Performance measurement in a Greek financial institute using the balanced scorecard Free

Performance measurement in a Greek financial institute using the balanced scorecard

1. Introduction

In recent times the importance of a holistic performance measurement system has been born out by various research studies. For example, in the USA, Lingle and Schiemann (1996) compared business results between companies using balanced scorecard (BSC) measurement with the companies using traditional financial measurement. The authors found that BSC users distinguish themselves from the traditional financial measures over the balancing financial and non-financial measures, linking strategic measures to operational performance, and clearly communicating measures and progress to all employees (Clarke and Tyler, 2000). Understanding the importance of BSC by the managers has led companies to develop a variety of corporate scorecards. Much recent research reveals that a large number of institutional investors are making their decisions based on non-financial performance measures (Daly, 1996). (Daly, 1996) also argues that analysts who stressed the importance of non-financial issues have increased accuracy in their earning estimates and a strong correlation was found with growth expectations. BSC is regarded as the most influential business performance measurement philosophy developed in the past 75 years, and some groups predict that within five years at least 40 percent of all Fortune1000 companies will use BSC.

1.1. Balanced scorecard

According to Kaplan and Norton (1996), the balanced scorecard supplements traditional financial measures with criteria that measure performance from three additional perspectives – those of customers,internal business processes, and learning and growth (Figure 1):

• 1.

  Customer perspective. Since companies create value through customers,understanding how they view performance becomes a major aspect of performance measurement.

• 2.

  Internal business process perspective. According to Kaplan and Norton (2000a, b), in the internal-business-process perspective, executives identify the critical internal processes in which the organisation must excel.

• 3.

  Learning and growth perspective. According to Kaplan and Norton (2000a, b), this perspective of the balanced scorecard identifies the infrastructure that the organisation must build to create long- term growth and improvement. Learning and growth come from three principal sources:

• 4.

  • people;

  • systems; and

  • organisational procedures.

• 5.

  Financial perspective. Within the balanced scorecard, financial measures remain an important dimension. Financial performance measures indicate whether a company’s strategy, implementation, and execution are contributing to bottom-line improvement.

Kaplan and Norton (1992) presented the balanced scorecard as a performance measurement system which can be used to focus attention on the most critical resources and to induce consistency of decision making and resource allocation (Neely et al., 1994). The founding idea is that the performance measures linked to BSC give to the management a fast but comprehensive view of the business. It guards against sub-optimization in the resource allocation, because it directs balanced attention on the four critical perspectives described previously. Later, Kaplan and Norton pay more attention to define relationships among the perspectives and introduce a concept of the strategy map (Kaplan and Norton, 1996, 2000a, b). This map is based on the cause and effect relation between the strategic objective and actions in a sequence determined by the perspectives.

Figure 1 Balanced scorecard four perspectives

In recent years the BSC has attracted considerable interest in practice as well as in theory. A great deal of literature on the BSC concept has been published and there have been countless seminars and workshops dealing with BSC issues. Success stories of companies that have implemented balanced scorecards seem to promise high benefits for BSC users. Several surveys indicate that the BSC concept is widely used in large companies in the USA and throughout Europe. For example, Silk (1998) estimates that 60 per cent of the Fortune 1,000 companies in the USA have had experience with balanced scorecards. Marr (2001) reports: “The latest data suggest that over 50 per cent of the largest US firms had adopted a measurement framework, such as the balanced scorecard, by the end of 2000”. Another study estimates that more than 40 per cent of all Fortune 500 US companies use balanced scorecards (Williams, 2001). In the UK, 57 per cent of the businesses are reported to use balanced scorecards and 56 per cent of non-users are discussing possible implementation (Management Services, 2001). In a worldwide study of management tools, Rigby (2001) shows that the balanced scorecard has a utilization rate of 44 per cent.

The remainder of the paper is organised as follows: section 2 describes the company and the actual case study; finally section 3 concludes this paper and outlines the results of the particular project.

2. Case study

The study took place at a Greek financial institute (GFI). The company was continuously improving its operations through a business process re-engineering(BPR) programme. As part of these efforts management decided to assign some of their resources for a performance management project.

2.1. The company

GFI is a banking institution of worldwide reputation and a dynamic player in the Greek financial environment. GFI enjoys the prestige and trustworthiness required by the uncertainty of the financial environment, based on the Greek state, its major shareholder, a sound capital structure, its forward-looking and efficient management and a customer-oriented business philosophy. GFI has managed to combine economic rationality with social responsibility and modern banking practices. Attuned to developments in the Greek and international economic environment, GFI has taken the strategic initiative to expand its operations and network in the urban areas and establish an international presence. GFI is a universal bank, offering a full spectrum of financial products and services in order to satisfy the whole range of customer financial needs. GFI has built up and maintained a unique competitive advantage as the exclusive provider of credit of the wider rural sector. With its 457 branches network covering the entire country, GFI is always there to offer a comprehensive package of financial products and services to companies and individuals. Today, GFI’s client base is estimated to more than 2.5 million customers. Its development-oriented credit policies and the competitive interest rates attract customers from the industrial, commercial and consumer credit sectors.

GFI has gone through a phase of overall organizational and operational structure transformation in order to attain a greater chance of realizing its business strategy. A major prerequisite for the transformation as well as for the continuous improvement of the bank’s performance, in an intensively changing environment, was the establishment and implementation of integrated management systems and mechanisms. The performance management systems support the overall bank managerial mechanism throughout all the managerial process phases, such as the creation of objectives, the evaluation of performance and the selection of appropriate measures and interventions in order to achieve the set objectives. Therefore, management systems consist of decision-making strategy tools, used on the one hand for efficient utilization of the bank’s resources and on the other for the development of competitive advantages at all levels, in the:

• rapid response to market needs and opportunities;

• development of integrated and competitive products and services;

• quality of the production, distribution and support processes; and

• utilization of the intellectual and emotional capital of its personnel.

2.2. Purpose for adopting managerial systems based on the balanced scorecard

In contemporary banking, managerial systems converge towards the need to develop a strategic performance measurement system that will support the application, monitoring and adaptation of strategy so as to achieve the bank’s strategic objectives. This type of integrated mechanism is supported by the balanced scorecard. The balanced scorecard provides organizations the ability to evaluate operational performance and progress in realizing their objectives by using a “balanced” sum of financial and other indicators.

The BSC, which has been chosen by the bank, breaks down GFI’s strategy into specific objectives and performance indicators for all the operational functions and organizational units of GFI. The purpose of the BSC is to support managerial decision making in achieving strategic, tactical and operational objectives. Figure 2 indicates the central role of BSC in the implementations of strategy.

Figure 2 BSC as a critical precondition for the implementation of GFI strategy

The BSC designates key performance indicators on which decisions regarding topics such as planning, performance auditing/evaluation and corrective actions are based.

2.3. Project phases

As mentioned previously, the link between BSC with the operational and organizational model is fulfilled via the key performance indicators which initially refer to all the operational functions and subsequently are provisioned/distributed to the organization units. The latter are accountable for the realization of objectives based on the key performance indicators (ex.:unit production) or are generally assigned the production and monitoring of the above (ex. risk management units, strategic planning unit). The BSC therefore includes:

• Criteria/data (based upon which criteria and measures decisions are made).

• Function (based upon which performance functions decisions are made).

• Decision makers (who is responsible for making the decision).

Even so, the balanced scorecard is not a static performance measurement system. On the contrary, the success in implementing the balanced scorecard is supported by the continuous validation based upon the bank’s set strategic and operational objectives. This dynamic function is comprised of the following three distinctive yet interdependent phases which were used in the particular project:

• 1.

  Phase 1. Strategic objectives and performance measures determination based on the four BSC performance perspectives (financial, commercial, internal efficiency, infrastructure development/improvement continuity). This process was supported with the specification of strategic objectives and performance measures for each function (gain new business, customer service, risk management etc.).

• 2.

  Phase 2. Collect analyze data and produce reports. It should be noted that the availability of this data is dependent on the bank’s information systems, while simultaneously it is possible to take actions to create “bridges”with the aim of collecting of critical data based on the existing infrastructure.

• 3.

  Phase 3. Decision making to improve bank performance. During this phase the anticipated and actual objective result indexes of the key performance indicators are compared, deviations are detected and justified, and measures and interventions are chosen to improve performance. Under this conception, the BSC is essentially a management tool and not just a performance measurement tool.

The aforementioned phases constitute a generic process – “life cycle” (Figure 3) which supports the design,implementation, analysis and use of performance measurement systems (Santos et al., 2002). Based on the four perspectives of the BSC, the team involved in the design and implementation process, identified potential strategic objectives and the corresponding performance measures. Once the system has been designed and implemented, managers use analytic tools (Phase 2) to help them increase their understanding about the reasons why a particular level of performance has been observed. Finally, (Phase 3), the identification and evaluation of appropriate corrective actions takes place. It is worth mentioning here, regarding the recent developments of the balanced scorecard,that during the migration from the design stage to the implementation stage of Phase 1, a strategy map (Kaplan and Norton, 2000a, b) could be used in order to communicate and disseminate the results of the design stage.

Figure 3 BSC management “life cycle”

Restructuring and modernization initiatives should be based upon strategy and policies instituted by GFI so as to:

• clarify the purpose of the functional and organizational restructuring(based on specific requirements – performance improvement objectives in the sectors of cost, time, production and quality);

• permit different interventions to align and converge so as to meet Organization objectives and mission;

• facilitate intervention programming and methodology (which type of radical redesign without limitations from existing systems and which types of immediate improvements to existing systems);

• insure corresponding objectives (business, financial, production) and means(resources, mechanisms);

• clarify to all shareholders the need to implement corrective interventions and thus facilitate change.

Specifically, the implementation of the balanced scorecard system involves the tasks shown in Figure 4.

Figure 4 Performance measurement stages

2.4. The interconnection between BSC and operational planning and management information

The development of a coherent and effective process for formulating and evaluating performance at a strategic and operational level is described in Figure 5, the major processes flow and the results as they arise at each stage. Specifically, the analytical process for strategic planning, periodical programming and result auditing are described in the budgeting system.

Figure 5 Strategic planning processes, periodical planning and result auditing

The balanced scorecard is the connecting link between setting objectives and implementing them for the GFI strategic and operational plan. The implementation of strategic objectives is accelerated through the determination and communication of the organizational units, which are called upon to set their own operational plans based upon strategic guidelines. The operational plans of the organizational unit designates specific objectives for each unit, objectives which are analytically transcribed with clarity on each unit’s balanced scorecard. In order to achieve the objectives specific actions, activities,projects and interventions are required as well the determination of the financial repercussions which these will have on the budgetary burden for each unit. The BSC can be considered integrated only to the point to which it is designed and in coordination with other bank management systems and processes,considering:

• the financial budget and auditing system;

• service, customer and organizational unit costing system; and

• the over-all strategy plan which is prepared by the bank as well as the tactical (annual) program prepared by the customer and support units.

Within the framework of the wider strategic and tactical programming management system after the completion of the annual operational plans, which concern the detailed three year rotational strategic plan, the GFI’s annual balanced scorecards are produced. The objectives of the operational plan of the customer units are specified in relevance to the four axes of the balanced scorecard:

• 1.

  Financial performance.

• 2.

  Customers.

• 3.

  Internal performance.

• 4.

  Continual improvement and development.

Finally, each axis objective of the balance scorecard coincides to a number of actions for the achievement of these objectives. Specifically:

• Each customer unit programs the specific means required for the realization of its program as well as an activity timetable. Indicatively, the required actions and interventions for the available products, network modernization,systems development and sales processes, marketing activities and new product design, the coinciding equipment substructure and human resources are designated analytically.

• The action plan for each axis and operational dimension of the balanced scorecard is composed on the basis of financial impacts to income, expenses and investment. To exemplify this; the decision for the development and distribution of new products would likely require investments for new equipment as well as an increase in training expenditures for personnel and marketing expenses,expenditures which will create income (and profit).

The management information mechanism is completed with the balanced scorecard playing a central role in the GFI’s operational design. The qualitative evolution of the banking MIS, from the typical budget to implementation of integrated performance management systems like the balanced scorecard, is depicted in Figure 6.

Figure 6 Evolution of management information systems in accordance with international practices

Essentially, the management information system based on the BSC substantially overweighs the traditional budget/annual report dimensions, enriching the“final” financial efficiency (equity capital performance, asset performance, capital adequacy indicator, etc.) with “interval”objectives (commercial effectiveness, as product and customer profitability,internal performance, as response time to customers requests, process cost, and substructure/continuous improvement development, as skills development for process execution, etc.).

For example a strategic target set by the company is “increase of bank’s profitability”, the production unit’s target is specified, among others, within the critical success factor of “supply services oriented to customers needs”. The specified success factor consists and simultaneously pinpoints the need for relevant information. Critical information, concerning the “market share in relation to new/modified product”, the “income increase rate in relation to the major product category/market sector”, the“degree of costumer satisfaction” or “percentage of new product sales to the existing customer base”.

2.5. Work execution methodology

The analytical design is based on the one hand on the utilization of the company balanced scorecard (vertical approach), and on the other hand on the specification of the critical success factors of the strategic objectives and the performance indicators in the major processes of the operational model with the development of the operational balanced scorecard (horizontal approach). Figure 7 presents the integrated design and development methodology of the balanced scorecards for the bank’s organizational units.

Figure 7 Design and development methodology for the balance scorecards

The analytical task methodology is as follows.

First action: definition of major process for the mega process.

Second action: definition of critical success factors (CSF) for each major process. The following steps were realized:

• Step 2.1: formulation of performance criteria for each BSC dimension and based on these the determination of the required prerequisites for assuring the effectiveness and efficiency of the major processes.

• Step 2.2: CSF exploitation which were determined during for the development of the BSC strategy. The examination and assurance of compatibility between the strategic and operational CSFs.

Third action: indicators’ allocation which lead to the achievement of CSFs. The operational BSC constitutes the basis upon which the BSC was developed for the bank’s organizational units. Subsequently, the operational view took into consideration product differentiation or customer types (task development for major customers or SME customers) based on predetermined major product categories, market fragmentation and the Bank’s channels of distribution. Figure 8 presents in summary the development of performance indicators methodology at the process level, using as an example the task development functional unit.

Figure 8 Performance indicators methodology

Fourth action: corresponding organizational units to major processes. The objective of this action was the transition from the bank’s operational BSC to the organizational units BSC. An essential prerequisite for achieving this objective was the clarification and correlation of the bank’s organizational units responsibilities, based on the organizational chart, with the major processes of the bank’s new operational model.

Fifth action: selection of key performance indicators based on identified criteria. The result of the previous stage was an operational pool and not organizationally elaborated performance indicators for each organizational unit. For the aforementioned reason elaboration and selection took place to select the correct key performance indicators for each organizational unit. A critical factor in the performance system is that the performance indicators must fulfil three characteristics: they must be balanced, they must represent the vital few indicators and they must be strategically aligned. Thus the performance indicators were selected based on the following characteristics:

• Alignment to strategic objectives: the indicators must specify the bank’s strategy, specifically in relation with the basic priorities and decisions.

• Conceptual simplicity and clarity: the performance indicators are absolutely understandable and clear, so as to be useable and communicative to the bank’s personnel.

• Organizational alignment: the performance indicators are representative of the corresponding responsibilities of the bank’s organizational units.

• Lead vs lag indicators: the performance indicators must primarily include lead indicators and cause of the final effects, as well as the final actual lag indicators/effects.

• Information accessibility: the bank’s systems (existing, under installation) must have easy access to the performance indicators must be easily accessible.

The objective was that the multitude of performance indicators on the balanced scorecards be manageable (10-15). Figure 9 presents the chosen criteria characteristics for the performance indicators.

Figure 9 Selection criteria

Sixth action: balanced scorecard development for GFI’s organizational units. Development of the balanced scorecards for all the organizational units based on the organizational chart.

Seventh action: communication with GFI’s subject matter experts, such as organizational unit managers, for commentary and verification of key performance indicators. A meeting and presentation of intermediate results took place in order to receive feedback fromGFI’s network and central office subject matter experts.

Eighth action: analytic description of performance indicators. The performance indicators descriptions were founded on BSC elaboration and evaluation in collaboration with the project team, the department of restructuring and the department of strategic planning. In the framework of this collaboration for the clarification of the performance indicators the following were determined:

• the GFI’s product categories for which the coinciding performance indicators would be monitored;

• the customer groups (market fragments) for which the coinciding performance indicators would be examined; and

• the channels of distribution for which the coinciding performance indicators would be examined.

Ninth action: development of cause and effect relationship diagrams for chosen units. These diagrams present the cause and effect structure between the performance indicators of each unit in accordance to the four dimensions of the balanced scorecard, and constitute the basic evaluation criteria for the suitability and completeness of the chosen indicators.

3. Conclusions

This paper has provided an insight to implementing a BSC in a Greek financial institute (GFI). The paper presents a structured methodology as central to the implementation of the BSC. Displayed below are the overall project results based upon the series they were produced.

3.1. Development of balance scorecards for production units and branches (retail banking area)

The following were developed during this stage:

• the performance balance scorecards for private, business units – at unit and subunit levels – as well as for a typical branch office;

• the collective performance indicators description table of the previously mentioned units, subunits and branch office; and

• the cause and effect diagrams of the performance indicators for the private,business units as well as for the typical branch office.

3.2. Development of balance scorecards for the remaining organizational units of the bank

The following were developed during this stage:

• the balance scorecards for the remaining organizational units of the bank based on the organizational chart;

• the detailed charts for unit performance indicators; and

• the cause & effect diagrams of the performance indicators for the funds management and investment banking units.

The balanced scorecard has brought to the company many benefits. Some of them are outlined below:

• The capability of better performance management through the realisation of what creates value in GFI and the introduction of financial as well as non-financial measures.

• Integration and monitoring. The balanced scorecard monitors the progress towards the attainment of strategic goals and focus on strategic implementation. The process involved the entire organization in reaching to achieve its vision. It provided a process to weed out activities of low strategic importance.

• Focus. Having a maximum of three to four measures per perspective forces the organization to identify the performance measures that are essential and are related to the strategies selected by the bank to reach its goals. This allowed the management team to focus on long-term goals rather than short-term objectives.

• Feedback. The balanced scorecard provided a methodology for identifying and articulating the strategies of importance and then provided feedback on the actual performance to date compared to the targets that have been established for the bank.

However, like most other management tools, the BSC needs to be extensively used in order to realize its full value as a strategic communication and management tool. Moreover, even though the particular case study and most other documented cases seem to agree that such an implementation will, in many aspects, be beneficial for a company, one must not overlook the fact that its effectiveness and benefit is dependent on the sequence and content of the design process used to deploy it, as well as on many other predictable and unpredictable internal or external factors that have not yet been fully rationalized and documented.

Clearly, there are limitations to the research approach followed in this study. As with any case study, the findings cannot easily be generalized to other empirical settings. The approach initially taken (balanced scorecard) may have worked well in another context, while the approach that was subsequently developed here may not be transferable to another company.

Corresponding author

Panagiotis Chytas is the corresponding author and can be contacted at: www.p.chytas@chios.aegean.gr

Panagiotis Chytas, Michael Glykas, Christos Staikouras, George ValirisPanagiotis Chytas is a Phd Candidate in the Department of Business Administration, University of the Aegean, Chios, Greece.Michael Glykas is an Assistant Professor in the Department of Financial and Management Engineering, University of the Aegean, Chios, Greece.Christos Staikouras is a Lecturer in the Department of Accounting and Finance, Athens University of Economics and Business, Athens, Greece.George Valiris is an Assistant Professor in the Department of Business Administration, University of the Aegean, Chios, Greece.