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Posted on April 17th, 2014, by

Introduction

Among strategic tools, a special place belongs to the balanced scorecard framework. Many of the Fortune 500 companies used the BSC framework to improve performance and to reach success. This framework allows to align different organizational dimensions, establish balance between them and align different organizational goals into a viable strategy. The dimensions considered in the framework are customer, financial, internal business processes (operational) and learning and growth dimension (Daft, Murphy & Willmott, 2010). The purpose of this paper is to review and critically analyze the implementation of balanced scorecard by a particular organization (Tri-Cities Community Bank), review performance measures used in this organization, trace the relationships between these variables, consider the relative performance of the branches of the organization, and generate recommendations on the use of balanced scorecard in the chosen company.

1. Company background

The company is named Tri-Cities Community Bank. It is located in the Midwest of U.S. and has two divisions, northern and southern. Each division has five branches; the branches are organized as follows: every branch has a president, vice-president, loan representatives, customer service representatives, mortgage loan originators, tellers, head tellers and administrative assistants (Albright, Davis & Hibbets, 2001). Current targets of the company include the improvement of performance, growth of customer satisfaction and employee training.

2. Categorization of performance measures

For analysis of the strategy of Tri-Cities Community Bank from the perspective of balanced scorecard approach, it is reasonable to categorize performance variables into four dimensions of balanced scorecard. Table 1 shows the results of the categorization of performance measures by the dimensions of balanced scorecard.

Learning/Growth Internal Business Processes Customer Service Financial
 Employee training hoursEmployee satisfaction

Employee turnover

 

 

New products introducedSales calls to potential customers

Thank you calls/cards to new and existing customers

Referrals

Cross-sells

 

Number of new customersNumber of product per customer

New accounts

Customer satisfaction

Customer retention

 

Outstanding loan balancesDeposit balances

Non-interest income

Table 1. Categorization of performance measures

3. Causal relationships between organizational variables

Key financial measures for Tri-Cities Community Bank are outstanding loan balanced, deposit balanced and non-interest income. It is possible to trace several relationships between variables in the other balanced scorecard dimensions which lead to the changes in the targeted financial variables. For example, adding new products leads to the increase of the number of customers (since new products might attract new types of customers), increase the number of products per customer (because existing customers might be interested in the new products) and therefore increase outstanding loan balances, deposit balances and non-interest income.

Another causal chain is associated with employee satisfaction. Greater employee satisfaction will lead to better employee performance, which would lead to the improvement of such variables as referrals and cross-sells, will improve customer satisfaction and customer retention (since employees will be more motivated and will work better). Improved customer satisfaction and retention, in their turn, will result in improved loan balances, non-interest income and deposit balances. Finally, sales calls and birthday cards to new customers and thank you calls to existing customers will also improve customer retention and customer satisfaction, as well as the number of new customers; the improvement of these variables will have a direct impact on three financial variables.

4. Analysis of BSC effectiveness

One division of Tri-Cities Community Bank used the balanced scorecard for developing and maintaining strategy, while the other division of the Tri-Cities Community Bank did not follow the recommendations of balanced scorecard approach. In order to determine whether balanced scorecard approach was effective for Tri-Cities Community Bank, it is necessary to analyze key financial indicators ”“ loan balance, deposit balance and non-interest income ”“ of both branches for year 2000 and 2001. Table 2 contains data on financial performance of all 10 branches of Tri-Cities Community Bank and analysis of the percentage of change of key financial indicators during the target year.

Branch

Loan Balance (2001)

Loan Balance (2000)

% of change

Deposit balance (2001)

Deposit balance (2000)

% of change

Non-interest income (2001)

Non-interest income (2000)

% of change

A

39.3

35.9

9.47%

85.1

77

10.52%

476

411

15.82%

B

58.1

49.7

16.90%

104.5

101.4

3.06%

428

399

7.27%

C

63.7

56.1

13.55%

136.3

124

9.92%

529

474

11.60%

D

46.7

45.1

3.55%

93.1

86.7

7.38%

291

276

5.43%

E

54.4

53.9

0.93%

109.3

108.2

1.02%

343

344

-0.29%

F

42.9

41.9

2.39%

87.5

88.5

-1.13%

345

335

2.99%

G

64.5

64.5

0.00%

115.2

114.8

0.35%

498

477

4.40%

H

33.2

32.7

1.53%

78.2

77.8

0.51%

230

233

-1.29%

I

51.1

50.8

0.59%

93.7

91.6

2.29%

293

280

4.64%

J

71.2

68

4.71%

150.8

145

4.00%

589

571

3.15%

Table 2. Financial indicators and analysis of their changes for Tri-Cities Community Bank branches

It is possible to see that all branches have more or less improved their performance during the target year. Average percentage of increase in loan balance for these 10 branches in 2000-2001 year is 5.36%, average increase of deposit balance is 3.79%, and average increase of non-interest income is 5.37%. Now it is reasonable to evaluate the results of the branches which used balanced scorecard (branches A-E) and the results of the branches which did not use balanced scorecard (branches F-J). Table 3 shows the average change of financial indicators for both groups of branches.

 

Change of financial indicator A-E F-J
Avg increase of loan balance

8.88%

1.84%

Avg increase of deposit balance

6.38%

1.21%

Avg increase of non-interest income

7.97%

2.78%

Table 3. Comparison of financial results for branches A-E and F-J of Tri-Cities Community Bank

The results of analysis in Table 3 clearly show that the branches which used balanced scorecard showed results which were significantly better than the results of other branches, and the difference in changes of the financial indicators was by 2.87 times for non-interest income, 4.82 for loan balance, and 5.29 for deposit balance. These figures clearly illustrate the effectiveness of balanced scorecard approach.

5. Branch performance

The process of balanced scorecard implementation was different for all five branches of the company. Table 4 shows the comparison of relative performance of these branches, expressed as average change of financial indicators.

Branch Avg change of financial indicators
A

11.94%

B

9.08%

C

11.69%

D

5.45%

E

0.55%

Table 4. Relative performance of branches

It is possible to see that best performing branch is branch A, with branch B closely following it. At the same time, lowest performance among branches which used the scorecard approach is for branch E. Distinctive feature of BSC implementation in Branch A is the focus on employee satisfaction and rewarding, along with focus on customer interests. This branch also adopted realistic goals, and aligned them into the strategy. Branch C also focused on employee rewarding and celebration of successes; at this branch, there was significant focus on teamwork which also helped improve performance. The comments of staff members of branch E show low level of understanding of BSC and low level of importance of BSC to employees; this explains the low results of branch E.

6. Recommendations

The use of balanced scorecard at Tri-Cities Community Bank was quite a successful experiment, but in order to make full use of it, the company should develop a wholesome strategy based on the balanced scorecard framework, and integrate the strategies of branches into this global strategy, i.e. align the organization (Silverthorne, 2008). It is also important to communicate the changes to the employees, and to show the importance and value of the changes; many staff comments in the considered case show that employees and even top management of the branch did not always have full understanding of what they were doing.

Finally, it is important to pay more attention to different aspects of learning and growth dimensions. According to Kaplan & Norton (2004), there exist three areas of learning and growth dimension: human capital, information capital and organization capital. While Tri-Cities Community Bank paid certain attention to human capital area, the areas of information capital (technology) and organization capital (values and culture) were largely disregarded. Incorporating these aspects in the balanced scorecard approach will help the company become more viable and financially successful.

 

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