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BORIS GROYSBERG ELIOT SHERMAN

The Royal Bank of Scotland Group: The Human Capital Strategy What gets measured gets done. — Expression attributed to multiple sources In the summer of 2008, the Royal Bank of Scotland Group (the Group), one of the largest banks in the world by operating profit, had one of the most advanced human resource management support systems in the world (see Exhibits 1 and 2 for financial information). Implemented progressively from 2000 and known as the Group’s human capital strategy, the initiative sought to quantitatively determine how the Group’s many employment practices improved—and weakened—overall business performance. Specifically, the human capital strategy assessed how certain people measures (such as turnover rates and managerial effectiveness) affected business measures such as sales and customer service. It had been up to the Group’s employee engagement team to spearhead the development and introduction of these measures across the Group’s different businesses. The heart of the human capital strategy was the Human Capital Toolkit (toolkit), a comprehensive collection of data-driven software applications available to HR managers via the Group’s Intranet. The toolkit was fed with data from various sources including a Group-wide annual survey of employees compiled into a set of categories and benchmarked against other large, diversified financial services firms. In addition, managers could perform a large number of tasks through the toolkit, such as commissioning surveys and individual research tailored specifically to their business, analyzing branch-level employee data, or reviewing best practices world-wide. However, despite the advanced nature of the Group’s human capital strategy, questions about its application remained. For example, was utilization of the toolkit and human capital analysis as high as it could be among managers who stood to benefit from it? And what else should be done to support RBS leaders leverage this resource?

Background The Royal Bank of Scotland (RBS) dated back to 1727, when it was established by royal charter in Edinburgh.1 In 1874 the bank expanded into London, and by the 1920s began establishing a presence throughout Great Britain, generally through acquisitions. In 1969, RBS and the National Commercial ________________________________________________________________________________________________________________ Professor Boris Groysberg and Research Associate Eliot Sherman of the Global Research Group prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2007, 2008 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

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Bank of Scotland merged to become Scotland’s largest bank with a 40% market share. Beginning in the 1980s, the Group rapidly diversified its businesses: it set up an innovative car insurance company (Direct Line), entered the U.S. banking market (by acquiring Citizens Financial Group), launched the U.K.’s first fully-fledged online banking service, and engaged in joint ventures with retailer Tesco. In the 1990s, the Group implemented an effort known as “Project Columbus” which sought to rejuvenate its retail banking division via superior service delivered through customer segmentation. During Project Columbus, the Group’s head of employee engagement, Greig Aitken, was responsible for developing and implementing a training initiative to familiarize staff with a new technology that was being introduced as part of the restructuring. Overall, Project Columbus proved effective, allowing the Group to direct increased revenue toward lowering its cost-income ratio, a key metric in banking that helped quantitatively determine how efficiently management was performing. In 2000, at the age of 41, Sir Fred Goodwin became CEO of the Group, replacing Sir George Mathewson, who stayed on as chairman of the board until 2006. Goodwin required his 10-member executive team to meet every weekday morning (those who could not physically attend on any given day teleconferenced in).2 As one article noted, “The meeting is without prior agreed-upon agenda, instead discussing the issues uppermost in the minds of the executive team.”3 Said one executive team member: “Fred loves the morning meeting. It is his chance to put his imprint on whatever is happening.”4

The NatWest Acquisition In 2000 the Group succeeded in a take-over battle against competitor Bank of Scotland to acquire National Westminster Bank (NatWest)—nearly three times its size—in a $34 billion deal, the largest in the history of U.K. banking and the fourth largest banking transaction ever. Included in the Group’s offer document was a point-by-point outline of how integration would be managed, including potential cost savings, income gains, job losses, and delivery dates for new initiatives. The NatWest acquisition made the Group the #2 retail bank and the #1 private, corporate and offshore bank in the U.K. As a result of the acquisition the Group predicted (and achieved) $4 billion worth of profit enhancement, primarily through the creation of a “manufacturing” division to handle certain shared services and back-office functions with a concurrent focus on promoting common products, processes, policies and technology platforms across business units. The Group’s brands and businesses were organized into customer-facing units focused solely on growing revenues, while the manufacturing division drove efficiency-improving measures. Perhaps most impressive was the effort made to integrate the 446 distinct systems within NatWest’s information technology (IT) platform into the Group’s, despite the fact that the Group’s platform was one quarter the size of NatWest’s.5 Aitken spoke to the role that the human capital strategy played in supporting the NatWest integration: We had all of the key building blocks of the human capital strategy—then in its infancy—in place for the NatWest work. But it wasn’t until the change of control in March 2000 that we had a large organization where the economies of scale were such that human capital management was no longer an option for the group, but a strategic imperative. The HR Leadership Team (the Group’s HR Board) had already introduced a full shared services approach and a strong business partner structure within RBS. As this approach extended across the newly enlarged Group, our shared services function created common HR platforms 2

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and consistencies across measures. This enabled the introduction of our human capital strategy progressively across the business, and supported our business leaders by getting them the right information to make informed people decisions. And that meant being much, much more evidence-based. It meant being able to measure the impact of initiatives, being able to develop joined-up strategy for HR, and being able to act quickly on information from employee surveys. Neil Roden, Group director of Human Resources, emphasized the importance of this evidencebased approach to HR management. It’s a belief of mine that measurement is important and that in organizations you need to be able to demonstrate the value of what you do. Because if you can’t demonstrate that value, if you can’t measure it, then you’re in a difficult place if somebody says, “Well you want me to spend £500,000 on that, but you don’t know what it’s going to do, you can’t measure the impact, and can’t determine the value?” Would you do that with your own money? Supported by surveys of NatWest and RBS employees, the Group was able to track the progress of the acquisition and measure the effectiveness of its people strategy as well as its impact on business performance. By 2006—having made over 20 acquisitions since 2000—the Group outperformed its peers in every one of the 15 employee opinion categories. By 2007, Paul Geddes, the Group’s CEO of consumer banking, noted: Integration is a core competency of ours: for example, for myself coming in after the NatWest acquisition I can’t tell who is ex-NatWest and who is RBS. Even if I could it wouldn’t matter. But for other organizations where people came from once upon a time there is a legacy they carry with them, and there’s always these factions around. I’ve never seen any of that here, and objectively, I think we’re quite meritocratic and fair with talent evaluation.

The Group in 2008 Since 2000 the Group had undergone a massive transformation, nearly quadrupling in size (see Exhibit 3 for a list of brands and Exhibit 4 for peers by operating profit). In 2000, prior to the NatWest acquisition, the Group was home to 32,000 employees, many of whom were located in the U.K. The NatWest acquisition saw RBS operating in over 30 countries with 140,000 staff. In October 2007 a consortium of buyers led by the Group—and including Dutch-Belgian Bank Fortis NV and Spanish Bank Banco Santander SA— successfully acquired the Dutch bank ABN AMRO Holdings NV for nearly $100 billion. The transaction was the largest acquisition in financial services history, and allowed RBS to considerably diversify the Group’s income streams in key geographies. The acquisition made RBS the #1 corporate and institutional bank in both the UK and Continental Europe and #5 in both the US and Asia Pacific (ex-Japan). In addition, it created opportunities for growing its international retail franchise in fast-growing markets such as India and China, as well as extending a strong global capability in international cash management, payments and trade finance. By April 2008 the Group had 171,000 people across 5,000 business units with over 40 brands operating in more than 50 countries and catering to 40 million customers.6 In 2007, operating profit was approximately $21 billion out of $62 billion in revenue, while the Group maintained $3.8 trillion in total assets.7 Structurally, the Group was organized into four main operating divisions, supported by a number of group functions as follows:

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Global Markets Responsible for providing banking services and integrated financial solutions to major global corporates and financial institutions, as well as offering a world-class capability in international payments. Global Markets consisted of Global Banking and Markets, a leading corporate bank and Global Transaction Services businesses, which ranked among the top five payments businesses in the world. In 2007 Global Markets delivered a pro-forma operating profit of $13bn. Regional Markets The RBS Group operated in a number of distinct national and regional markets around the world, including the UK, Europe, the Middle East, Asia and the Americas, offering personal, business and commercial customers a range of banking products and services, through the largest network of branches and ATMs in the UK, and telephone and internet banking. As well as The Royal Bank of Scotland, NatWest, Ulster Bank, Citizens Bank and Charter One, the division’s brands included MINT, the One Account and Tesco Personal Finance. These business units together generated $17bn pro-forma operating profit in 2007. RBS Insurance RBS Insurance was the second-largest general insurer in the U.K., with a growing presence in Spain, Italy, and Germany. In the U.K. market it was ranked first in car insurance and second in general and home insurance. Brands included Direct Line, Green Flag and Churchill. In 2007, RBS Insurance generated about $1 billion in operating profit. Group Manufacturing The Manufacturing division provided the rest of the Group with a wide range of support functions, including IT, processing, telephony, property, purchasing and security expertise. Its key driver was to provide efficiencies and support for income growth across multiple brands and channels by using a single, scalable platform and common processes wherever possible. It had become a centre of excellence for managing large-scale and complex change as a result. In 2007, the cost of maintaining the Manufacturing division was $9 billion. Group Functions A number of other group functions provided strategic support and advice to the operating divisions. These were: Group Legal & Secretariat, Strategy, Finance, Risk & Internal Audit, Communications and Human Resources. Overall, in 2008 the field of consumer banking, which represented the largest component of the Group’s operations, was very competitive. As most banks had become increasingly diversified, the major players tended to offer similar financial products, making the effectiveness of employees in delivering superior customer service a continued focus for RBS. This made effective HR management a strategic imperative, one that the Group’s CEO recognized. As Tony Williams, HR director of global policy and employment, noted, “It helps that we have a chief executive who is absolutely passionate about this stuff. He might not use the exact labels we use, but he’s passionate about everything that goes into it. He’s very, very focused on the importance of staff engagement.”

Human Capital Strategy In 2008, a core focus of the RBS HR function was to help business leaders utilize key people measures such as employee engagement, turnover and leadership effectiveness. The human capital strategy enabled the provision of this data side-by-side with business data, such as customer service scores and business performance measures. See Exhibit 5 for an overview of this approach.

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Initial Human Capital Measures Neil Roden, Group director of human resources, described the state of the Group’s HR when he arrived in 1997: We’d just gone through Project Columbus which was a huge change program, which in fact laid the foundations for our takeover of NatWest later on. I wasn’t around then, but what I was told was that HR was marginalized in that process. So when I arrived I inherited a function that I wouldn’t have said was in great shape. It didn’t report to the chief executive. It wasn’t part of the inner group, so my predecessor didn’t attend the morning meetings, and initially I didn’t either. It felt like we were just one level below the executive committee, where the action was. There were also some conflicts between team members. So the function was ripe for a real strategic overhaul and change, and everyone kind of knew that. Between 1997 and 2000 Roden introduced a strong evidence-based HR function framed around a consultancy model, supported by a shared services function led by Tony Williams. Roden introduced an annual HR customer survey and bi-annual activity review to ensure that the HR function was focused on delivering the business’ priorities. Roden explained how the Group’s HR programs tended to operate, and how Aitken’s work differentiated itself from those activities: What do the HR people working with the business unit leaders actually do? They basically work on discrete projects, at the end of which they’re supposed to deliver something. And that leads you into a kind of consultancy model, where HR staff diagnose for general managers what the issues are, generate some solutions, and try to implement them. And then you say, “OK, but these projects need to be adding value to people. They need to be adding value to the business. And that leads you to wonder, how do you know any of this HR stuff makes any difference at all? If we all just went home for a year, what bad things would happen? So we started kicking around the whole idea of HR measurement. We upgraded the annual employee opinion survey and included external benchmarks. We started producing data from various sources, which led us to the question of, can we join this data up? Are there things we can do with this data that would help the business? Leveraging the data to better understand and support HR initiatives became Aitken’s focus. He and Roden agreed that this human capital strategy needed to be highly evidenced-based and very clearly demonstrate the impact that its measures had on bottom-line business performance. As Aitken recalled: So after the acquisition of NatWest, we had the scale to put into place a human capital strategy across the Group. Tony Williams had implemented our shared services strategy in RBS and was backing NatWest into it – his team had developed a global data warehouse that pulled various elements of people data together from HR systems across the Group including information such as where they work, what their performance rating is, what their salary is, etc. What that allowed us to do was join that up with data on the business as a whole, particularly financial measures, and start building a much more proactive HR measurement approach which we called human capital. The timely data and analysis for managers that Aitken could deliver through tools such as acquisition surveys was critical to integration efforts—it afforded managers the ability to quickly analyze the human capital landscape of their newly-acquired business entities in order to ensure ontime and effective delivery of their promised initiatives. 5

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Turnover and Absences The aggregation of people data and subsequent analysis provided RBS with deep insight into key people measures such as absence and turnover. Noted Roden: Sir Fred commented a number of years ago that “We appear to be a recruitment agency doing financial services on the side.” He was referring to the fact that short-term tenure—in terms of staff joining and leaving within the first 12 months of service—was high in some of our businesses. In some isolated cases it was up at 60%, which was unacceptable. Consequently, there was an intense focus within the organization on short-term tenure, turnover, and absences, including targets, and these were driven down to below market norms. This focus on the metrics delivered significant financial savings in recruitment costs and, importantly, our retention levels are consequently much higher. Our employee voluntary turnover rate at the end of 2007 globally was 12.0% and our absence rate was 3.4%. Further, by analyzing survey data RBS could demonstrate which elements of the employee proposition and which HR elements impacted engagement for different employee groups (as segmented by criteria such as age, gender and tenure—see Exhibit 6 for the employee proposition). This allowed them to determine the aspects of the employee proposition which, when influenced via HR measures, would give the Group the most “bang for its buck.” Good managers, for example, could only influence engagement to the extent that their span of control allowed. Rewards programs, in contrast, affected the whole organization simultaneously, but were shown to have less of an impact on engagement than leadership effectiveness.

Employee Engagement In 2000, as part of the new human capital strategy, RBS (in partnership with HR consultants Hewitt Associates) developed a new metric —employee engagement—that they believed was a key component of measuring the strength of the Group’s human capital. The shorthand used by managers for these three elements was: ‘Say, Stay, Strive’, and they were measured through answers to six particular questions in the employee opinion survey (see Exhibit 7 for these questions). By running multiple regressions on survey data, RBS determined that more engaged employees produced superior business results. Engagement was primarily manifested in three ways: what employees said (did they consistently speak positively about the Group to colleagues, potential employees and customers?); increased retention (did they have an intense desire to be a member of RBS?); and whether or not they exerted extra effort (also known as “discretionary effort”) toward behavior that contributed to the Group’s success. Aitken described engagement—as distinct from satisfaction or commitment—and its role in strategy. If you think about satisfaction, commitment, and engagement, employee satisfaction is, “Do you like it here?” Commitment is, “Do you like it here and do you want to stay?” And in both these cases, you could be surfing the Web for seven hours a day. It doesn’t mean that you’re actually driving superior shareholder value. It just means you like it here because you have free access to the Internet. It’s not until you get to the third component which is—if you like it here and want to stay—do you also strive, do you go that extra mile, do you demonstrate what we would call discretionary effort? When you understand that component, you really start to differentiate commitment levels in staff.

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Now we are able to identify what the engagement score is for a branch and what the drivers of engagement are in order to develop an action plan that helps our business improve. Year-toyear we measure the exact same triggers and compare them to the previous year’s as well as with peer businesses across the organization and external benchmarks from other admired companies. We try to really give leaders a complete view of their staff and trajectory going forward. Aitken and his team were able to draw quantitative conclusions about HR policy from the employee engagement data. For example, he noted that staff who took three or more components of the Group’s flexible reward system were up to 20% more engaged (components of the flexible reward system ranged from additional voluntary pension contributions, insurance products, healthcare, childcare, or a company car; see below for more). As Aitken said, “These are all the things that naturally draw you closer into the organization. So if you sign up to a seven-year savings-related share option certificate on a Monday you’re also telling us you are not leaving on Tuesday unless something catastrophic happens.” One company document summarized correlations between engagement scores and business results: […] the data shows that engagement drives above average performance, with those branches employing staff with high levels of engagement experiencing the highest levels of sales in relation to other targets. Similarly, there is a positive correlation between the highest customer satisfaction scores and high levels of employee engagement. RBS, in conjunction with Towers Perrin ISR, researched their own employee opinion survey data as well as those of 34 global high performing companies across 38 countries - involving feedback from 465,000 people. (See Exhibit 8 for a section of this survey.) The survey analysis showed that specific drivers of employee engagement vary depending on geographical location. The research indicated that "opportunity for personal development and growth” emerged as the most important driver of employee engagement globally. For employees in the US and India a key driver of engagement was reward; in Japan and Korea, leadership was important, with the question of "management provides a clear sense of direction" coming through as a key driver of engagement; in the Netherlands, the key driver of engagement was around work-life balance. These key drivers of engagement were then used by RBS Group to target and focus employment policies, to attract and retain talented people in all the countries that they operated in.

Building Human Capital Buy-In The Group’s business executives and HR executives had successfully developed a shared vision of the importance of an effective human capital strategy. Employee engagement was not the only human capital metric utilized in this analysis—indices were also created based on leadership effectiveness and linked to customer service, as well as achievement of sales targets, staff absences and turnover. As Ray Gammell, HR director for RBS Europe & Middle East, noted: I can remember a time when we were doing a budget round and we were considering investing more on the people side, significantly more, and the CEO of the business went around the table and asked Mike [Bamber, the chief executive of retail markets at Ulster Bank] 7

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and some of his colleagues if they would increase their bottom-line targets based on this kind of investment. That to me is the ultimate test of whether or not the concept, and the practicality of doing it, is bought into. And they did increase their targets, which was an indication of commitment. We’ve invested millions in people development since those days, and we’ve only been able to do that by taking an approach that was more metric-driven, more bottom-line focused with a clear return on investment. People have been able to buy into that. A critical aspect of ensuring large scale buy-in was the standardization of metrics across the myriad of countries, businesses and languages represented within the Group. Fiona Whittaker, HR director of Group Organisational Effectiveness, cited this in reference to the leadership index, a metric that measured managerial effectiveness (see Exhibit 9): Through the RBS global employee opinion survey we have created a leadership index, for example, which is one of the many measures that are consistent across the RBS Group. We ask globally benchmarked questions in our employee surveys and use consistent definitions in our data to establish metrics and indices that can be compared internally and externally on a likefor-like basis. This enables us to segment and analyze our people data in much the same way that market researchers do with customer data. This allows us to really cut and dice metrics in any way we need to. By mapping people measures and business measures to the demographics that we have, we get a strong insight into individuals and their impact on business performance and customer service. The standardization of metrics across the Group’s different business units was also essential to ensuring fair comparisons between employees, whether they were located in New England or Japan. Additionally, having data at the business unit level afforded managers the opportunity to recognize and address human capital challenges at the aggregate level. See Exhibit 10 for a demonstrated link between certain people metrics—such as the leadership index—and performance within some of the Group’s call centers, and Exhibit 11 for a demonstrated link between sales and leadership. See Exhibits 12 and 13 for additional human capital rankings.

Evidence-Based Management: Providing Business Insight Since 1997 the Group had sent out an annual survey to all employees consisting of about 100 different questions offered in multiple languages. In that time the response rate to the survey had increased from 70% to 90%. Survey results were distributed across the Group via several methods. Goodwin communicated the Group’s results to the entire staff, while each division received specific presentations; managers received reports via the Intranet or on paper, specific to their function; relevant results and challenges were communicated at the business unit level; and survey results were shared with financial analysts in addition to being included in the Group’s annual Corporate Responsibility (CR) report. The annual survey—termed “YourFeedback”—also measured the Group’s performance across a collection of 15 categories which were benchmarked against external companies (see Exhibits 14 and 15 for benchmarking results). For most of the survey’s statements employees noted whether they agreed, tended to agree, were neutral, tended to disagree, or disagreed (about 20 questions followed a slightly different rating scale). Statements ranged from “people acknowledge the good work that I do” to “there is too much unnecessary paperwork in my job” to “management encourages trial and error as a vehicle to achieve breakthrough ideas.” See Exhibit 16 for survey results as presented to employees.

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Aitken described the importance of the annual survey: Our response rate for 2007 was 90%, 20% above the financial services norm and higher than the global high performing norm. It’s a phenomenal response rate. There are lots of companies who will have a really good survey response rate in one country or in two countries, but we have a 90% response rate across the world. The reason is because we do something with the results—we communicate to people in a way that says, “You told us this in the survey, this is what we’re going to do, and this is when you can see it done.” A good example of that would be the fact that through the employee survey our executive board was getting a message that there is too much bureaucracy in the Group. The employee survey helps us understand the effectiveness of key business initiatives such as the continuous improvement framework ‘Work-Out’ within RBS. ‘Work-out’ provides all employees with the opportunities, tools and techniques to get to the root cause of problems, volunteer creative solutions, get on-the-spot decisions from their managers and actively take part in improving the customer experience and business processes. Following the introduction of the Work-Out programme, the employee opinion survey tracked its effectiveness – showing a significant increase in engagement scores at every level and in every business unit, between those people who had taken part in Work-Out (approximately 40,000 staff by the end of 2007) versus those who hadn’t. (See Exhibit 17.) Feedback from the employee survey also highlighted that one of the key drivers of employee engagement was non-financial recognition. The RBS Remuneration and Benefits team did further analysis in response to the survey feedback and concluded that a mechanism was needed to enable managers to recognize excellence in customer service outside of the annual bonus rounds. Aitken explained: “Our remuneration and benefits team designed ‘the big thank you,’ a recognition site that enables managers to recognize excellence at the point where it happens. This can be used at any time of the year and recognizes where staff have “gone that extra mile” for a customer or a colleague. It can be a box of chocolates, flowers, a red letter day, wine etc. It’s all online.” The Group viewed the annual survey as a trigger event for managers to address the greatest challenges facing their groups. Managers developed action plans based on survey results which were included in their quarterly reviews. The people scores were taken extremely seriously— managers whose people scores were troublingly low were given the opportunity to correct them and implement their action plan. It was unlikely that this approach would have occurred consistently across the Group without the strong support of the CEO. Roden noted how Goodwin demonstrated his support for human capital measures around the delivery of survey results: The letters inviting staff to participate come out from Sir Fred, the survey is contextualized around the chief executive, and the thank-you letter plus all the group level results are presented to the staff by Sir Fred, rather than the HR function. He’ll do something on RBTV, which is our business television network, in terms of the results. Once the group-level results are communicated, our divisional executives right down to branch leadership and staff take ownership of their areas and identify interventions that they plan to commit to in the following 12 months to improve their results. These “action plans” are then reviewed at executive board level on a quarterly basis to track action against plan.

Pulse Surveys In addition to the annual survey, managers could commission “pulse surveys,” or smaller, targeted surveys with a narrow focus on a specific business unit. The Group predicted that, in 24 months, the use of the Human Capital Toolkit (see below) for developing and implementing pulse surveys had saved over $2 million in terms of labor and duplication costs. The

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pulse survey tool had become so successful that it was launched on the Group’s intranet in order to enable individual businesses to access and administer it themselves.

Exit Surveys Exit surveys—or “leaver surveys”—were conducted with employees who were departing the Group in order to evaluate what, if any, aspects of the employee proposition were not being met for that particular staff member. Acquisition Surveys Acquisition surveys played a crucial role in helping managers across the Group integrate new units and teams soon after a takeover. Aitken noted the importance of these measures as the Group had, in recent years, grown significantly through acquisitions: Particularly when you look at the period from 2000 to 2007, we made over 20 acquisitions in that period of time, so employee insight was absolutely critical. And our introduction of that acquisition survey allowed us to survey staff within 60 days of change of control where appropriate. Because we then had to really understand how staff were feeling and what their motivations were, within two weeks of that the business has a comprehensive overview of leadership capability, engagement levels, product brand and reputation, effectiveness of the acquisition, communication, etc. This type of survey is invaluable as our business leaders enter the integration phase of an acquisition and it also helps to establish a baseline of employee opinion, motivation levels, and leadership effectiveness.

The Human Capital Toolkit The Human Capital Toolkit—a suite of online tools and resources that helped HR professionals across the Group diagnose issues, develop interventions, share best practices and measure the effectiveness of their people strategy—was the heart of the Group’s human capital strategy (see Exhibit 18 for a screenshot). It consisted of six separate modules: surveys, reports, benchmarking, research, measurement and business intelligence, and was available to around 2,000 HR executives and consultants across the Group. Put simply, the toolkit aimed to put the sum of the Group’s human capital efforts in one place to enable access to consistent, global tools and avoid duplication. The toolkit was designed in partnership with the Group’s communication department, IT department and the HR Shared Services function to ensure it fully leveraged the Group’s infrastructure advantages. The site was designed to enable users to access the resources they needed within “5 clicks.” To Aitken, this user-friendly aspect of the toolkit was critical to building buy-in among HR managers. “If you focus all of your attention on the software and see it as a cure-all, you will fail. The right expert support and centralized collation is important but without a sense of how the data will be used by individual managers, you will simply wind up with a lot of unused data.” In addition, the toolkit enabled HR managers to work with their businesses to measure their own people metrics—such as turnover—across different units and even brands. With this informed perspective, managers could target specific areas for improvement; a manager who discovered, for example, that one of his bank branches was extremely highly rated across the Group for maintaining low employee turnover, could work with HR to determine what that branch was doing differently and how to replicate it across other locations.

Applying Human Capital Analysis to a Business Problem A key area of application of the human capital strategy was the Group’s consumer banking business. The Group’s consumer banking division had 2,250 branches and encapsulated both the RBS and NatWest retail brands, collectively catering to over 15 million customers. On average, branch 10

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managers earned about $80,000 per year with bonus. Branch managers reported to area managers, of whom there were approximately 200 earning about $130,000 with bonus. Area managers were responsible for 20 branches each and reported to regional managers, who earned approximately $200,000 (and, in turn, reported to regional managing directors earning around $350,000). Helen Cook, a member of the Human Capital Board, was in charge of HR for consumer banking and marketing and was working with Paul Geddes—who had recently been appointed CEO, consumer banking—on developing a consumer banking strategy for the RBS and NatWest brands in the U.K. In 2007, as part of a strategy review Cook and Aitken analyzed the business’s current human capital position. The analysis request reflected a strong evidence-based view of business performance within the consumer banking division. By capturing a series of performance measures compiled into comprehensive dashboards, key consumer banking executives were able to understand the impact the performance measures had on their business. The dashboard measures included: number of employees in each key role, from customer advisor through to regional manager; average salary for each key role; average incentive payout; absence rates compared to targets; tenure and turnover rates; talent ratings (key levels of management were categorized into their individual potential to perform more senior roles); distribution of performance ratings across key roles; spans of control (average number of direct reports for each people management role); engagement and leadership index scores; discipline and grievances numbers, as well as most common reasons for them; and diversity metrics. Aitken described what the human capital analysis revealed: Paul and Helen agreed that we would try and analyze every bank branch in the Group by region, by area manager, by branch manager, by aggregate, and by division in terms of customer service, financial performance, and also in terms of leadership, engagement and a number of related measures. When we looked at the results what stood out was that the area managers’ influence on business performance and people performance wasn’t as strong as the branch managers’ influence. So what we need to figure out from that is why the area manager role isn’t having the desired effect in terms of performance. Geddes added, “So clearly, the first line managers play a critical role. We’re debating what that means. However, it does say we need to make it worthwhile for talented people to stay as branch managers. In terms of where we’ve focused our efforts since this came to light, certainly it’s been on the branch manager side of the population.” Geddes and Cook knew that they needed to formulate a new approach to human capital within consumer banking based on Aitken’s analysis—the question was, what should it entail? Cook described her reaction to the analysis results. The correlation for branch managers was so high we couldn’t ignore it. In my conversations with Paul I made it clear that while looking at this business, one thing we cannot ignore is the organizational design. We can experiment with different products, or different approaches to the consumer, and we can restructure around individuals, but actually there is something fundamentally flawed in this model, which is: for a variety of reasons, there is a layer in here that is adding limited value. We need to put the power back in the front line, and it’s currently in the middle/ head office. Cook continued: So it’s clear that the most important role and yet the most undervalued role over the last five years was that of branch manager. It’s a challenging role because you have 11

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numerous, non-aligned responsibilities. People view the job as a stepping stone to the next job that you really want to do, which then raises all sorts of questions about career path. There should be various career paths depending on what your skills are, depending on what you want to do, and you shouldn’t have to go through branch management to go up the earnings curve. Finding quality branch managers was a challenge across the Group. Mike Bamber, the head of retail markets at Ulster Bank, noted: The hunt for quality branch managers is one of the major challenges of my job. Branch managers are key in the retail business. We’re quite a disparate, widely distributed business with fewer outlets than say NatWest or RBS, but in a situation like Ireland, which is a much smaller country, we still have 260 outlets, and you need quality management in each of those. So the hunt and continual battle to retain quality branch managers is a key challenge. Geddes, Cook, and Aitken were undecided as to just how radical a change was necessary for consumer banking. As Cook noted, “We need to get out of this model we’re in to actually create more income—one could argue the current model is in parts value destroying. The margins are getting squeezed, and the structure is management-heavy.” Geddes and Cook wondered: what was the best way to empower branch managers? Could some of the best area managers be transitioned into that role, or should the Group focus on bringing in entrepreneurial individuals from other units? Should current branch managers be incentivized to stay, as opposed to the current model which saw them viewing the branch manager position as more of a stepping stone position? Whichever strategy was chosen, they knew that branch managers had to be empowered. As Cook noted, “The old branch manager in the U.K. banking system was a really prestigious job to have. Now we basically just give them revenue targets, and they don’t even get to interview the staff they have.”

Branch Manager Performance Measurement Gammell described how branch managers were evaluated: We try to keep our model for branch manager performance measurement simple enough to have a balanced approach with four elements. You can visualize a triangle: in the center is control, which is your basic foundation. If you haven’t got that, everything is going to be wasted. The other three elements are points on the triangle: sales of financial services products; people, or in other words employee satisfaction and engagement, as well as levels of communication and response; and customer service, and we actually have a service score for each of our branches. So on a daily basis, sales are being measured, on a weekly basis control and people are being measured, and monthly we have service data coming in. These four measures—control, sales, people and service—make up our LEP [leadership excellence profile] competencies, which are the things we look for in a new branch manager hire. Branch managers had a one-on-one evaluative meeting with their area manager regularly at midyear (similarly, branch managers met one-on-one at the same time with the members of their staff). In advance of the meeting, branch managers received an evaluation regarding what aspects of their job they were and were not succeeding at. Because they had the chance to go over this material before the meeting, and see how much it matched up with their own view, these meetings often served as an opportunity to adapt lagging performance in one or two categories into an action plan—branch 12

The Royal Bank of Scotland Group: The Human Capital Strategy

408-060

managers could request assistance in terms of additional employees, personal coaching or another form of joint problem solving. Certain businesses within the Group were in the process of introducing additional HR measures for branch managers. For example, an HR policy that Ulster Bank was in the process of implementing for branch managers had an A, B and C ranking system—an approach that had been implemented at another of the Group’s brands but was new to the Ulster Group. As Bamber described it: “A” managers are stars that you can see really leading by example, the people who had the best practice, who are going places and nurturing talent within their own branches. “B” managers have the talent or potential to do that but haven’t yet fulfilled that promise, and if you don’t do anything about it they could slip down. They could go either way, and the challenge as a manager is to push them upwards to become stronger Bs or As. The Cs are those managers whose metrics—across the retail balanced scorecard of sales, service, people and control—are either flat or going south. By the end of 2007, Bamber expected to be able to benchmark—on a robust and consistent basis— Ulster Bank’s branch managers in order to accurately segment them and examine potential correlations between branch manager characteristics and LEP competencies. Branch managers were not informed of their ranking; however, there was an ongoing debate across the Group as to whether they should be and if so, where to start (some, for example, believed it should begin with more senior managers who generated more applicable data).

Utilization In 2008, the RBS approach of linking people, sales, customer service and financial performance metrics through a single lens has been so successful that a web-based interactive tool has been launched (see Exhibit 13) across its retail banking operations in the US, Republic of Ireland and UK. The bank is working on extending the approach into commercial and corporate business units in 2008/2009. While there were positive results from utilization of human capital resources in general and the Toolkit specifically across Group businesses units so far, it was clear that overall understanding and utilization could be increased. As Roden noted: For the human capital strategy we have a very high percentage of understanding and usage in the U.K. We’ve got a 75% usage in the U.S. and then it declines in Asia and in other parts of Europe to around 50%. So my drive over the next year or two is about really leveraging the value of the human capital strategy that we have in place. For example, we have developed the products that make up the Group’s human capital strategy, all of which are being used somewhere in the world. I’d like them all to be used appropriately by all of our businesses. And that means a concerted focus in Asia and Europe while continuing the good work in the U.S. and U.K. We need to make sure that our businesses know how to use them, know the context in which to use them, and understand them inside out. We need to be as committed to leveraging the value of these tools as we have been in designing and building them. To do this, we need to oversimplify things so that our business leaders can contextualize it to their staff in a way that gets performance driven. And that’s something that we’ve done successfully in the U.K. but we need to make sure that we export it across the Group. Added Geddes on the need for utilization, “The role of people differs by business unit. As head of consumer banking, I have the highest number of people, therefore these things completely matter to 13

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The Royal Bank of Scotland Group: The Human Capital Strategy

me. It’s all of my cost base. The difference for me between having good and bad people in the right places is everything. Because ultimately there is very little else to differentiate banks.” One way Aitken ensured a partnership approach with his businesses throughout the development of the Group’s human capital strategy was through the Human Capital Board, which contained business and HR executives and was responsible for governing and prioritizing human capital initiatives based on business impact. Cook agreed that utilization of human capital measures across the Group could be improved: I think we could do more with [the human capital strategy]. I think if more people in the Group see how we’ve used it they would be more inclined to incorporate similar human capital analysis within their own businesses […] given that we are in such a low-margin business with similar products, so the only real asset we have is our employees. I just think that more people in the Group could use it more widely than we use it today.

Taking the Next Steps In 2008, RBS was one of the most people-focused financial services firms in the world. As Roden noted, employee management factored into every executive compensation consideration. “Our managers are held accountable for three main areas: financial performance, customer service, and the people management side. So every senior manager and every manager in the U.K. and worldwide will have a component of their performance and development related to people management.” Aitken knew that further steps needed to be taken before all divisions of the Group utilized the toolkit to further refine their human capital strategy. Aitken wondered: what would be the best way to improve utilization? Should the goal be complete utilization across the Group? What was the best way to approach managers who would benefit the most from this analysis? For example, Geddes had been open to human capital analysis in part because of his background: as Cook noted, “Paul came to us from a retailing background, so he’s very interested in customer insight, in digging deeper and looking at the business—including employees—from a different angle.” Additionally, Aitken wondered: how could he ensure that all leaders across the Group received insightful human capital intelligence about their businesses, enabling them to make more informed people decisions and deliver superior service and business results? Roden described the priorities for the Group’s human capital strategy going forward: We have an outstanding human capital infrastructure across the Group that delivers insight directly to the desktop of our HR professionals. It is clear that there are a number of key tools that are so powerful that we now need to make them readily accessible to our business leaders. Consequently, we are building an interactive tool that will enable leaders to view key people, sales, customer service and financial performance metrics through a single lens—something that, when accomplished, will embed our human capital strategy into the way we do business. If we are to fully leverage the value of human capital within the Group we need to get the insight into the hands of those making important people decisions. We have a competitive advantage in our human capital strategy and this will enable us to support further acquisition integration efforts, such as our portion of ABN AMRO, thereby extending our strategic advantage and ensuring that our business leaders continue to deeply understand our people strategy and its impact on performance.

14

The Royal Bank of Scotland Group: The Human Capital Strategy

Exhibit 1a

408-060

RBS Consolidated Income Statement ($ millions) for year end 31 Dec 2007 2007 66,840 (41,504) 25,336 16,930 (4,622) 2,654 9,714

2006 49,376 (28,184) 21,192 14,232 (3,844) 5,350 7,128

2005 42,662 (22,826) 19,836 13,500 (3,682) 4,686 5,906

12,796 (578) 36,894 62,230 15,104 3,532 6,294 3,940

12,486 (540) 34,812 56,004 13,446 2,842 5,316 3,356

12,152 (594) 31,968 51,804 11,984 2,626 5,632 3,650

Operating expenses Profit before other operating charges and impairment losses

28,870 33,360

24,960 31,044

23,892 27,192

Insurance claims Reinsurers’ claims Impairment losses Operating profit before tax Tax Profit from continuing operations Loss from discontinued operations, net of tax Profit for the year

9,540 (236) 4,256 19,800 4,104 15,696 272 15,424

9,100 (184) 3,756 18,372 5,378 12,994 --12,994

8,826 (200) 3,414 15,872 4,756 11,116 --11,116

326 492 14,606 15,424

208 382 12,404 12,994

114 218 10,784 11,116

Interest receivable Interest payable Net interest income Fees and commissions receivable Fees and commissions payable Income from trading activities Other operating income (excluding insurance premium income) Insurance premium income Reinsurers’ share Non-interest income Total income Staff costs Premises and equipment Other administrative expenses Depreciation and amortisation

Profit attributable to: Minority interests Preference shareholders Ordinary shareholders

Source:

Company documents.

15

408-060

The Royal Bank of Scotland Group: The Human Capital Strategy

Exhibit 1b

RBS Consolidated Balance Sheet ($ millions) for year end 31 Dec 2007

Assets Cash and balances at central banks Treasury and other eligible bills subject to repurchase agreements Other treasury and other eligible bills Treasury and other eligible bills Loans and advances to banks Loans ad advances to customers Debt and securities subject to repurchases agreements Other debt securities Debt securities Equity shares Investments in Group undertakings Intangible assets Property, plant and equipment Settlement balances Derivatives Prepayments, accrued income and other assets Assets of disposal groups Total assets Liabilities Deposits by bank Customer accounts Debt securities in issue Settlement balances and short positions Derivatives Accruals, deferred income and other liabilities Retirement benefit liabilities Deferred taxation Insurance liabilities Subordinate liabilities Liabilities of disposal groups Total liabilities Minority interests Equity owners Total equity Total liabilities and equity

Source:

16

Company documents.

2007

2006

365,732 14,180

12,242 2,852

22,278 36,458 438,920 1,658,500 201,122 351,732 552,854 106,052 --96,984 37,500 33,178 674,820 38,132 91,908 3,801,038

8,130 10,982 165,212 933,786 117,748 136,754 254,502 27,008 --37,808 36,840 14,850 233,362 16,272 --1,742,864

625,266 1,364,730 547,230 182,042 664,120 68,048 992 11,020 20,324 75,958 58,456 3,618,186

264,286 768,444 171,926 98,952 236,224 31,320 3,984 6,528 14,912 55,308 --1,651,884

76,776 106,076 182,852

10,526 80,454 90,980

3,801,038

1,742,864

The Royal Bank of Scotland Group: The Human Capital Strategy

RBS Stock Price

800 700

Royal Bank of Scotland Stock Price

600 500 400 300 200 100 0

Royal Bank of Scotland FTSE All Share FTSE Banks

D

ec -9 Ju 9 n0 D 0 ec -0 Ju 0 n0 D 1 ec -0 Ju 1 n0 D 2 ec -0 Ju 2 n0 D 3 ec -0 Ju 3 n0 D 4 ec -0 Ju 4 n0 D 5 ec -0 Ju 5 n0 D 6 ec -0 Ju 6 n07

Monthly Closing Price

Exhibit 2

408-060

Source:

Thomson ONE Banker, accessed September 17, 2007.

17

Source:

RBS Brands by Division

Company documents.

Exhibit 3

408-060

-18-

The Royal Bank of Scotland Group: The Human Capital Strategy

Exhibit 4

Top Ten Largest Banks Worldwide by Operating Profit, 2007 ($ billions)

Bank HSBC Holdings plc JP Morgan Chase & Co Bank of America Corp. Royal Bank of Scotland Group plc UniCredit SpA Banco Santander SA BNP Paribas Barclays plc Credit Suisse Group Wells Fargo & Co

Source:

408-060

Operating Profit 23.4 23.0 21.4 19.8 16.2 15.0 14.4 14.4 13.6 11.6

Company documents sourced 1 May 2008.

Exhibit 5

The Joined-Up Approach

Service Excellence Through People joining up decisions …. Marketing

HR

Sales

Service

Financial Performance

Joined up approach

More informed people and business decisions

Source:

Company documents.

19

408-060

The Royal Bank of Scotland Group: The Human Capital Strategy

Exhibit 6

Employee Engagement Strategy

Employee Engagement Strategy Understanding the impact of our people on performance Example Inputs

Employee Segmentation & Demographics

Global people Data

Example Business Metrics

Joiner Survey Leaver Survey

Customer Service Branch Profitability Productivity Cross-selling ratio Staff turnover Financial performance

Proposition & Brand

Pulse Survey Employee Opinion Survey

Support Measurement of Human Resource and Business Initiatives

Acquisition Survey

Leadership

Incentive Design& Strategy

Engagement

Attraction

Employer Brand Effectiveness

Supports Predictive Analysis and Informed Business Decisions

Source:

8

Company documents.

Exhibit 7

Global Engagement Index – “Say, Stay, Strive”

SAY

Given the opportunity, I tell others great things about working here I would recommend RBS as a good place to work It would take a lot to get me to leave the RBS group

STAY

STRIVE

I hardly ever think about leaving the RBS Group to work somewhere else My business motivates me to contribute more than is normally required to complete my work My business really inspires me to do my best work every day

Source:

20

Company documents.

The Royal Bank of Scotland Group: The Human Capital Strategy

Exhibit 8

408-060

Global Drivers of Engagement Item drivers

My business is well managed Satisfaction with recognition for the performance in current job

Category

UK

Nether lands

Germa ny

US

India

Ireland

Division Leadership

1

1

1

1

1

1

2

2

2

Recognition & Reward

Opportunity for personal development and growth

Performance Mngt.& Development

3

Retaining most talented people

Performance Mngt.& Development

4

Rewarding relationships with key customers

Customer Focus

Divisional management style encouraging employees to give their best

Division Leadership

Developing people to their full potential

Performance Mngt.& Development

Incentive/Bonus plan effectively motivates superior performance

Recognition & Reward

Pay compares well to that in other similar organisations

Recognition & Reward

Commitment to quality/continuous improvement

Customer Focus

Interest of the Senior management of my Business in the well-being of employees

Division Leadership

Promoting the most competent people Business is taking the right steps to improve efficiency

Source:

4

4

3

2

5

2

2

4

3

5

5

3 3

Workload & Work-Life Balance

4

Performance Management & Development

5

Efficiency

4

5

Efficiency

Understanding of customer requirements and expectations

People are encouraged to balance their work life and their personal life

3

5

Company documents.

21

408-060

Exhibit 9

The Royal Bank of Scotland Group: The Human Capital Strategy

RBS Leadership Index

Source: Company documents.

22

The Royal Bank of Scotland Group: The Human Capital Strategy

Exhibit 10

408-060

Applied Human Capital

Real example of human capital in action Our Human Capital Strategy identified 7 areas of employee performance that showed a significant, consistent positive link with business and customer performance metrics. These measures were Leadership Index, Engagement index, Customer Focus, Image and Competitive position, Managing People and Change, Efficiency and Innovation together with Performance Management and Development. When mapped to lead business metrics within the contact centres such as average handling time, call time, hold time, call wrap time and calls per hour, the 3 centres with the highest score across the 7 people measures outperformed all the remaining centres consistently in business output. Essentially, higher scores across these 7 people measures evidenced lower average handling time (279 sec. V’s 344), greater calls per hour (8 v’s 5), less customer hold time (17 sec v’s 22) and shorter wrap time (22 sec v’s 31).

Performance is higher in units with more favourable employee opinions. Talk

AHT 344

Wrap

Hold

Calls Per Hour

22

291

8

31 279 279

240 240

17 17

22 22

0

0

High Favourability

0

0

5

5

0

Low Favourability

Actual date within RBS Group - business unit anonymised

Source:

Company documents.

23

408-060

The Royal Bank of Scotland Group: The Human Capital Strategy

Exhibit 11

Impact of Leadership on Sales (anonymised data)

Business Area B – Impact of Leadership on sales performance 115%

CVP Sales Scores

110%

Leadership Index

105% 100% 95% 90% 85% 80% 40%

50%

60%

70% Leaders hip Index

Source:

24

Company documents.

80%

90%

100%

The Royal Bank of Scotland Group: The Human Capital Strategy

Exhibit 12

408-060

Branch Bank Human Capital Metrics (anonymised data)

“Business Area A” – 2006 Full year metrics Figures represent the difference from the median for CSI, EOS scores, turnover and sales for a real business unit within RBS Group (anonymised for presentational purposes) Branches

CSI

Engagement Index

Leadership Index

Turnover

Sales

Median

85%

55%

67%

10%

104%

Top 10%

9%

16%

15%

-10%

11%

10-20%

6%

10%

9%

-4%

5%

20-30%

4%

6%

5%

-5%

6%

30-40%

1%

2%

0%

0%

0%

40-50%

0%

0%

0%

0%

1%

50-60%

-2%

-7%

-5%

0%

-4%

60-70%

-3%

-9%

-9%

2%

-5%

70-80%

-5%

-4%

-2%

2%

-3%

80-90%

-6%

-5%

-4%

4%

-2%

Bottom 10%

-10%

-11%

-16%

5%

-13%

Branches with above average CSI scores tend to perform above average on EOS, HR and performance metrics Equal to or greater than the median Less than the median

Source:

Company documents.

25

408-060

The Royal Bank of Scotland Group: The Human Capital Strategy

Exhibit 13 Global interactive web-based tool to support managers (dummy data used for presentation purposes)

Source:

26

Company documents.

Source:

Favourable Scores

1

Efficiency

Employment Security

Customer Focus

Workload & Work Life Balance

Division Leadership

Managing People and Change

0

25

50

67

67

75

84

85

81 78

76 73

69

Recognition & Reward

77

78

76

76

73 70

68

64

Job Satisfaction & Engagement

Performance Management & Development

Leadership Index

Cooperation & Working Relationships

Engagement Index

Respect & Diversity

Communication

Innovation

Image & Competitive Position

RBS group Leadership

Very strong long term improvements - RBS 2007 vs. RBS 2003

The Results of Human Capital Management

Company documents.

Exhibit 14

100

-30

-15

0

8

8

8

9

9

15

10

11

11

11

12

12

13

14

14

15

18

18

Differences From Benchmark

30

408-060

-27-

408-060

Exhibit 15

The Royal Bank of Scotland Group: The Human Capital Strategy

RBS Group vs Global Financial Services Norm

Source: Company documents.

28

The Royal Bank of Scotland Group: The Human Capital Strategy

Exhibit 16

408-060

Survey Results

29

408-060

Exhibit 16 (continued)

30

The Royal Bank of Scotland Group: The Human Capital Strategy

The Royal Bank of Scotland Group: The Human Capital Strategy

408-060

Exhibit 16 (continued)

Source:

Company documents.

31

408-060

The Royal Bank of Scotland Group: The Human Capital Strategy

Exhibit 17

Work-Out & 2007 Employee Engagement Results

Category scores by Work-Out participation against RBS Group norm CATEGORY

Participated in Work-Out: YES

Participated in Work-Out: NO

1

RBS Group Leadership

+5

-2

2

Division Leadership

+6

-3

3

Managing People & Change

+4

-2

4

Customer Focus

+3

-2

5

Communication

+6

-3

6

Efficiency

+6

-3

7

Innovation

+6

-3

8

Workload & Work Life Balance

+3

-2

9

Co-operation & Working Relationships

+3

-1

10

Respect & Diversity

+3

-1

11

Performance Management & Development

+5

-3

12

Recognition & Reward

+5

-2

13

Job Satisfaction & Engagement

+4

-2

14

Image & Competitive Position

+5

-2

15

Employment Security

+4

-2

16

Engagement Index

+5

-2

17

Leadership Index

+4

-2

Example: Job satisfaction and engagement are 4 points higher for staff who have participated in Work-Out compared to the overall RBS Group average, and 6 points higher than those who have not participated in Work-Out

Source:

32

Company documents.

Source:

Human Capital Toolkit Screenshot

Company documents.

Exhibit 18

408-060

-33-

408-060

The Royal Bank of Scotland Group: The Human Capital Strategy

Endnotes 1 “Our Banking Family,” A Brief History of the Royal Bank of Scotland Group, www.rbs.com, accessed September 14, 2007. 2

Lynda Gratton and Sumantra Ghosal, “Beyond Best Practice,” MIT Sloan Management Review, Spring 2005,

p. 50. 3

Gratton and Ghosal (2005).

4

Gratton and Ghosal (2005).

5

Gratton and Ghosal (2005).

6

Company information – RBS Group Communications, cited April 24, 2008.

7 http://www.investors.rbs.com/downloads/Keyfactsfigures-Feb2008.xls,

34

accessed April 28, 2008.