T

he time for review and introspection found the CEO of a large bank in India deep in thought. The bank had seemingly initiated the 'right' decisions and actions-launched a suite of financial product offerings to its customers, deployed an appropriate operating and governance model, undertaken alliances and joint ventures for related financial services, adopted state-of-the-art technology, and deployed new age distribution channels. All these initiatives were expected to catapult the bank into the 'admired big league'. With the overall numbers better than satisfactory and the regulator satisfied with their results and compliances, the outlook was clearly positive. However, a place in the 'admired big league' still seemed elusive-there seemed to be a missing link to the otherwise perfect picture...

The situation illustrated in the anecdote is definitely not a rarity in the banking industry today. The industry has undergone a rapid transformation in the last decade-banks in India now find themselves competing vigorously for survival by acquiring a 'share of wallet' of their customers. The underlying processes and technologies adopted have created new capabilities and dimensions for 'service' and 'delivery'.

The recent trends of shrinking margins and increasing competitive pressure are forcing most players in the banking and financial services sector to focus on adopting appropriate methods to enhance performance, while improving their quality of service. Also, banks have increasingly become aware of the greater challenge of acquiring new customers while retaining and expanding relationships with existing customers using a finite set of resources.

This competitive environment makes it imperative to know the performance of individual products and services and determine which of them contribute to profitability. The realisation that, not all products and customer relationships are equally profitable, is leading many banks to define and adopt multiple approaches for service delivery and set appropriate performance measurement techniques.

Against this backdrop, many banks in India have attempted to formulate strategies that enable them to compete in this dynamic business environment. Some of them have made considerable headway in implementing these strategies, while others have not been successful. The differential outcomes experienced by banks have been attributed to a variety of reasons. However, a key enabler for future success is the approach taken by banks to measure the efficacy of their strategies and management of their performance.

Business Performance Management-Case For Review?

We find that performance management in many banks in India has been largely synonymous with measuring financial performance vis-à-vis the CRAMEL framework or its variants.

C: Capital Adequacy
R: Risk
A: Asset Quality
M: Management Quality
E: Earnings
L: Liquidity

Financial performance parameters have typically been developed along the dimensions of this framework. These are typically used for peer comparison and benchmarking, regulatory reporting, and shareholder reporting purposes. Some banks have also linked these parameters to the individual performance review process and compensation of its employees. However, these financial measures are primarily lag indicators, a post-mortem view of the business, rather than lead indicators that assess the bank's ability to create value in the future.

BANKS should develop and implement metrics like customer, processes, learning and innovation that provide a view of their past performance and ability to create value in the future

The erstwhile performance management and measurement system in Indian banks sufficed in the past. The transformed, dynamic environment makes it imperative to review and re-engineer the bank's performance management system.

• The emergence of retail as the business of the future has necessitated almost a complete review of the way Indian banks have traditionally conducted business. Specific segments such as retail assets, fee-based services, and delivery channels require to be managed almost like traditional consumer goods businesses (with focus on active 'customer acquisition' and 'customer retention' rather than passive 'service' that would be more relevant in the erstwhile 'walk-in' business model). These strategies require measurement in a manner that extends beyond CRAMEL and stand-alone non-financial measures.

• There is an increasing need for banks and financial services organisations to focus on methods to increase income, improve quality of service, and reduce cost of operations. Computation of risk parameters, for example, Funds Transfer Pricing (ftp), capital allocation or risk-adjusted performance would be incomplete without recognising appropriate recognition of non-interest overheads and 'delivery costs'.

• Technological developments and business pressures have enabled new business models such as outsourcing, alliance etc. These have necessitated building newer capabilities by banks. The performance measurement system needs to accommodate evaluation of these new business models and capabilities.

Some banks have deployed performance measurement systems with management dashboards that incorporate financial and non-financial measures (staff productivity, customer satisfaction etc.). However, in many instances, it is found that these non-financial measures and lead indicators are viewed stand-alone, without adequately linking them to overall strategic objectives. In such cases, the 'standard' financial measures continue to remain the foundation for the individual performance review process and executive compensation. Therefore, these banks, while espousing strategies focused on building customer relationships, core competencies, and organisation capabilities, tend to actually motivate and measure performance only with financial measures.

A few banks are also in different stages of implementing a holistic performance management system based on methodologies such as the Balanced Scorecard that drill-down corporate strategic objectives down to the grass-roots level and measure performance across multiple perspectives (i.e., financial, customer, internal process, learning, and growth). These banks have experienced varied degrees of success-while some can boast commendable progress and successful implementations, others have encountered roadblocks due to 'design' and 'implementation approach' inadequacies.

TO MOVE towards a more effective organisation, banks need to drive change in its processes, systems and mindset of its' internal and external stakeholders

Approach To Business Performance Management

This dynamic growth of the Indian banking industry over the last few years, rapidly changing and innovative product portfolios and business activities, differing risk profiles and adoption of varied business models, have made performance assessment and identification of drivers of its value, increasingly complex.

The bank's performance management will need to be a process that synchronises the institution's strategy with day-to-day operations and translates the same into measurable results. The ultimate goal of business performance management is to ensure that the organisation and all of its subsystems (processes, departments, teams, employees, etc.) are working together in an optimum fashion to achieve the results desired by the organisation. It should be a top-down process that extends beyond financial metrics, key performance indicators, and performance incentives.

There is a wide range of aspects that need to be addressed for effective performance management (See Managing For Effectiveness).

While there may be multiple approaches and tools to adoption of appropriate performance measurement systems in an institution, there are some basic underlying guiding principles:

• A clear articulation and communication of the institution's strategy is essential to set the direction for defining organisational performance. A shared understanding of the strategic direction of the organisation subsequently forms the basis for defining performance metrics, which are at the heart of a robust performance management system.

• Appropriate performance measures that take a balanced view across various parameters need to be developed. These include:

Financial parameters that assess the changes in financial position, future potential to repay, how shareholder wealth is being increased, performance contribution to capital growth;

Customer satisfaction, customer response time, customer profitability, marketshare, complaints;

Processes like service levels, cost income ratio to productivity, quality of service delivery to internal and/or external customers;

Learning and Innovation like market innovation, reduction in the number of errors and/or complaints in service delivery, training investments and returns

• Appropriate processes that allow for capture and utilisation of information need to be established. This may require investment in appropriate systems that capture and disseminate information at a granular level and manage risks. The future will require increasing investments in analytical tools as part of an integrated framework to support the bank's decision-making and performance measurement process. As banks move along the learning curve, they could buy or develop more sophisticated systems that require expertise and organisation maturity apart from accurate meaningful data.

• Introduction of mechanisms to 'influence' achievement of the desired objectives will further enhance the efficacy of the organisation's performance management system.

• Linking the balanced scorecard to the rewards and incentives is a good way of ensuring the systems' robustness.

• An appropriate governance structure supported by a robust monitoring mechanism needs to be deployed. This would assist in effective institutionalisation of the process. Visible top management involvement is a necessary condition for smooth and successful roll-out.

Likely Hurdles In Performance Measurement

Currently, the approach adopted and current levels of sophistication of various banks in India today, identify a number of challenges for successful deployment of the 'right' performance measurement system. Our prior experience indicates that some well-intentioned performance management initiatives have had limited success. This may be due to any of the following reasons:

Design inadequacies:

• Development of inappropriate metrics (metrics that are not result-oriented, measurable or actionable);

• Incorrect or a lack of linkages of metrics to strategic objectives. Stand-alone or inappropriate metrics may not elicit the desired behaviour from people and systems within the organisation;

• Introduction of complicated or a high number of metrics;

• Limited identification and definition of information needs; and

• Level of information currently captured by the existing systems of financial institutions may give an incomplete picture of a bank's performance. Historically, banks and financial services organisations in India have deployed multiple software applications for varying business models and/or have limited it support. This leads to the challenge of identifying, extracting, cleansing and aggregation of data from multiple applications.

Implementation approach inadequacies:

• A lack of sponsorship and buy-in across the organisation;

• Inadequate education and communication efforts;

• Failure to manage expectations from the performance management system;

• Aspiring for implementation deadlines and timelines that are too 'aggressive', the pressures of which may jeopardise the entire initiative;

• Inability to introduce effective 'incentive' and 'penalty' mechanisms. Some categories of Indian banks have a cultural legacy that hampers their ability to effectively influence performance through incentives or suitable penalties.

Banks need to drive change in a number of areas to move towards a more transparent organisation, while working with regulators and market participants to create the necessary conditions for greater transparency at reasonable cost.

Conclusion

Deployment of an appropriate performance measurement framework along with a supporting governance model is central to the institution's long-term success. In order to move towards a more effective organisation, banks need to drive change in a number of areas and strongly influence the behaviour of its stakeholders, processes, and systems within and outside the organisation.

Therefore, an appropriate performance measurement system will be most meaningful when they are cascaded top-down and linked to distinct, organisation-wide strategic objectives. While it is important for banks to address possible design and implementational approach inadequacies in future performance management initiatives, sustained benefits can be achieved only if banks view performance management as a continuous process, rather than as a 'one-time' initiative. Getting the 'appropriate framework' right now will enable banks to take full advantage of the opportunities waiting around the corner.

Anupama Raghunathan, Amar Mehendale, and S. Mahesh are part of business advisory services team in KPMG Consulting, India. The view expressed in the article are the personal views of the authors and do not reflect the views of KPMG.