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Mendacious former Shell UK Managing Director Sir David Varney and the HMRC lost computer discs debacle

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The merger that exposed a taxing problem for managers

By Vanessa Houlder

Published: July 11 2008 03:00 | Last updated: July 11 2008 03:00

When a UK government department lost computer discs carrying the personal data of 25m people – members of 7m families in receipt of child benefit – last year, the incident was blamed on mistakes by junior officials. But a report just published on the debacle focuses its criticism not so much on individuals as on the “unsuitable organisational design” of HMRC, the department formed by the merger of the Inland Revenue and Customs & Excise three years before.

In the report of the investigation headed by Kieran Poynter, chairman of City of London professional services firm PwC, Mr Poynter expresses dismay at HMRC’s “muddled accountabilities”. In a swipe at the complex structure adopted for the 2005 merger, he says HMRC should have opted for a traditional, hierarchical structure: “[HMRC] is not suited to the so-called ‘constructive friction’ matrix type organisation [that was] in place at the time of the data loss.”

But the architects of the structure for the merged organisation were neither naive or inexperienced. They were McKinsey, the consultancy firm, which was paid £5.5m for its advice on the new organisational model, management processes and governance structure. The chairman of HMRC at that time was Sir David Varney, a senior industrialist who had worked at Shell, British Gas and BT.

So did HMRC really get it so wrong – and if so, why? McKinsey declines to comment about its work for HMRC. But the experience highlights the importance of the management structure in any merger of two organisations.

Both outside and inside HMRC, the management structure has been condemned. Even before the discs were lost, at least one professional institute – the tax faculty of the ICAEW, the UK chartered accountants’ body – blamed the “matrix management” for lack of accountability, ownership of issues and clarity of vision. Soon after, a Cabinet Office report highlighted the “proliferation of committees” at HMRC and criticised “the complex management structure”.

At the time of the merger, however, HMRC’s top managers faced a traditional management problem of finding a way to integrate two entities without forcing one partner to mould itself to the other. They had two big organisations with different cultures: Inland Revenue was pragmatic and intellectual; Customs & Ex-cise more confrontational. Costs had to be cut 5 per cent a year, with the consent of the unions and without alienating staff.

Nelson Phillips, head of the organisation and management group at Tanaka Business School at Imperial College, London, says outright acquisitions that target specific assets and people are relatively easy, but: “The more you try to merge and create synergies the more difficult it is.”

When the bank Citicorp mer-ged with insurance and brokerage business Travelers in 1998, the new Citigroup tried to present the deal as a “merger of equals” by appointing managers from both outfits to share the responsibilities of every post. But many former Citicorp staff left because they felt they did not fit into the new organisation. The notorious “merger of equals” of Daimler-Benz and Chrysler Corp in 1998 was never a success and finally failed last year after severe culture clashes.

Around the time the HMRC was formed, Sir David explained that senior managers’ responsibilities would not correspond with the former structures of the two legacy organisations, so enabling a new culture to develop. “We didn’t want an organisation that was split along lines of customers, operations or policies or infrastructure,” he said.

Terry Cook, president of the Association of Revenue and Customs, which represents senior managers, says it was clear from the start that HMRC needed a “more unified and integrated structure”. A system of 37 business units created huge duplication, no common direction and no clear lines of accountability up to board level, he says.

But was the matrix structure a fundamental flaw? The idea of a grid-like structure with multiple reporting lines first became popular in the 1970s for encouraging speed and innovation. At best, it helps top management understand the consequences of a course of action. But it has often been criticised for causing loyalty clashes and turf battles.

Peter Strueven, global head of post-merger integration for Boston Consulting Group, defends matrix structures, saying that big organisations making decisions that cut across products, functions, customers and geography need a matrix. HMRC might even have been right to adopt a matrix structure and the blame may lie with how it was implemented, he suggests.

Prof Phillipssays matrix structures remain essential for multinationals. But he says a hierarchical structurehas advantages for transaction-processing organisations such as HMRC that need clear lines of communication. He suspects the adoption of a complex structure in cases such as HMRC might be a way of avoiding hard decisions: “Who is the boss? You can both be the boss in a matrix,” he says.

In the aftermath of the debacle of the discs, HMRC has moved to a simpler structure that makes responsibilities clear. But in the long run, creating a common culture may prove a hard task. Preconceptions and stereotypes persist, says Mr Cook: “I am afraid we are still grappling with a lot of that.”

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