1) Categorize performance measures among the four Balanced Scorecard Perspectives using a list of performance measures provided in the Case materials.

2) Show cause-and-effect chain to document how performance measures are related.

3) Evaluate financial results and conclude whether or not the implementation of Balanced Scorecard was effective

Case Materials

Tri-Cities Community Bank: A Balances Scorecard Case

Tom Albright Stan Davis Aleecia R. Hibbets

University of AlabamaUniversity of Tennessee at Chattanooga University of Louisiana at Monroe

CASE A: BSC DEVELOPMENT

Tri-Cities 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.

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, theywill 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 make 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 noninterest income. She knows that any program emphasizing improvement in these three measures has a strong chance of receiving approval.

ExhibitA1 Key Business Perspectives and Lead/Lag Indicators*

KEY BUSINESS PERSPECTIVES: Financial Perspective -How do we look to our shareholders?

The financial objectives of the organization serve as the focus of all activities. Every measure selected for a balanced scorecard should be part of a causal chain that results in improved performance on financial objectives.

Some examples of financial perspective objectives in the hospital industry include operating margins, cost per case, and capital fund-raising.

Customer Perspective -How do customers view us?

In the customer perspective~ organizations must identify key customers and market segments. Organizations must also determine how they add value for customers and seek to deliver better products and services that are tailored to specific customer needs.

Some examples of customer perspective objectives in the hospital industry include improved recommendation ratings and discharge timeliness.

Internal Business Perspective -At what must we excel?

For the internal business perspective, organizations identify those processes that must be improved or created in order to reach the objectives of the customer and financial perspectives.

Some examples of internal business perspective objectives 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 lofty standards set in the previous three objectives, organizations must invest in their people and infrastructure. For this perspective, organizations identify where resources are needed and craft a plan to enable its employees to achieve the objectives of the other perspectives.

Some examples of learning and growth perspective objectives in the hospital industry include increased employee training and retention, improved information technology systems, and adequate staffing for all shifts.

LEAD AND LAG INDICATORS:

Nonfinancial measures (NFMs) selected in the customer, internal business process, and learning and growth perspectives serve as lead indicators of improvement in financial objectives because improvement in these NFMs often "lead" or precede the improvement observed in financial measures. Likewise, the financial measures selected in the financial perspective are often called lag indicators because improvement in these financial measures often "lags" or comes after the improvement in the NFMs.

Adapted from Kaplan and Norton's 1996 Translating Strategy into Action: The Balanced Scorecard (1996) and The Strategy-Focused Organization (2001).

ExhibitA2 - Performance Measures for TCCB Balanced Scorecards

Notes from Branch Presidents' Meetings

The most important financial measures are loan balances, deposit balances, and non-interest income. Everything we do 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 services with a "hometown" feel.We rely on word-of-mouth advertising as much as we do radio and newspaper ads.

Our employees must have training in 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 offerings.

ExhibitA3 - Cause-and-Effect Chain Illustration for TCCB

CASE B: ASSESSING FINANCIAL IMPROVEMENT

The presentation to the Board of Directors was well received and Chris secured permission for a pilot study of the BSC in the five SD branches. She had one year to convince the CEO and Board of Directors of the BSC's ability to improve branch performance. During the year, all five SD branches implemented the BSC. However, each manager brought his or her individual style to the implementation process.

Now, the one-year trial period is over and Chris has collected data to determine whether the program was successful. Because no unusual business situations occurred during the year, Chris believes any changes in performance among the adopting branches can be attributed to the BSC. Exhibit B1 reports financial data on loan balances, deposit balances, and non-interest income for the periods ended June 30, 2008 and June 30, 2007, respectively. The SD branches, Branches A-E in Exhibit B1, began their BSC programs on July 1, 2007. As part of her program assessment, Chris interviewed several employees at each branch. The interviews are summarized below:

BRANCH A:

Customer service representative -Mary Richards

One reason for implementing the BSC is to help us reach our branch goals. Everyone understands that our strategy is to balance loans, deposits, and Certificates of Deposit with growth. For example, to create greater loan volume, we are willing to accept a lower profit margin on each loan. The BSC helps clarify our strategy.

Loan representative -Mike Moore

We have to work at our scorecard measures.They're not easy, but they are realistic.The process seems fair because my measures are just as hard as the other scorecards I have seen.Of course, the measures on my co-workers' scorecards may be different from mind, but everyone has to work hard.

Head teller -Paul franks

If we meet or exceed our targets, we are eligible to earn cash bonuses. Each month the top performers are recognized and rewarded. There's also a $1,000 reward per quarter to the individual who performs the best on his or her scorecard.

BRANCH B:

Loan representative Pamela Wise

As I understand it, the BSC is a tool to measure our progress in achieving the goals established by management. In our case, we want to meet the financial needs of a growing community, yet keep a small-town feeling to our services.

Teller -Glenda Smalley

Some of my scorecard measures are challenging, but no more so than the other scorecards I have seen. The measures are difficult, but not unattainable. I think the BSC is being used to encourage us to do better. We are rewarded when we improve. For example, our performance on the BSC helps to determine our year-end bonuses, as well as promotions and raises.

BRANCH C:

Customer service representative -Bill Sorensen

Sure, I understand why we implemented the balanced scorecard. It's purpose is to promote teamwork among tellers, loan officers, and customer service representatives. Also, it helps everyone understand our goals and how to reach them.

Mortgage loan originator Debbie Hansen

The scorecard taught us how everyone has a part in achieving branch goals by selling, cross-selling, serving as a communication port, and making customers feel welcome. Management wanted a lot of employee feedback when we were deciding to start the BSC. They wanted to be sure we knew about the program.

Administrative assistant Lou Martin

When we reach our BSC goals as a branch on a quarterly basis, we throw a big party. Individually, we can earn time off, up to a day every, two months, if we do well on the BSC. Unfortunately, some of my scorecard measures are next to impossible to achieve.

BRANCH D:

Loan representative -Gary Smith

As I understand it, the BSC is for charting growth. We had to determine which measures were important to the company. Thus, our branch manager asked a few questions when we were deciding which measures to include on the scorecards. I think she helped focus our ideas.

Customer service representative -AI Taylor

My scorecard measures are not impossible; they are fair. All of our measures are probably about the same difficulty. There are some incentives to achieve our goals. For example, we can earn $50 each month if we meet our individual BSC goals. Our branch president is always looking for better ways to reward us for good BSC performance.

BRANCH E:

Loan representative -Ann Stone

In our branch, the BSC is to keep track of what we're doing and to compare our performance with others. I don't see it as a big deal. I reached all of my goals within two months of starting the program.

Teller -Pete Jones

I think the scorecard is used just to keep up with people's activities. I'm not sure any tangible rewards are associated with my performance on the BSC. If I do poorly, I'll probably be fired, however. On the other hand, keeping my job may be considered a tangible reward.

Administrative assistant -Daniel Hughes

We didn't get to participate very much in developing our scorecards. Management just came in one day and told us about the new performance measurement system.

Loan representative -Tim Vines

I've read that the scorecard is supposed to help companies with their strategy. It's difficult to get an idea of our strategy from management. l\Maybe what I do helps (or does not help) us achieve our strategic goals.

Chris believed the BSC had been a success. She expressed her confidence to the CEO about winning board approval for her plan to expand the BSC to all branches. However, she understood the board would require hard evidence before approving a plan. Chris also understood she must be prepared to answer questions about what went right and what went wrong during the pilot study in the SO branches.

Exhibit B1

Branch performance on key financial indicators