Financial performance management in banking

With increasing competition in the marketplace, unpredictable market conditions, and the ever-accelerating pace of business, banks today need to be able to adapt and change course faster than ever before.

Banks, more so than other businesses, are required to continuously manage risk: A bank's reason for being in existence is to accept structured uncertainty and manage the associated risk with a goal in order to capitalise on the risk differences and turn in a profit.

Already burdened by complex regulatory requirements such as Basel II, IFRS and Sarbanes-Oxley, bank losses due to exposure to securitised asset portfolios are likely to result in more legislation, and an increasing focus on risk management. Globalisation and cross-border consolidation, while offering measurable business benefits, also impacts on risk. As a result, the ability to share and verify information is more critical than ever before.

Changing customer behaviour patterns, including decreased customer loyalty and ever-increasing service demands, means that banks are facing an even more challenging road going forward. Retaining customers requires investing in new services and technologies, which the bank is required to balance against managing operational costs, and the exposure to the risks arising from these new initiatives.

The successful navigation of these risks while optimising returns requires a flexible, comprehensive business performance management process.

The business performance management process revolves around three core areas:

* Gaining insight and understanding into the business. In order to manage performance, the business first needs to understand key performance drivers. Ultimately, managing the key performance driver will translate into managing performance.

By studying past performance, and correlating past decisions and inputs to bottom-line performance, analysts can gain insight into the most likely drivers of success and establish appropriate indicators. These drivers must then be aligned with the strategic goals of the business, so that they can be used to inform the planning and monitoring processes. In the banking environment, some of the key drivers are customer assets and liabilities, and their corresponding interest margins. This, together with non-interest income, provides a reasonable picture of the bank's revenue prognosis.

Methodologies such as matched-funds transfer pricing, can then be utilised from a strategic perspective to drive growth in appropriate areas and ensure a sufficient inflow of customer deposits, and can help to maintain a healthy balance sheet and ensure consistent client yields.

* Planning for performance. Moving from a traditional balance sheet and income statement planning process to a driver-based view means that planning can become an intelligent process. Bottom line results can be forecast with increasing frequency and accuracy by merely adjusting the variables to the planning process. Rolling, driver-based budgeting and forecasting processes eliminate traditional guesswork, and the impact of, for example, a central bank rate adjustment can be visible instantly in the business plan.

* Measuring and monitoring. Key performance indicators and dashboards can now be utilised in addition to standard reports to measure and track performance against prior periods and plans. Problem areas can be quickly identified and addressed. A successful measuring and monitoring strategy ties key performance indicators from the operational level right through to strategic initiatives. Indicators of new cheque accounts opened in a retail branch connect through the various levels in the organisation right through to a growth indicator at a strategic level. The performance management process is iterative, and the findings and results from each should be used to inform the next process.

In order to successfully apply the principles of performance management, the bank needs to meet some fundamental requirements, as well as have the correct tools in place.

The criteria are:

* Reliable data. The foundation of good performance management is a reliable set of financial information that is generated automatically and reconciles with operational transaction systems, providing clear accountabilities for profit and cost centres.

* Reliable measurement tools. There needs to be a clear definition of everything the organisation wants to measure, and an understanding that there may be different views of the data required to comply with different consumers: management accounting, statutory reporting, etc. There is a need to develop reliable measurement tools that cover financial targets, customer views, business processes, technology, human capital and their relationship to return on capital.

* Appropriate access for all levels of management. Ensuring that all participants in the process have appropriate and timely access to information is critical. Access should preferably be online to enable better and faster decision-making as well as timely and consistent measurement of results.

* Effective planning tools. Planning tools and processes should enable effective linkage between departments, lines of business and the enterprise to eliminate dysfunctional manual steps and provide integration between strategy formulation, business planning and execution. In particular, calculations such as consolidation of business units, transfer pricing between business units, calculation of funds transfer pricing and interest margins should be automated and driver-based, eliminating manual errors and time-consuming reconciliation processes. An effective tool will also include workflow to aid the planning administrator in managing deadlines in a high-participation planning process.

* Analytical processes and tools. Development of the analytical processes and tools to explain variance against plans, to test 'what if' hypotheses and 'recover' scenarios to improve decision-making.

MCI has a track record of implementing successful planning and reporting applications for a number of banks and financial institutions around the African continent, including South Africa's largest commercial bank.

For further information, please contact Filip Vanden Houte, MCI: tel 011 454-3420, fax 011 454-3417, e-mail filip@mci.co.za.