By now, most banks have set their 2015 targets into motion, including return on assets, return on equity, efficiency and asset quality goals. Yet, many still haven’t implemented business line key performance indicators (KPIs) that tie to these goals. Inevitably, the quarterly projections come in and everyone scrambles to either cut expenses or manipulate the numbers to reach targets. The problem is that most business lines have cut expenses to the point that quality and growth are compromised. This “slash-and-burn” approach may be effective for the short-term, but it is in no way strategic.
Developing benchmarks by business line to enforce accountability can help business lines tweak their staffing, processes and strategies while also highlighting low performers and manual processes that need automation. Although this seems logical, in practice, few banks have had success in figuring out, when establishing these metrics, the depth required and relevance to strategic goals and objectives. The following best practice tips can help create metrics, set appropriate goals and design an effective overall performance management strategy:
Don’t over-engineer benchmarks. Every department should be working with three to five (not 20) easy-to-track metrics. Too much detail can cause confusion as well as create more work than it’s worth to calculate. For example, tracking the average time customers wait in line in branches is next to impossible and non-productive, but tracking call center hold times is much easier and most likely exists in a canned report today. Time and motion studies are typically a waste of time and too detailed for this exercise.
Take a balanced approach. A mixture of efficiency, quality and risk benchmarks provides a good balance. For instance, a contact center agent can take 100 calls a day but not be effective, so scoring abandoned rate/hold times can be equally or more important than just scoring agent calls. The contact center is an easy-to-understand example and the same methodology applies across all business lines.
Eliminate ways to game the system. Many departments may hide actual costs due to outsourcing. Areas where this is often an issue are marketing, human resources (HR), legal and information technology. To account for this, business lines should include a staffing metric as well as outsourced costs. For example, HR should look at bank headcount supported by full-time equivalents (FTEs) as well as outsourced HR costs as a percent of non-interest expense.
According to data we’ve collected in surveys, median banks reported 81 employees per FTE and 23 basis points (based upon non-interest expense) of outsourced HR costs. Another way to account for outsourcing costs is to take the outsourced expenses and tie them back to internal staffing by dividing the outsourced costs by the average loaded staff costs.
Revenue benchmarks are essential. While expenses and staffing are important, revenue benchmarks should not be forgotten or left out. Let’s look at some of the most common inputs into non-interest income. Overall fee income per-checking account is a great number to track. At Cornerstone, our median bank makes about $182 per-retail checking account, consisting mostly of ATM/debit interchange ($71 per-retail checking account) and nonsufficient funds (NSF)/courtesy pay income ($84 per-retail checking account).
Look to multiple data sources. In addition to the 300 benchmarks that Cornerstone tracks, we recommend our clients look to their loan origination, online banking and call center solution providers for additional peer data. Groups like the Mortgage Bankers Association are also good resources.
Create a balanced scorecard. Setting goals is more art than science. While it is important to know what peer banks are doing, it is more important to align benchmark targets to your bank’s strategic plan and mission. A balanced scorecard approach takes not only efficiency/profit into account but also customer service/convenience, risk and fees/pricing. Value comes from a balance of all of these inputs and benchmarks should be established around each of them.
Understand and articulate nuances. As a bank begins to set goals it can expect to hear excuses as to why some goals may be unattainable. The following unique circumstances should be kept in mind when setting goals:
- Small branches will typically underperform peers as the minimum staff needed from a security perspective does not account for the transactions and/or new accounts opened. Many banks have gone to a universal employee role and shared branch manager duties to increase efficiencies.
- Scale can affect support groups such as technology, accounting/finance, HR, marketing and especially enterprise risk management. A bank that is below $500 million in assets should not expect to perform as well as a $5 billion-plus bank in these areas.
- Many banks use call report benchmarks like assets-per-employee and efficiency ratios as performance indicators, but this high-level data can be misleading. Appropriate goals should be set based upon a variety of factors, including number of branches given the bank’s asset size. In a recent benchmarking study, we found that the median $2 billion asset bank had approximately 32 branches, $4.2 million in assets per-employee and a 63.62% efficiency ratio. Another factor to consider when setting these goals is the number of employees allocated to non-traditional business lines that can be high revenue producers, such as investments, insurance and business services.
Updating goals is an ongoing process. Benchmark targets should be tweaked over time as the bank’s business model evolves and the benchmarking culture matures. It is most important that senior leadership understands the targets and agrees with the methodology that managers use to establish them.
Once a scorecard has been built and goals set, it is time to monitor performance and use this information to manage the bank. Call center and branch metrics can be measured and reported on a daily basis. Other metrics, such as for the back office, are more likely to be measured on a monthly or quarterly basis as ebbs and flows can occur throughout the month.
The following design principles can assist in the establishment of an effective performance dashboard:
- Measurements should always be shown against both a goal and historical comparison, such as what the bank did last quarter/last year. Understanding trends can help identify issues before they become real problems;
- Goals should be tied to performance incentives for both the front and back office functions;
- Automation will save this effort from being a one-time process. Dashboards/intranet technologies are a bank’s best friend. Also, a strong data warehouse will prove very useful as data will need to be gathered from several systems, including core, loan origination, teller and general ledger.
As a bank reviews its results, it should look at outliers, including high and low performers within an area, and try to determine the reasons for the differences. Sometimes variances can be the result of a personnel issue, but usually there are explainable reasons for the delta including training, manager challenges and technology issues. Identifying outliers is as important for sales functions such as investment brokers and mortgage loan officers as it is for branches and other FTE-based metrics, where individual performance can be tracked.
Having specific goals and objectives via business line metrics both provide a roadmap for employees and enforces accountability. The winners will be those who can develop automated performance dashboards that provide detailed goals and objectives and are tied to incentives to reward high performers.
Mr. Weikart is a managing director with Cornerstone Advisors, Inc., a Scottsdale, Ariz.-based consulting firm specializing in bank management, strategy and technology advisory services. He can be reached at firstname.lastname@example.org.