This article will focus on Balanced Scorecards for Banks.
Definition: According to TechTarget, a performance scorecard is a graphical representation of the progress over time of some entity, such as an enterprise, an employee or a business unit, toward some specified goal or goals. Performance scorecards are widely used in many industries throughout both the public and private sectors. The performance scorecard is an essential component of the balanced scorecard methodology.
The focus of this article will be on balanced scorecards for banks. Implementation of the balanced scorecard for banks and financial institutions is a very tricky thing, according to BSC Designer, as there is huge temptation to focus on financial indicators only. We all know that banks work with money to make more money. So, it is very easy to ignore non-financial indicators that have a direct impact on financial performance of banks.
Nobody knows the goals! – How does the following scenario sound to you? Senior management of the bank goes off to a retreat at a nice resort to hammer out the strategic goals for the next one, three, and five years. They all agree that Earnings per Share (EPS) has a compound growth over the next five years of 10%, the customer base will double, the customer cross-sell ratio will improve from 1.6 to 2.5, and the bottom 10% of underperforming employees in the bank will be eliminated. Everyone is excited about the goals, plays a few rounds of golf, performs a few team building exercises, and then goes back to their jobs without any plan of attack.
If asked a few weeks later, only one fourth of senior management will remember the goals. Worse yet, probably only one in twenty of the bank staff is even aware of the bank’s strategy. The purpose of the balanced scorecard for banks is to get everyone on the same page.
Best Practice for Balanced Scorecard – The Advanced Performance Institute states that the basic principles of Drs. Robert Kaplan (Harvard Business School) and David Norton’s original balanced scorecard model have proved hugely influential on subsequent thinking about the subject. Their main point was that a balanced scorecard should focus on the four key perspectives:
- Internal Processes
- Learning and Growth
The Financial Perspective – These metrics typically focus on revenue and profit goals. A bank will compare these numbers to past performance, budget, and peers. One measure I found effective was to compare branch profitability against the other branches. Those that ranked in the top quartile got a score of four, the middle two quartiles a score of three and two, and the bottom quartile a score of one. The goal of a branch was to not get a one. Another measure that is effective is the efficiency ratio. This measures the cost of revenue which is calculated by expenses divided by revenues. For example, an efficiency ratio of 45% means that every dollar of revenue costs $0.45 to raise. The goal is to lower this ratio.
The Customer Perspective – This perspective looks at measures as they relate to customers and the market. They analyze customer growth and service targets as well as market share and branding objectives. Typical measures include customer satisfaction, service levels, cross-sell ratios, market share, and brand awareness. Much of this data comes from the Marketing department. The main goal is to increase the bank’s share of wallet of their customers and the surrounding market.
The Internal Process Perspective – The bank is constantly making investments in the employees, technology, and bricks and mortar. These measures review how effective these investments are performing over time. Some of the measures will be assets, deposits, or revenues per Full-Time Equivalent (FTE). Other measures would include revenues per square foot. The key is to these measures is the payback of your various fixed investments. If a measure is getting too high, you may need to invest in another FTE.
The Learning and Growth Perspective – Focuses on the intangible drivers of future and is often broken down into the following components:
- Human Capital (skills, talent, and knowledge)
- Information Capital (databases, information systems, networks, and technology infrastructure)
- Organization Capital (culture, leadership, employee alignment, teamwork, and knowledge management).
Typical example measures and Key Performance Indicators (KPIs) include staff engagement, skills assessment, performance management scores and corporate culture audits. These types of goals are the hardest to measure and are often times subjective. When I worked at IBM, they addressed this strategy by requiring each of its employees to obtain 40 hours of education per year. They offered many internal classes and tracked the hours by employee.
Where to go for help? – There are many vendors that offer corporate performance management, often referred to as CPM. The key is that you need a partner that will assist you in building a balanced scorecard for banks, specifically. If you are just getting started with the finance piece of your scorecard, Oracle Hyperion Financial Management, SAP Business Planning & Consolidation, IBM – Cognos TM1, and Solver’s BI360 are all good solutions to capture the metrics for your scorecard and to present the scorecard KPIs in the form of a report or a dashboard.
If you are ready to tackle the customer, internal process, and growth and learning perspectives, you will need a data warehouse with a good reporting engine. You might consider IBM Cognos, SAP BusinessObjects, Oracle Business Intelligence Enterprise Edition, and again BI360 by Solver.
Whether you are tracking one or all four of the key perspectives in your bank scorecard, BI360 by Solver is a solution that will grow with your company and complexity as the solution is very scalable. Solver, Inc. is happy to answer any questions and generally review BI360’s easy-to-use, Excel- and web-powered reporting and score carding solution for banking and finance industry users. Get your whole organization on the same page today so that everyone will be tracking towards the bank’s strategic goals and objectives by utilizing balanced scorecards for banks.