FINANCE

U.S. Banks: Spreadsheet Warriors or Scorecard Wizards?

Apr. 19, 2006

Editor's note: The following is an excerpt from Performance Management Drives Improvement at U.S. Banks, written by Bill Bradway, Group Vice President, Banking Practice, IDC, and published in December 2005. The research was sponsored by Cognos, an IBM company, to gather perceptions and opinions about the banking industry's need for performance management solutions and how these might develop over the next few years.

Less loyalty, increased demands

The regulatory environment and competition among banks have intensified to new levels, raising the stakes to even higher levels among U.S. banks. Customers are less loyal and more demanding. While banking products continue to evolve, margins have narrowed and merger and acquisition consolidation continues to challenge banks to improve their business results. Many banks see improved customer loyalty and improved risk management as the way forward.

Key drivers: customer loyalty & risk management

We asked 15 large U.S. banks with assets of $10 billion or more to rank the importance of 10 business drivers. Two drivers tied for the top with unanimity: customer loyalty and risk management. Comments indicated that these drivers have risen to the top of mind because of their long-term impact on expanding the business (keeping customers and cross selling) while avoiding mistakes or making bad decisions (mostly credit/loan related). All banks talked about regulatory compliance; it was a significant issue for 60 percent of respondents.

Financial metrics focus on costs, losses, and risk-based returns

Most banks are still driven by financial measurement systems tied to their annual profit plans and budgets. Respondents all had a well-established, integrated general ledger with profit and cost centers used to measure and control the business. As expected, about 70 percent of respondents cited the profit-and-cost center capabilities as having a high impact on their bank's performance management. However, what took top position was the impact of performance management on nonperforming loans and loss ratios– a unanimous point of view.

Customer metrics focus on relationship and value

A high percentage of respondents cited customer profitability, share of wallet, and revenue by customer as important elements of their performance management system for both line management and top management. Banks that are investing, or have recently invested, heavily in performance management technology also include customer metrics in their plans. At several banks, these investments reflect the CxO's priorities.

Potential profitability, stage of life-cycle metrics and lifetime value are used by only 20 percent of the banks, but each of these metrics is included in future plans at 60 percent to 70 percent of the banks. These results are indicative of where the advancement in customer metrics will occur over the next five years.

Leveraging technology for performance execution

Respondents are using a mix of online access to retrieve and use performance metrics and batch reports. About 33 percent of respondents have either daily or real-time performance management capabilities enabled by distributing information to line managers. And 63 percent of respondents still rely on monthly batch reports.

About 75 percent of the banks provide online access to a data warehouse (or data mart). Almost all the banks had enabled their Intranets to support online access. The differentiation between the more advanced banks and the rest is the amount of accessible performance data. Slice and dice analytical tools are becoming more widely adopted within the banks. 60 percent have enabled these tools online, while another 20 percent also deploy these tools for use with batch report-based data.

Graphical dashboards of one form or another were used for batch reports and one-third of the respondents are now using graphical dashboards in an online environment. These dashboards stop short of true enterprise balanced scorecard objectives. Managers at these banks are using dashboards to make tactical decisions in daily operations with more rigorous analysis on a more timely basis.

Spreadsheet Warrior or Scorecard Wizard?

Based on the research results, Financial Insights developed a Performance Management Leadership Grid. The Grid classified respondents into four categories:

Spreadsheet Warriors are struggling with inefficiencies and measure business strategies with whatever tools are available.
Enterprise Performance Kings have a less than optimal execution effectiveness rating but are investing heavily with a view to improving.
Technology Engineers have good tools but little alignment with strategy. They tend not to spend on performance management yet perceive few shortfalls.
Scorecard Wizards have developed advanced analytical scorecards but are currently distributing only monthly reports.

n=15. Tier 1 banks: assets in excess of $100B; Tier 2 Banks: assets between $30B and $100B; Tier 3 banks: assets between $10B and $30B. Source: Financial Insights, an IDC Company, 2005.

Conclusion & recommendations

Clearly there are many ways for banks to address performance management. The most successful, however, will develop performance management metrics that blend financial results, "customer delight" metrics, and operational excellence. To build solutions to fulfill this triangle of demands, U.S. banks should consider the following:

The foundation of all good performance management is a reliable set of financial information that is generated automatically, on a timely basis, and reconciles with operational transaction systems, providing clear accountabilities for profit and cost centers.
Planning tools and processes should enable effective linkage between departments, lines of business, and the enterprise level to eliminate dysfunctional swivel chair or manual steps to provide drill-down and roll-up views.
An online environment with appropriate access for all levels of management and staff will enable better and faster decision making as well as timely and consistent measurement of results.
Banks need to develop the analytical processes and tools to explain variance against plans, to test "what-if" hypotheses, and create recovery scenarios to improve decision making.

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