans, this means of communication was too abrupt. Many
wondered if they had been moved from their past jobs because of poor performance.
More senior Mexican managers explained that often these managers would come to them
and ask why Jim had decided to move them. Most of the Mexicans felt that more
communication was required about why things were happening the way they were.
Accountability
Early on, the Canadian managers identified an almost complete lack of accountability
within the bank. Senior managers had rarely made decisions outside the anonymity of
a committee and when resources were committed to a project, it was equally rare for
someone to check back to see what results were attained. As a result, very little analysis
was done before a new project was approved and undertaken.
The first initiative taken by the Canadians to improve the level of analysis, and later
implementation, was the use of what they called the “business case”. The case
represented a cost benefit analysis that would be approved and reviewed by senior
managers. Initially, it was difficult to explain to the Mexican managers how to provide
the elements of analysis that the Canadians required. The Mexicans were given a
framework, but they initially returned cases that adhered too rigidly to the outline.
Similarly, managers would submit business cases of 140 pages for a $35,000 project.
Cases required multiple revisions to a point of frustration on both sides, but it was only
when an analysis could be prepared that satisfied the Canadians and was understood by
both parties, that it could be certain that they all had the same perception of what they
were talking about.
Some of the Mexican managers found the business case method overly cumbersome and
felt that many good ideas would be missed because of the disincentive created by the
business case. One manager commented that “It is a bit discouraging. Some people
around here feel like you need to do a business case to go to the bathroom.”
Most agreed that a positive element of the business case was the need it created to talk
with other areas of the bank. To do a complete analysis, it was often necessary to contact
other branches of the bank for information because their business would be affected.
This was the first time that efforts across functional areas of the bank would be
coordinated. To reinforce this notion, often Canadian managers required that senior
managers from several areas of the bank grant their approval before a project in a
business case could move forward.
Matrix Responsibility
Changes in the organizational structure further complicated the implementation of a
system of accountability. Senior management had recognized a duplication of services
across the different functional areas of the bank. For example, each product group hadits
own marketing and systems departments. These functions were stripped away and
consolidated into central groups that would service all areas of the organization.
Similarly, product groups had been responsible for the development and delivery of their
products. Performance was evaluated based on the sales levels each product group could
attain. Under the initial restructuring, the product groups would no longer be responsible
for the sale of their products, only for their design. Instead, the branches would become
a delivery network that would be responsible for almost all contact with the client. As
a result, managers in product groups, who were still responsible for ensuring the sales
levels, felt that they were now being measured against criteria over which they had no
direct control. The Canadian management team was finding it very difficult to explain
to the Mexicans that they now had to “influence” instead of “control”. Product managers
were being given the role of “coaches” who would help the branch delivery network to
offer their product most effectively.
As adjustments were made to the structure, the Mexican manager’s perception of his
status also had to be considered. In the management hierarchy, the Mexican manager’s
relationships were with the people in the various positions that they dealt with, not with
the positions themselves. When a person was moved, subordinates felt loyalty to that
individual. As a result, Mexican managers moving within an organization (or even to
another organization) often did so with a small entourage of employees who
accompanied them.
STAFF REDUCTIONS
As services within the bank were consolidated, it was obvious that staff reductions would
be required. Inverlat staff were comforted by the bank’s commitment to retain all staff
for the first year, particularly when considering the poor state of the economy and the
banking sector; but, even at lower levels of the organization, the need for reductions was
apparent. Some managers complained that the restructuring process was being slowed
considerably by the need to find places for personnel who were clearly no longer
required.
Motivations for retaining staffing levels were twofold. First, BNS did not want to tarnish
the image of its foreign investment in Mexico with massive reductions at the outset.
When the Spanish bank, Banco Bilbao Viscaya (BBV), purchased Banca Cremi the
previous year, they began the restructuring process with a staff reduction of over 2000
employees. BNS executives thought that this action had not been well received by the
Mexican government or marketplace.
The second reason BNS management felt compelled to wait for staff reductions was that
they wanted adequate time to identify which employees were productive and fit into the
new organizational culture, and which employees would not add significant value. The
problem was, quality employees were not sure if they would have a job in a year, and
many managers thought that employees would begin to look for secure positions in other
organizations. One Canadian manager commented that even some employees who were
performing well in their current postions would ultimately lose their jobs. Many thought
action needed to be taken sooner than later. A senior Mexican manager explained the
situation:
Take the worst case scenario, blind guessing. At least then, you will be
correct 50% of the time and retain some good people. If you wait,
people within the organization will begin to look for other jobs and the
market will choose who it wants. But as the market hires away your
people, it will be correct at 90% of the time and you will be left with the
rest.
Until that point, not many managers had been hired away from the bank. Many felt that
this was due to the poor condition of the banking sector. As the economy improved,
however, many believed that the talented managers would begin to leave the bank if job
security could not be improved.
Jim felt that something was needed to communicate a sense of security to the talented
managers they could already identify, but he was not certain how to proceed.
CONCLUSION
Jim felt that the Canadian team had been relatively successful in the early months. Many
managers referred to the period as the “Honeymoon Stage”. It was generally felt that the
situation would intensify as managers looked for results from the restructured
organization and as staff reductions became a reality. Jim then wondered how he could
best prepare for the months ahead. Much of the communication with employees to date
had been on an ad hoc basis. Jim did not feel they could take the risk of starting
reductions without laying out a plan. The negative rumors would cause the bank to lose
many of its most valued Mexican managers.