They say fortune favours the brave, but launching a bank? In a credit crunch? Still, having established a successful personal finance business 10 years ago as a joint venture with the Royal Bank of Scotland (RBS), Tesco decided a fully fledged retail bank was a logical next step and bought out RBS's shareholding.
Of course, other retailers have joint ventures or distribution agreements with banks and insurance companies. Tesco's agreement with RBS had allowed the retail giant to launch its own-brand banking and insurance range, as well as roll out ATM machines and the Tesco Compare website. Tesco Personal Finance had notched up 5 million customers, earning more than £200m in profits, and became the UK's third-largest car insurer in the process. But Tesco wanted to offer customers its own current accounts and mortgages.
No other retailer had set up its own full-service bank in the UK. But although the supermarket had an unrivalled brand, customer knowledge and chain of outlets, it still relied on RBS for product, processing capability and technology. Some 2,500 RBS employees were involved in servicing Tesco customers, while another 200 in the Edinburgh head office handled sales, marketing and product development. Ownership and profits were split equally between the two parties. Untangling that arrangement would be tricky - particularly in the 12 weeks Tesco wanted it completed. The supermarket chain was convinced that the prevailing economic climate represented a substantial opportunity for a new bank to win new customers.
Navigant used its financial services experience to strike a deal by which RBS became Tesco's supplier. First, the consultancy helped Tesco plan precisely which services RBS would provide during the transition period and how to ensure that service to customers would not be interrupted while the changes were taking place - regulatory approval for the deal hinged on assurances that Tesco's customers would not be negatively affected.
And Navigant worked with Tesco to create an operating model for the new business. About 15 consultants from Navigant worked alongside four people from the retailer's corporate finance function. A deal as large and complex as this involves lawyers, actuaries and accountants too, so Navigant's consultants liaised with them all to support negotiations and help draft the contracts.
The change of ownership also meant that more robust contractual arrangements with RBS were essential. 'Tesco needed to understand not only how the new business was going to operate, but also how it would manage the performance of RBS,' says Navigant's Simon Kent.
Success depended ultimately on ensuring that former RBS employees remained engaged and committed to providing a high-quality service.
In July 2008, with regulatory approval granted, Tesco signed contracts with RBS worth £950m, establishing Tesco Personal Finance as a significant player in the banking market. Navigant is now helping Tesco prepare for the next stage of the bank's evolution.
'It was a challenging project,' says Nicola Goodricke, Tesco's business development manager. 'Our objectives changed and evolved as we went along. Navigant's consultants were very adaptable in helping us find our way. They provided resources and advice at late hours and into the weekend. They made things work for us in difficult circumstances.'
Tesco's financial service offering had been provided in a 50-50 tie-up with RBS, but the retail giant saw opportunities in setting up its own full-service bank, relegating RBS to supplier. Navigant had less than three months to guide Tesco through the changes. Its consultants liaised with lawyers, actuaries and accountants to negotiate a new arrangement - all without affecting customers - and set out guidelines for operating the new business. It was vital to keep former RBS staff committed. Now, Tesco Personal Finance is a significant player in banking.
- Do your homework. effective negotiation must be built on thorough due diligence;
- Don't fear complexity. Focus on the key elements that will determine success;
- Take the people with you. Make sure everyone shares the same goals.
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