Chemical Bank Bal Scorecard case study
The new, larger banking company was better- positioned to compete in a marketplace characterized by intense pricing competition, an outflow of deposits to mutual funds, rapidly evolving technology, and increased customer demand for value. Hegiras commented on Just one indicator of the future competitive environment for retail banking: At the time of the merger, the old Chemical Banking Corporation with assets of $75 billion, had a market capitalization of $2 billion. Less than four years later, Microsoft has offered to buy Intuit, a personal financial software company with $223 million in sales for $1.
Billion. What do you think Bill Gates is buying for all that money? Historically retail banking had emphasized efficient collection and processing of deposits. Hegiras wanted to transform the bank Into a market-focused organization hat would be the financial service provider of choice to targeted customer groups. To implement this strategy, Hegiras knew that the bank had to make major Investments to understand customer needs and to identify attractive customer segments.
The bank also had to develop and tailor new products such as annuities, investment products, and technology-based payment services to meet customer needs in the targeted segments.
With a broader product and service line, and excellent knowledge of its customer base, the bank would then be able to find ways to develop new relationships with Its most desirable customers and expand the banks business with hem?increasing its share of Its customers’ Flanagan transactions (or “share of wallet” as it was described in the bank).
When asked how he expected to implement such dramatic and extensive strategic change, Hegiras said: My biggest problem is communicating and reinforcing strategy. The Balanced Scorecard is one of a set of tools we are using?along with Mission and Vision Statements, Gap Analysis, Strategy Consensus, and Brand Positioning?for strategy formulation and communication. The Balanced Scorecard can’t win without a good mission statement and vision, an excellent strategy, and good execution. But it is retainer part of the architecture of success.
It is an element in a major communications program to 15,000 individuals. Norman Klein and Professor Robert S. Kaplan prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright 1995 by the President and Fellows of Harvard college. 10 order copses or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.
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Bal V Blanchard from March 2012 to September 2012. 195-210 Chemical Bank: Implementing the Balanced Scorecard No one owns a process end-to-end (most do Just a small snippet).
But every individual should understand how they fit in?what their role is for helping the company achieve its strategy. The scorecard gives us the measures we need to stay focused on performance, while at the same time enabling us to clarify and communicate our vision, and focus our energies for change. The measurement allows learning, and the learning renews the vision and refuels our energy for change. Retail Banking in the sass Experts predicted that the sass would prove to be an intensely competitive decade in retail banking.
In the past 10 years, the approximately 14,000 banks in the United States had shrunk to 10,000, and there were predictions of as few as 4,000 to 5,000 banks by early in the next century. Customers were demanding new investment and insurance products and far more convenient ways to do their banking. They were asking banks for new telephone options and for improved access to Tams with enhanced functionality. These changes meant that branch personnel would be doing fewer deposit, withdrawal, and check-cashing transactions and would have to become more involved with higher-value interactions with customers, including sales of new products.
But even with the move to higher-value services, banks anticipated operating fewer branches at the turn of the decade.
Research indicated that 61% of retail banking customers between the ages of 18 and 4 actively used Tams, while only 27% of customers 55 to 64 did so. The trend lines were clear. The banks that would survive and prosper would be deploying superior technology, offering new products, and delivering service through new channels. Further, technology would be the key to new partnerships, especially with insurance companies and brokerage firms, and new strategies to identify, attract, and retain more profitable customers.
Ted Frantically, managing director of Strategic Planning and Finance, noted that the traditional retail deposit business had become very tough.
Revenue growth was slow uh to lower interest rates and outflows of deposits to nonbinding service providers, such as mutual funds. Growth in core operating expenses and the need to invest in new delivery systems added to the challenge. Frantically noted: currently we nave over S our New York Markets division. Landlords expect rental increases on their properties, and employees expect raises.
These factors, coupled with low revenue growth, produce a real profitability squeeze for retail banking.
We need to demonstrate to our corporate parent that we can earn good returns on the $800 million we spend each year and free up funds for investment in the future. In 1994, New York Markets was responsible for managing $27 billion in consumer and small business deposits, as well as over 300 branches, over 800 proprietary Tams, a state-of-the-art telephone service center, and other related distribution channels.
The division also acted as a distributor and referral source for Chemical’s mortgages, credit cards, home equity loans, and other consumer credit products, which were managed by Hegiras as national business lines. Mutual funds were also sold through a branch-based brokerage operation. The New York Markets division had the number one market share among small immemorial companies (under $1 million in sales) with a total of roughly 150,000 accounts.
This represented a 24% market share in the metropolitan area. New York Markets also claimed a 16%-17% share of the consumer market, with 1. Million customers holding approximately 3 million accounts. Net income of $1 5 million in 1993 was scheduled to double to about $30 million in 1994. Actual results for 1994 turned out much stronger, with pre-tax profits of nearly $200 million, due to a major product redesign based on a market segmentation approach, reductions in operating expenses after the merger, and effective deposit spread management in an improving interest rate environment. Exhibit 1 shows summary financial information for New York Markets division in 1993 and 1994.
Exhibit 2 shows the organization chart of the Retail Bank.
Developing the Balanced Scorecard Frantically had been introduced to the BBS concept in mid-1992 while attending a one-week business school executive program. He had immediately sensed that the BBS insistence on clear specification of strategic objectives and appropriate measures in four areas?financial, customer, internal business, and learning and growth?would be a useful way to create change at Chemical Bank. Frantically asked Tony Elopement, vice president of Retail Bank Strategic Planning and Finance, to chair a middle-management task force to build a Balanced Scorecard for the New York Markets division.
Elopement recalled the task force experience: The group worked hard and generated good ideas and analysis.
But we soon realized that a mid-level group would find it difficult to push performance measures up to senior management. If the BBS was going to have an impact, Mike Hegiras had to be committed to the concept. In May 1993, Hegiras attended a presentation about the BBS and was convinced that his approach could help create the cultural change he desired at the Retail Bank. Other senior managers at the bank, however, remained skeptical.
David Norton, one of the co-authors of the initial BBS article, was brought in for a presentation to the senior management group.
After the presentation, the group became committed to moving ahead with a Scorecard project. The Retail Banks Balanced Scorecard Frantically, as head of Strategic Planning and Finance, functioned as the internal champion for the BBS. Elopement led the day-to-day functioning of BBS activities, and Norton was retained for consulting support. They divided the senior management group into four sub-groups, each one responsible for developing objectives for one of the BBS perspectives.
By October 1993, strategic objectives had been identified for each of the four BBS perspectives (see Exhibits AAA-AD). The subgroups, with assistance from lower-level managers, then developed measures for the objectives in their assigned BBS perspective.
By the end of 1993, the entire group had reached consensus on a complete scorecard for the New York Markets division (see Exhibit 4). Frantically noted that an immediate impact of the BBS project was to amplify the banks strategy statements: Formerly, we communicated our strategy to the 8,000 people in the organization using the five dimensions on the left [see below].
We found we could boil it down to three core strategic themes which aligned well with three of the perspectives of the BBS. The scorecard focused our thinking in this way, and Mike [Hegiras] now communicates these three themes continually to all 8,000 people. It’s been branded into their minds so that they know that if they’re doing something that doesn’t fit into one of these three themes, they probably shouldn’t be doing it.
And as we were building the scorecard, we found that we could relate each measure to one of those three themes.
Original Statements Core Strategic Themes Balanced Scorecard Perspective Focus on Attractive Markets Shift the Customer/Profit Mix Customer Improve Productivity Internal Create an Enabled Organization Learning and Growth Increase Fee Revenue Improve Service Quality Improve Operating Efficiency Promote Continuous Learning and Improvement 4 In addition to aligning the scorecard measures to the three strategic themes, the team developed causal links across the objectives and measures.
For example, two of the financial objectives?Revenue Growth and Reduce Risk?were expected to be outcomes from the theme, Shift the Customer/Profit Mix. The BBS group linked the Revenue Growth and Reduce Risk outcome objectives back to objectives in, respectively, the Customer, Internal, and Learning and Growth perspectives that were the performance drivers of these outcomes (see Exhibit 5).
This chain of cause and effect relationships illustrated that if the bank was to broaden and increase the set of financial products that retail customers transacted with the bank, then it must shift TTS image from a provider of a narrow set of banking services to becoming a financial advisor and service provider for targeted customer groups?an objective to increase customer confidence in our financial advice. This objective emerged from extensive consumer research that the bank had recently conducted.
This research had split Chemical’s customer base into five large segments based on their attitudes, behaviors, and other characteristics. The Chemical executives focused their scorecard objectives and measures, especially in the customer perspective, on meeting ten expectations AT customers In ten top tenure segments I nee scorecard objectives and measures provided focus on implementing effectively the new customer segmentation strategy.
Having specified the link from financial objectives to customer objectives for the Broaden Revenue Mix objectives, the BBS team then linked to three of the internal objectives that its people must excel at if the bank were to create its new image as a broad provider of financial services: Understand Customer Segments Develop New Products Cross-Sell the Product Line These internal processes were now identified as vital to implementing the bank’s Broaden Revenue Mix strategy. Previously, performance measurement had focused on continuous improvement of existing processes like check processing and teller transactions.
Thus the BBS process, starting from identifying financial and customer objectives, had highlighted several new internal processes for the organization to develop best-in-class delivery capabilities.
The three internal perspective objectives led naturally to objectives in the Learning and Growth perspective. The banks customer representatives would have to expand their skills, so that they could serve as a customer’s financial counselor and communicate credibly and knowledgeably bout an expanded set of financial products.
The customer representatives also would need ready access to information on all the banks relationships with each customer. The incentive system for the banks employees would also have to be changed to encourage the new behavior and skill acquisition. These three enablers? new skills, access to strategic information, and aligned incentives?would contribute to more capable and skilled employees who, in turn, would drive the internal process objectives.
Each objective in the Retail Banks BBS was similarly linked in a series of cause-and-effect relationships that told the story of how the banks strategy would be accomplished.
Frantically commented on the benefits from establishing the linkages in BBS objectives and measures: In the past, we found it hard to get and maintain focus on our infrastructure?things like MIS and employee training and skills. We talked about their importance, but when financial pressure was applied, these were among the first spending programs to go. Now with measures of Strategic Information Availability and Strategic Job Coverage on the BBS, people can see the linkages between improving these abilities and achieving our long-term financial goals. The BBS kept these issues front and center for the senior management group, so that a focus on these infrastructure investments could be sustained even in a highly constrained environment for corporate spending.
Lee Wilson, chief of staff for the Retail Bank, concurred with this view: The process has increased learning in the organization. Everybody agrees on the overall objectives, but it takes time to align 8,000 people and make appropriate infrastructure investments and commitments. If we stay the course, the Abs’s earning perspective will enable Chemical Bank to really deliver superior service sooner than other banks.
By the end of 1993, measures for each of the objectives had been selected and a senior manager had been designated for collecting the information and reporting on each measure. For example, the owner of the three measures under “Market & Sell” was Dave Mooney, manager of the Manhattan branch network, who reported to Jack Stack, the managing director of Sales & Service (see Exhibit 2).
Mooney met frequently with branch marketing and selling managers and with Jack Stack to discuss progress along these three measures.
Impact of the Balanced Scorecard Lee Wilson had not come to the bank until April 1994. While he had missed the 1993 process that led to the BBS, he could offer observations from his somewhat independent perspective: I see the BBS as a very valuable tool for the management team, but one that needs to keep evolving. To begin to appreciate the value of BBS at Chemical, you have to understand that its primary benefit was to pull together the two management teams. At Manufacturers Hanover, accompanied policies had been handed down by a strong central staff.
Chemical, on the other hand, relied on a more decentralized approach.
Given the two cultures, there were inevitable tugs-of-war between them after the merger. In early and mid-1993, the BBS meetings provided a mechanism for the senior people to focus on a common objective: devise a new strategy for the Retail Bank. Those meetings allowed people to come together and overcome their differences in assumptions and styles. A powerful shared sense emerged in these meetings about how the combined bank could capitalize on the potential from its new scale of operation.
The BBS gave the senior executive group a positive perspective, focused on serving customers in a learning environment.
Frantically concurred, recalling the frustration of attempting to develop a consensus on strategy in 1992, shortly after the merger: Everyone had agreed to the strategy: “Provide superior service to targeted customers. ” But we couldn’t agree on how to implement this strategy since everyone had a different opinion about what superior service really meant and who our targeted customers should be.
The BBS process gave us specific and operational definitions of superior service and targeted customers. But ten glow AT consensus-Dunging gave way to Translation In late EYE as work teams began to struggle with implementation. Several of the measures were difficult to obtain.
People debated whether to use substitute measures or leave the measures blank until improved data systems could be developed. 6 Senior managers also noted that the BBS was quite visible only in the lives of 27 top- level managers in the Retail Bank.
It was not yet being used to drive change throughout the organization. Some of the BBS themes had been communicated to employees through the monthly newsletter, News & Views (see Exhibit 6), and at the annual Branch Managers meeting. But the BBS had not been communicated to rank and file employees as a new management tool. Elopement explained: We got delayed by gaps in our measurement system.
We had most of the information on customer satisfaction and customer profitability, but we didn’t have the requisite data on customer share and retention by segment.
The data for some of the new measures, like Strategic Job Coverage and Strategic Resource Alignment, did not exist at all and had to be created and developed by the responsible department. Even when we had some data, such as the mix of transactions in different channels, we had problems bringing together the information from diverse systems. As a result, e haven’t built a credible base yet. The measures are Just now on board. The tracking has Just begun.
Wilson felt that some of the BBS measures were not critical for customer satisfaction goals, nor actionable.
He explained: We have an internal measure called “Trail to Trolls” [Trolls are unhappy customers]. This index aggregates over a hundred different measures of customer complaints and degrees of dissatisfaction, but it isn’t actionable. If the Trail to Troll Index starts to deteriorate, I don’t know if it’s been caused by performance that valued customers consider critical, or whether it’s a minor matter. When it was first developed, it was quite valuable in focusing management’s attention on service quality.
But we can’t do quality for quality sake.
We need to focus on those dimensions most critical for meeting or exceeding customer expectations of service quality. And to do that we need measures that are actionable. Measuring Customer Profitability William Jordan, managing director, had market management responsibility for the consumer and small business activities in New York Markets. When asked for his perspective on the BBS, he immediately voiced his support and expressed, in tragic terms, the fundamental importance of BBS : we tent to Touch on ten snort term Ana ten Mont-o-Mont n Tallness.
Nils makes us excellent at tactics, but sometimes we find it difficult to think strategically about where we should be three to five years out. The Balanced Scorecard provided a forum for senior management to have active discussions about both the present performance and future targets we must achieve. I like the way it forced us to think about revenue opportunity and potential, and how we should measure our progress down the path that will insure our future.
The BBS reinforces the need for a new focus on the customer, especially the need to get to a more profitable mix of customers, and to retain and deepen our relationship with our best customers. Jordan for years had believed that most of the Retail Banks small business accounts were profitable.
Recently an activity-based cost study had matched “costs to serve” with “revenues earned” down to individual customers. The study showed that only 55% of small-business accounts were profitable on a fully loaded basis. This information prompted Jordan to launch several new initiatives to enhance small- easiness customer profitability.
He wanted to know the defining characteristics of profitable and unprofitable customers so that he could begin thinking about how 7 unprofitable accounts could be made profitable by changing earnings credit, or minimum balance, or perhaps introducing fees and better control over fee waivers. Jordan, however, emphasized: Although we have raised our consciousness about strategic measures, the measures are not yet integrated. For 1995, I would like the BBS teams to identify a number of top-of-mind measures, perhaps as few as two or three, that reflect our strategic hems and priorities.
I want to see a graphical presentation of the BBS that gives us a five-year view of the Journey, and to be able to view short-term performance in terms of progress towards our five-year targets. Taking Sales Measures to the Branches Dave Mooney was implementing one of the first BBS measures?”Selling Contacts per Salesperson”?in the Manhattan branches. He recalled his first impressions of the BBS: I remember thinking, as we were going through it, how valuable the process was. It forced us to specify and understand the simple causal linkages from highlight uncial objectives to operational measures.
The BBS was well accepted because it was very consistent with our management philosophy to focus on activities, process, and components that, according to our theory of linkages, must be accomplished to produce the outcomes we desire.
But as simple as that sounds, we weren’t working the fundamental processes. Like most other banks, we had been managing by hammering on outcomes. We kept telling people, “Get more apostle In the summer of 1993, we started to focus on a measure at the beginning of the causal chain?how to make more sales contacts with customers.
We now realized that a necessary condition to produce new sales was for our salespeople to have more customer contacts. So my first step was to ask for 10 completed contacts per sales person every week. The sales people responded, We can’t do that.
We’re too busy. ‘ But we dug in and told them that we were serious about this objective. Selling was no longer to be an optional or discretionary activity, to be done if time allowed. Selling must become something that you find time to do. Mooney emphasized the importance of taking hold and managing the problem at that point.
There is an important lesson here,” he said.
“Measures don’t manage. The BBS gave us an engine, but it was management that had to put the vehicle in motion. ” Mooney was asked why the Balanced Scorecard was required to encourage sales people to do more selling. He replied: A lot of ideas were converging at the same time. We were Just putting into place a more formal, highly structured customer-calling process that produced the customer-contact measure. But then this measure had to survive a highly competitive debate that the senior management team put all prospective measures through to create the BBS.
My confidence increased about the importance of that measure and of the selling activity. The great value of the BBS was that it articulated the key levers of performance and reduced these to a few important drivers. He recalled that implementation became easier when the first results of increasing sales contacts with customers were known: We started to see phenomenal results, 2 to 3 product sales for every 10 contacts. That helped. But there was something else going on as well. People learned that the senior executives at the bank were not going to stop caring about this 8 measure.
The four or five people who ran the branch districts knew I was going to have to report out on the measure to Jack Stack and Mike Hegiras. That’s one of the powerful features of the BBS: it’s both motivating and obligating. The BBS forced us to stay on track and to follow up. Looking Ahead When asked to assess the current status of BBS, Frantically stressed that the work was well under way but nowhere near complete. The Scorecard has been very useful in helping us better understand the key drivers of our business.
Our monthly financial review meetings have now become strategic
