Question

True Coop Community Bank – A Balanced Scorecard Case

True Coop Community Bank (TCCB) is located in the Midwest US and has a total of 10 branches grouped into two divisions, the southern division (SD) and the northern division (ND). Each division consists of five branches; each branch employs a branch president, branch vice-president/chief loan officer, customer service representatives, loan representatives, mortgage loan originators, head tellers, tellers, and administrative assistants. All branches are located within a 60-mile radius.

TCCB has enjoyed strong financial success over the past few years but continues to look for ways to improve its performance. The strategic direction of the bank is reviewed annually at a meeting of top bank officials and outside consultants. The purpose of the meeting is to outline the vision and mission of the bank and to ensure all top managers understand and agree on the direction of the organization. In 2004, TCCB management adopted the master strategy of balancing profits with growth to ensure the bank remains an independent entity existing to provide quality service and products to an increasingly diverse customer base.

Chris Billings recently was promoted from marketing director to SD president. The promotion came just as Chris finished her evening Masters of Business Administration degree in December 2006. As part of her graduate studies, she was introduced to the balanced scorecard (BSC), a performance measurement system that directs decision-makers toward long-term value creating activities. Chris thought the BSC could be used to improve the financial performance of TCCB. In late December 2006, she approached the chief executive officer (CEO) and requested permission to implement the new program.

TCCB’s CEO was apprehensive about the new program. His reluctance stemmed from his own unfamiliarity with the BSC and Chris’s short tenure as SD president. The CEO also was concerned about whether Chris’s ideas would be accepted by the ND president and ND branch employees. Finally he was uncertain about the BSC’s benefits. At the same time, the CEO did not want to respond negatively to Chris’s first efforts as SD president. To appease Chris without totally committing the bank to implement the BSC, the CEO agreed to allow Chris to begin the process of developing the BSC in the five branches of her division. In turn, Chris agreed to make a presentation to the CEO and the bank’s Board of Directors in three months. In this meeting, Chris would present BSC concepts and how she planned to use the program to improve the financial performance of her branches. Given the short period of time to design a pilot study, Chris wondered how she could convince the Board of Directors to give her permission to implement the BSC. She knew she must convince the SD branch presidents of its value.

On January 7th, 2007, Chris met with her branch presidents to discuss the BSC program and enlist their help in developing balanced scorecards for their branches. She began the meeting by distributing a handout (Exhibit A1) highlighting the key objectives of the BSC. She used the handout to inform the branch presidents of the four business “perspectives” (categories of measures to be included on the BSC). The example measures she included on the handout are from a hospital that had implemented the BSC. Since she did not have example measures from a bank using the BSC, she wanted to show the branch presidents measures from another service industry for them to consider. As the handout shows, the hospital uses operating margin and cost per case as their primary financial measures, recommendation ratings from outgoing patients and discharge timeliness information as customer measures, length of stay and readmission rate (patients being admitted again for the same injury or illness) for the internal business measures, and employee training and retention measures in the learning and growth perspective. She then instructed the branch presidents to work together to develop meaningful measures to be included on branch BSCs. While each branch would eventually develop a branch-specific scorecard, she believed the branches were similar enough to allow branch presidents to work together initially. The group was to meet again in six weeks to discuss their progress in developing branch BSCs.

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The group meeting on February 25th did not go as well as Chris had hoped. While the branch presidents had done a good job of identifying areas that needed attention within each branch, the information presented could, at best, only be considered as raw materials necessary to build a BSC program. Much work was needed prior to implementing the program.

With time running out, Chris grew concerned about the scheduled meeting with the Board of Directors on March 31st. She had nothing concrete to present at the meeting and worried she might not receive permission to pursue the program if she did not make a solid presentation to the board. Chris’s goal is to present a group of quantifiable measures that are linked through causal relationships and lead to improvement of key financial measures.

One of the primary benefits of the BSC comes through mapping the causal relationships from nonfinancial performance measures to the three primary financial measures the bank monitors. Nonfinancial measures are categorized into three perspectives: Learning and Growth, Internal Business Processes, and Customer Focus. The cause and effect linkages in the BSC will occur in the following manner: if learning improves, then internal processes will improve. If internal processes improve, then customer value will increase. If customer value increases, financial performance will improve. Financial performance is the ultimate evaluation of a firm’s strategy. If financial performance improves significantly, the firm’s strategy is successful. Thus, if the strategy is good, the measures of the nonfinancial perspectives will be lead indicators of increasing value that will ultimately be proven by improved financial measures.

Exhibit A2 provides a list of performance measures developed by the branch presidents and notes Chris took during meetings with them. Exhibit A3 illustrates a sample cause-and-effect chain. For example, as shown in Exhibit A3, if employees receive training in sales effectiveness, customer service, product profitability, and local bank knowledge, they will be better equipped to provide customers with higher quality service. TCCB measures the effectiveness of its training programs by having employees take in-house tests on various training topics. By increasing employee knowledge and skills, higher quality referrals and cross-sell proposals will take place, leading to higher customer satisfaction and greater customer retention. Maintaining the current customer base provides the basis for growth in deposit and loan balances, while a greater number of successful referrals and cross-sells increase non-interest income.

Chris wants to prepare a series of cause-and-effect chains to illustrate to the Board of Directors how the BSC can be used to improve performance on three key financial measures: loan balances, deposit balances, and non-interest income. She knows that any program emphasizing improvement in these three measures has a strong chance of receiving approval.

Required:

Prepare a report to the Board of Directors that explains how the BSC may be used to help TCCB achieve its strategic goals. Include the following in your report: 1) A table that categorizes each of the measures in Exhibit A2 into one of the four BSC perspectives. State why

you placed a measure in a particular perspective. 2) Two cause-and-effect chains similar to the one shown in Exhibit A3. Use the measures listed in Exhibit A2 or

suggest other measures you feel are appropriate. Be sure to include a causal chain explanation with your answer.

Answer 1

Exhibit A1

KEY BUSINESS PERSPECTIVES AND LEAD/ LAG INDICATORS*

KEY BUSINESS PERSPECTIVES:

Financial Perspective - How do we look to our share holders?

• The financial objectives of the organisation serve as the focus of all activities. Every measures selected for a balanced score card should be part of a causal chain that results in improvement performance on financial objectives.
• some examples of financial Perspective objective in the hospital industry include operating margings, as cost per case and capital fund raising.

Customer Perspective - how do customer view us?

• In the customer Perspective , organization must identify key customer and market segment. organization must also determine how they add value for the customers and seek to deliver better products and services that are tailored to specific customers needs.
• some examples of customers Perspective objective in the hospitality industry include improved recommendation rating and discharge timeliness.

Internal business Perspective - at what must we excel?

• for the internal business Perspective, organization identify those processes that must be improved or created in order to reach the objective of the customer and financial Perspective.
• some examples of internal business Perspective objective in the hospital industry include reducing the readmission rate (for the same medical condition) and increasing the doctor to patient contact time.

Learning and Growth Perspective - how do we continue to improve and create value?

• to achieve the loft standards set in the previous three objectives, organization must invest in their people and infrastructure. For this Perspective, organization identify where resources are needed and craft a plan to enable its employees to achieve the objectives of the other Perspective .
• some examples of learning and growth Perspective objectives in the hospital industry includes the increased in employee training and retention, improved information technology system and adequate staffing for all shifts.

LEAD AND LAG INDICATORS:

Nonfinancial measures (NFMs) selected in the customers, internal business process and learning and growth Perspective serves a lead indicators of improvement in financial objectives because improvement in these NFMs often "lead" or precede the improvement observed in financial measures.

Like wise, the financial measures selected in the financial Perspective are often called lag indicator because improvement in these financial measures often "lags" or come after the improvement in the NFMs.

Exhibit A2

Performance of the measures for TCCB balanced scorecards

• outstanding loan balances
• deposit balances
• number of products per customer
• number of new customers
• Non interest income- income earned from fees on services and products provided by the bank. Nil included fees associated with CDs, ATM cards, insurance policies, lock boxes, annunities, brokerage accounts, checking accounts, and travelers' checks.
• new loan created
• new accounts
• new products introduced
• employee training hours
• customers satisfaction
• customer retention
• employee satisfaction
• sales calls to potentional customers
• thank - you/ cards to new and existing customers
• employee turnover
• referral - referrals occur when an employee suggest customers see another branch employee for more information about a product.
• cross sells selling multiple products to a customer when the customer come in for only one product.

NOTES FROM BRANCH PRESIDENTS' MEETING

The most important financial measures are loan balances, deposits balances and non interest incomes. Every thing we should be aimed toward improving these three financial measures.

customer satisfaction must be improved. Because we are a small community bank, we rely on delivering quality service with a "hometown" feel.

we rely on world of mouth advertising as much as we do ratio and news paper ads.

our employees must have training several different areas, including sales techniques, customer service, and product knowledge/profitability. This type of training would improve the interactions between our employees and customers, allowing tellers and customer sales representatives to recognize customer needs and make more effective referrals and new product offering.

Exhibit A3

CAUSAL CHAIN EXPLANATION

If the employee receive training in the sale effectiveness, customer service, product profitability and local bank knowledge, then they can provide better customer service and higher quality interactions with existing client can take place. TCCB employees will be better able to ascertain the needs of the customers. thereby making higher quality referrals and cross- sell proposals to continue and customers will be more sastisfied and choose to continue banking with TCCB. increased referrals or cross sales increases non interest income and provide the basis for the growth in deposit and loan balances.

EXHIBIT B1

Branch Performance on Key Financial Indicators

as of june 30, 2018 as june 30, 2007

Branch	Loan Balance (million $)	Deposit Balance (Million $)	NON- interested Income (Thousands $)	Loan Balance (miilions $)	Deposit Balance (miilion $)	Non- interested incomes ( Thousands $)
A	39.3	85.1	476.0	35.9	77	411
B	58.1	104.5	428	49.7	101.4	399
C	63.7	136.3	529	56.1	124	474
D	46.7	93.1	291	45.1	86.7	276
E	54.4	109.3	343	53.9	108.2	344
F	42.9	87.5	345	41.9	88.5	335
G	64.5	115.2	498	64.5	114.8	477
H	33.2	78.2	230	32.7	77.8	233
I	51.1	93.7	293	50.8	91.6	280
J	71.2	150.8	589	68	145	571