Need help answereing the following questions about the case
1. In what ways does the Citibank Balanced Scorecard differ from the basic BSC model? Is the modification appropriate?
2. Citibank has made their version of the Balanced Scorecard into an integral part of their performance evaluation system. Which aspects of the system are objective and which are subjective? Would you make the system more objective, less objective, or leave it the same?
3. What par rating would you assign to McGaran for Customer Satisfaction, and why?
4. What par rating would you assign to McGaran for the Overall Evaluation, and why?
5. If your rating decisions were followed at Citibank, what subsequent repercussions (good or bad) do you anticipate?
Citibank: Performance Evaluation Frits Seegers, President of Citibunk Califoenia, was mceting with his manugemcat tean to review the performance evaluation and bonus decisions for the California beareh managers. James McGarar's performance evaluation was neat. Frith folt unsasy about this one. MACCaran was manager of the moat important branch in the Los Angeles atea, and his financials wefe ingpresive. A year ago he would have received "above por" rating with full bonus. But Iast year, the Califomia. Division of Citibank had introducod a new performance scorceard to highlight the importance of at diverse set of measures in achicving the stratcgic gouls of the division. Among the ncw mcasures introduced was a customer satisfacticon indicator. Unfortunately, James MccGaran had sconed belowe par" an casinener sativitactiom. Frits looked at Lisa Jatrsoo, the area manager superwising lames MeGaran. Frits had read Lisa's comments (Exhibit 1). The conatments were tery positive, bot lisat had not wanted to give a final recommendatios until she lhad discusocd it with Frits. She lnew that fames olse woud be watched closely by many managers within the division. The Financial District Branch James Mcharan was manager of the mont important of the M branches in the Las Angeles ares. Located in Lom Arygeles's financial district, James's buanch had a staft of 15 pevple, revenues of S6 milloon, and 54.3 million in profit marpin. The costceger base was very diverse. hadividual custocmers ranged froei people who worked in the financial district with soplisticased netall buaking nocds to lcss informed individuals banking for convenicnce. Business custoeners wore sophisticated buyers who demanded high service quality and knowked ecable cneployoes who coeld satiify their financial needs. "Moen and pop" businesses, the dominant segment in other negions, wete aloo present but to a much lesser eatent. Cuxpetition was intenee. Two cumpetifoc--Bank of America and Wells Fargo-had offices less than a block away from James's beanch James joined Citibank in 1985 as asciktant branch manager. He had worked in the banking industry since 1977. Within a year, in 1986, he was promoled to mamager ef a small branch. He progrenced quickly though the ranks until 1992 when he was biven the reppensibility of munaging the Financial District office. His performance in this oitfice had exceaded expectatims every single year. He had dellvered impsesoste financial resuls for focar vears in a now. In 1in6, whent the divisioct expomded its perforanaree indicasots to include non-financial measurcs, it becarae apputent that his branch's customer safefaction ratings did not follow the same puttern as lis financial performance any form of by any means. phecitcoic, mecharical, photocopying, teoonting or ocherwit-without the permatsion of Harvad Business School. 19404a Cinibunk: Performanee Evaluation James reported to Lisa Johnson, Los Angeles area managet. Lisa was a long time employec of Citibank. Sthe joined the company in 1978 in Chicago and moved to California in early 1988. Her area was the biggest in the division and included two regions that had previously been managed separately. Lisa was a hands-on manager who spent a lot of time in the branches supporting the managers and becoming familiar with the events in each branch. New Performance Scorecard Citibank was a niche player in the Californis market. It had eighty branches compared with foar hundred offices of its biggest competitor. Citibank's strategy in Califormia was to build a profitable franchise by providing relationship banking combined with a high level of service to its customens. Service was delivered face to face (in the branch) or nemotely, depending on the wishes of the customers. Customers' service expectations sove in line with their net worth, as did their profitability for the bank. These cusaomers demanded high levels of service with careful personal attention and a broad selection of financial products. Citibank provided a broad array of services including a dense network of ATM machines, 24 hour banking, and home banking Financial measures had doeninuted Citibunk's performance evaluation in the post. But top managers in the division felt that these measures were poor wehicles to communicate the high service strategy of the bank. Frits Secgers wanted people in the division to have a broader view of the buciness and focus their attention on thove dimentions that were critical to the long term success of the franchise. To reflect the importance of non-financial measures as leading indicators of strategy implementation, the Califorria Division developed a Performance Scorecard. It complemented existing financial measures with new measures reflecting important competitive dimenvions in the bank's strategy. The initial version was pre-tested in 1995 and, starting in the first quarter of 1996 . Performance Scorecard goals and periormance data became a central management tool to implement strategy and evaluate performance. The Performance Scorecand was built around six difterent types of measures: financial. strategy implementation, customer satistaction, control, people, and standards (sev Exhibits 2 to 5 ). Finamcial malsames were obtained from the mokular accountiog system and focused primarily on total revense and profit margin against targets. Stratexy implementation measures tracked revenue foe different types of target customer segments relevant to the strategy of the beanch. James's Performance Scorecard focused primarily on revenues from retail customers-households, busineseses, and protessionals. Custouner satisfactiou was measured through telephone interviews with appeoximutely twenty-five branch customers who had sisited the branch during the past month. Customer satisfaction scores were derived trom questions that focused on branch service as well as other Citibank services like 24 hours phone banking and ATM services. An independent research firm was responsible for administering the survey under the guidance of the division's Relationship Sotistaction department. Given the current strategy of the batni, which focused on customer service as a key differentiator, Frits Seegers cunsidered the customer sathifaction measure as critical to the long term succeas of his division. He saw it as a leading indicator of future financial performance. If customer satisfaction deterioeated, it was only a matter of time before it showed in the financials. 2 Citiaank: Performante Evuluation 196949 Coutred moasum reported the cvaluation by intemal auditors on the branch's intermal coetrol processes. Branches had to score at leant par (defined as 4 on a scale of It to 5) to be eligible for any bonus. If the rating was below 4 , the branch's business was considered at risk and did not meet the minimum requirements for effective control. Poople and Sardands were non-quantifible ratings determined subjectively by the branch marager's boss. The "people" measure focused on the proactive efforts of the manager to develop and communicate with subordinales, to enceurage area training programs, and to be a role model to more junioe people. Stantards included an assessment of a manager's involvement in community groups, trade associations, and business ethics. Each component of the Scorecard was scored independently into one of three rating categories: 'below par', "par", of "alowe par'. For those measures that could be measured quantitatively-financial, strategy implementation, custumer satisfaction, and control-pre-defined performance thresholds determined where performance fell in this tree-level scale. However, ratings related to people and standards lacked an appropriate objective indicator: in these cases performance was determined subjectively by the branch maraber's superioe. In addition, the manager's boss gave a global rating for each of the six components of the Scorecard and an overall rating for the branch manager. Performance and Incentives The performance planning process started in Octuber with a negotiation process between Frits Seegers and his area managers. At the end of this initial stage, Performance Scorecard targets for the upcoming year were established for the division and for each area. These targets were cascaded down the organization. Area managers negotiated with branch managers to determine their financial targets and strategy implementation gouls for the year. At the end of this process, the targets for branch managers were added up to ensure that they equaled or evceeded the area's targets. Customer satisfaction and control soals were common to all branches in the division. For customer satisfaction, the 1996 goal was to achieve a rating of at least 80 . Financial, strategy implementation, customer satisfaction, and control targets formed the quantitative basis for ar pout performance evaluation. Fach quarter, anea manatgers received branch information with the actual numbers for each of these measutes and a compurison with the quarterly objectives. This information, together with the subjective soures that the area manager gave for the People and Standards ratings, formed the basis for the quarterly and yearly evaluation of branch managers. Year-end performance evaluation was determined jointly by a team led by Frits Seegers. The team comprised the area managers, including lisa Johnoon, and manapers from human resources, quality, and finance. Frits believed that hasing a team jointly evaluate performance of every branch manager gave consistency to the peoces throughout the division. It was this team that was now meeting to decide Jamses's performance evaluation for the year. In addition to other motivational elements associabed with the yeafly evaluation, a branch manager's bonus was linked to his ot her final Performance Scorecand rating. A 'below par' rating did not carry any bonus. A "par" rating generated a bonus of up to 15% of the basic salary (for branch managers with a salary in the lower part of the salary beacket, the bonus could reach 20% ). An "above par" rating could mean as much as 30 "s bonus. "above par" rating- Performance of the Financial District Branch Frits reviewed the 1996 performance evaluation forms for James McGaran. His financials were outstanding -20rs above target. According to L.iw Johnson, James's branch "had generated the highest revenue and made the greatest margin contribution to the business of any branch in the system." His strategy implementation scores were in the "par" to "Sbove par" range, although Lisa Johnson had given him an "above par" rating in three quarters. James had maintained an "above par" rating in the control scorecard and Lisa Johnson had rated him exceptionally where she had the discretion to do so. However, customer satisfaction was 'below par'. A branch obtained a "pur' rating if it scored 74 to 79 . If customer satidiaction was above 80 or it had imptoved 6 points with no regression during 2 quarters and it was above the market average (77), then the branch got an "above par' rating. Lisa and Frits were aware that a strict application of the new policies for performanoe evaluation meant that James could get at most a 'pur' evaluation for the year. But James branch was the largest and toughest branch in the division. He had a demanding clientele and challenging competition. It was difficult to manage such a diverse set of indicators, and the customer satisfaction measure was sometimes hard to reconcile with demonstrated financial performance. James had discussed with Lisa his concerns regarding the adequacy of the survey. Customers rated not only their branch, but also other Citibank services sach as ATM's that were out of the control of branch managers. Thus, it was possible that these centralized services were not providing adequase support to the sophisticated customers of James's branch. Notwithstanding these concems, James had worked hard to improve the customer satisfaction rating during the last quarter. He had made some changes in his staff to improve the score. One person in the branch was now dedicated to greeting the customer when arriving at the office and helping with any problems that may arise. He also held branch meetings and coached branch employees to focus their attention on improving customer satisfaction. lames gave a lot of importance to his ratings. It was a matter of pride to be "above por' and show that he was able to successfully run the hardest branch in the division. He had felt very disappointed when, in two quarters of the year, his rating had been only par. His branch was difficult and he was delivering the best financial performatice in the division. He thoaght that his efforts deserved an above par rating, even if customer satisfaction was somewhat lagging Frits reviewed James's scorecards for each quarter of 1996 (Exhibit 2 to 5)- His financials were exceptional, but only in the last quarter was he able to pull customer satistaction to an acceptable level. If the perforanance evaluation team gave James an "above par" people could think that the division was not serious about its non-financial measutes. Jamtes had been 'below par' in customer satisfaction for all quarters of 1996 and, if this measure was truly important, he should not get an "above par" rating. On the other hund, he deserved the above par given his excellent performance in other dimensions. James was a refetence point for a lot of other branch managers. Frits held the summary scorecard in his hand (Exhibit 1) and turned to Lisa Johnson: Zisa, Fve read over your comments and reviewed James's quarterly scorecards. All that now remains is ticking off the six boues on this sunmary form and deciding on an overall performance rating for James ... What do you recommend?" Exhibit 1 James McGaran's year-end performance for 1996 suiad ly Mea Maiagat Aproved by Regaesi Pasiade Exhibit 2 James McGaran's Performance Soorecard for the first quarter of 1996 Exhibit 3 James McGaran's Performance Scorecard for the second quarter of 1995 Exhibit 4 James McGaran's Perfonmance Soorecard for the third quarter of 1996 Exhibit 5 Jarnes McCiaran's Ferfurrance Scurecard for the fousth quarter ot 1996
