Does size matter when it comes to culture?

In economic theory, companies become more efficient as they get larger until the reach a size when they become less efficient.

It’s one of those great economic ideas which allow theorists to straddle the fence – or in this case the U-shaped cost curve. The bottom of the U is the point of maximum efficiency after which size becomes a disadvantage.

For the corporate world however - and for financial services in particular - the optimal size of a company is far from an academic argument. More and more companies – and ANZ is one – have made a strategic decision to move away from scale in general.

"The institutional challenges of complexity are real and most often manifest in risk and conduct issues.” - Andrew Cornell

ANZ’s chief executive Shayne Elliott in his year-and-a-half in charge has committed the bank to a program of simplification, exiting some business – even profitable ones – because he sees greater value in focussing the bank’s resources on fewer businesses where the bank has a strong competitive advantage.

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It’s an implicit acknowledgement the benefits of scale – whether technical (product development etc), administrative, in purchasing or funding costs – need to be offset against diseconomies of scale – complexity, compliance, communication, engagement, failure to respond quickly to changing customer preferences.

In the decade since the financial crisis, one of the major issues vexing regulators and governments has been the concept of ‘too big to fail’ – what to do about financial institutions of such scale and complexity their failure would compromise the financial system and national, even global, economies.

Scale, from this perspective, has severe ‘negative externalities’ – costs to the broader community not paid for by the institution involved.

But there is another challenge which has become more prominent in the last decade and it also has to do with scale: the challenge to communication, operations and culture which comes from simply being too big and complex.

This is the question not of ‘too big to fail’ but ‘too big to manage’.


The vast majority of the conduct issues which have dogged financial institutions globally have come from behaviours taking place in pockets of generally robust institutions which were not picked up by compliance, reporting lines, internal management or boards.

The two ‘too bigs’ are of course related. In his 2010 Shann Memorial Lecture, former Reserve Bank of Australia governor Glenn Stevens made the point explicitly:.

“[New] arrangements surely have to include allowing badly run institutions to fail, which must in turn have implications for how large and complex they are allowed to become," he said.

"The finance industry, certainly at the level of the very large internationally active institutions, needs to seek to be less exciting, less ambitious for growth, less complex, more conscious of risk and more responsible about where those risks end up than we saw for the past decade or two."

The seven years since Stevens made those statements have born his words out. The institutional challenges of complexity are real and most often manifest in risk and conduct issues.

Even before the crisis when it became a ward of the state, Citigroup was also increasingly suffering from what many believed was unmanageable complexity.

It was fined for ramping bond markets in Europe, banned from some businesses in Japan, and pilloried for its analysts flogging stocks they considered dogs. Then chief executive Chuck Prince acknowledged his biggest challenge was to institute a common, effective culture and maintain proper controls across a sprawling global empire.

After conduct issues spanning the globe in the early 2000s, the final straw for then-chief executive Chuck Prince was his firm’s involvement in an Italian dairy scandal.

"We were defrauded by a milk company. If you can't protect yourself against a milk company you are not doing a very good job,” he memorably said.

Notably since that period Citigroup has consciously streamlined its business, exiting markets, economies and product lines. It has now returned to profitability and investor favour and has been able to pay special dividends, so robust is the revamped business.

General Electric too, which at the time of the crisis was the world’s largest non-bank financial institution, has now effectively exited financial services and has simplified its industrial business mix considerably – even selling off those lines for which it was most famous like household appliances.


The study of diseconomies of scale and how they impact internal communications and culture is a rich area not least because it is so intangible.

According to American business academic Stephen Wilson, author of the book Conquering Complexity in Your Business, complexity creeps into internal systems, adding layers of costs while eroding customer focus and profitability unless carefully managed.

"Complexity has three distinct impacts that lead to a competitive disadvantage," Wilson writes.

"The first impact is costs that are not being rewarded in the marketplace.”

“The second relates to focus, since complexity distracts a company from zeroing in on key areas of growth that generate most of the profits. Finally, complexity directly impacts processes, adding costs and consuming resources that should really be directed towards growth opportunities."

The bigger question remains, however: do the complexities in institutions of such size, the challenges of being across myriad businesses, the necessity of dealing with thousands of spot fires and eager regulators, outweigh the scale advantages of such an institution?

In the current environment, one response to these diseconomies of scale has been centralisation – back to the future in some ways.

The highest profile example is the American bank Wells Fargo which suffered a massive scandal over the creation of false accounts and product churning.

Reviewing the scandal, the bank’s board decided the autonomy which had been granted to the various arms of the business meant scrutiny was not sufficient – the balance between empowerment and control had tilted too far.

The response has been a wholesale re-ordering of reporting lines and a reversion to more simple, centralised structures.

“It is a fundamental rewiring,” Chief Financial Officer John Shrewsberry told investors. “Even if (running the business) costs the same, (the changes would) be worth doing because it’s an easier company to manage, it’s a less risky company to manage, and we get a better outcome.”


PwC’s consulting arm, Strategy&, makes the point in its paper Escaping the commodity trap: The future of banking in Australia, that successful banks in the future will need to be “simpler, smaller, and more deeply connected to their customers”.

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“Simpler banks will have the courage to entertain much more radical rationalisation of their product and service suite than they have in the past, even at the cost of short-term revenue,” the consultancy said.

“Banks must make disciplined, hard choices about how to allocate financial capital, physical capital, people and, of course, their reputational capital.”

Here at ANZ, Elliott has made the point “we should choose to do a few things and do them really, really well”.

“We want to be the best bank in Australia and New Zealand for people that want to buy and own a home or start and run a small business,” he says.

“For institutional clients, we want to be the best bank in the world, for people who in the business of moving goods and money around Asia. It’s really about intense focus and delivery on those segments.”

Elliott of course if far from alone. Companies, not just banks, which have suffered scandals which go back to culture and internal communication are looking closely at how they can manage complexity.

Deutsche Bank, like Citigroup, has drastically reshaped its business. JP Morgan has surpassed arch rival Goldman Sachs on many measures in part because of a simplification of its business and focus on funds management.

Andrew Cornell is manging editor at bluenotes

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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