The Balanced Scorecard (BSC) method of Lloyds TSB Bank - Essay Example

?Organisational Balanced Scorecard Report or Summary The paper describes the Balanced Scorecard (BSC) method of Lloyds TSB Bank. Balanced Scorecard is used widely in organisations for measuring the performance from different perspectives. The paper will discuss the four perspectives of balanced scorecard method for Lloyds. It describes different strategies Lloyds takes in order to accomplish the organisational objectives. The balanced scorecard provides a reasonable view of organisational performance. In Lloyds, BSC has assisted to disclose the major performance activities. Table of Contents Methodology 4 Results or Findings 5 Vision of Lloyds TSB Bank 9 Strategies of Lloyds TSB Bank 9 Organisational Values 9 Balanced Scorecard Application in Lloyds TSB Bank 10 Analysis and Discussion 14 Benefits of Introducing BSC into Lloyds Bank TSB 21 Drawbacks of Introducing BSC into Lloyds Bank TSB 23 Software Implementation of BSC 24 Conclusion 25 Recommendations 26 References 27 Bibliography 31 Appendices: KPI Formulas 33 Introduction The objective of the paper is to describe about the Balanced Scorecard (BSC) framework in relation to its implementation in the Lloyds TSB Bank, headquartered in the UK. The reason for choosing the organisation is that the company uses balance scorecard method for calculating and managing the performance of employees (Lloyds TSB Group plc, 2012). The paper will also attempt to evaluate several aspects of BSC in relation to Lloyds with the purpose to recognise how the implementation of BSC would help to measure the performance of the bank. Also the paper will aim at identifying the different drawbacks relating to BSC. Stating precisely, the determined objectives of the paper are to recognise different aspects of BSC and the major Key Performance Indicators (KPIs) of Lloyds. It will also aim to understand how implementation of BSC can prove to be beneficial for Lloyds along with identifying its probable limitations for the organisation which will further be used to provide recommendations. Methodology The research has been conducted in three phases, i.e. identification of research objectives, collection of data and analysis of the data collected. The method used for conducting the research has been based on a systematic approach. The research attempts to make a conclusion on a gradual procedure. Only secondary data i.e. information from internet sources such as company reports, books and academic journals have been used in this paper. In order to calculate and demonstrate the KPIs’ of Lloyds TSB Bank, MS-Excel application has been used. It is in this context that BSC’s four perspectives, i.e. customer perspective, financial perspective, internal business processes as well as learning and growth perspective and their related KPIs (two from each) will be examined through MS-Excel application. The excel graphs will be produced and demonstrated in order to justify the discussion of KPI. Results or Findings Balance Scorecard and Its Perspectives Generally, organisations use BSC to embrace information regarding monetary measures. In Lloyds, BSC can provide a lucid picture about the performance. It can provide the key factors which drive the performance in the organisation. It is worth mentioning in this regard that there are four general perspectives of BSC which are measured by an organisation while judging the performance (Mooraj & et. al., 1999). The following figure will describe the four perspective of BSC: Financial Perspective: The financial perspective represents long-term objectives of an organisation. The KPIs of financial perspectives are: Sales quantity: It aims at measuring the amount of sales; for example, by taking account of the changes in sales revenue over time Market share: It aims at measuring the market competency. For example, by comparing the market exposure of the competitors and that of the organisation Return on investment: It aims at proper allocation of resources. For example, by rendering an in-depth understanding to the most profitable sectors Return on capital employed: It aims at success of capital investment. For example, by indicating any further requirement of capital Profit ratio: It aims at identifying per unit profit for better efficiency in production. For example, identifying production cost to maximise profitability (Mooraj & et. al., 1999) Customer Perspective: The customer perspective includes processes relating to the most favourite and lucrative customer groups. The objective of customer perspective is to measure the non-monetary aspects of performance. The KPIs of customer perspectives are Customer satisfaction: It aims at measuring the sustainability of business. For example, by identifying the preferences of customers Customer retention: It aims at analysing market expansion. For example, the more customers are retained, the more the value of organisation or brand increases Value of customer: It aims at identifying the customer service efficiency. For example, by considering the gap between customers’ requirements and services offered Customer loyalty: It aims at measuring the attractiveness of organisation amid the customers. For example, by analysing the feedback of the customers Customer acquisition: It aims at measuring the capability of organisation to entice customers. For example, by studying the growth in the numbers of customers (Mooraj & et. al., 1999) Internal Business Process Perspective: The objective of internal business process is to measure effectiveness of inner procedures of business with the intention to yield greater productivity. The internal business perspective is particularly effective during the period of change as it concentrates on key procedures required in order to implement the change program effectively. The KPIs of internal business process perspective are Integration cost synergies: It aims at measuring cost savings. For example, by linking the costs incurred by various segments with the profit gain on the whole Supplier frequency: It aims at analysing the performance of suppliers. For example, by considering the inventory management techniques Cost income ratio: It aims at measuring the operational performances. For example, by quantifying the profit margin of the organisation Labour out ratio: It aims at measuring the satisfaction of employees. For example, by analysing the contribution made by the individual employees over a given period Administrative expenses: It aims at measuring the internal business efficiency. For example, by identifying the irrelevant costs and lacunas in the entire administrative process (Mooraj & et. al., 1999) Organisational Learning Perspective: The objectives of learning and growth perspective are to evaluate the efficiency of organisation regarding internal talents and abilities. The KPIs of organisational learning perspectives are Employee Engagement Index: It aims at measuring the affection of employees toward the job. For example, by measuring their level of integrity towards organisational policies Investment on training and development: It aims at measuring the learning performance of organisation. For example, by analysing the development of employee performances Score of employee training: It aims at measuring the development of skills and effectively of learning programs. For example, by analysing the gap between expected and gained performance outcomes Value of employees: It aims at understanding the organisational efficiency to empower employees. For example, by investigating whether shared values persist within the organisational structure Employee satisfaction rate: It aims at recognising the efficacy of organisation to provide benefits to the staffs. For example, by analysing the retention of valuable employees BSC procedure often recognises gaps between desired and existing talents and abilities. By using BSC for recognising strategic advantages and associated actions, these gaps can be addressed and removed by training and development (Mooraj & et. al., 1999). Vision of Lloyds TSB Bank The vision of Lloyds is to become one of the best banks in the UK and to compete effectively in certain relevant international markets. The crucial strategic priorities are to enlarge the business and to maintain robust asset quality. Lloyds places the customers at a lead position of its formulated vision and it attempts to satisfy their requests with passion. The way Lloyds manages the relationship with the customers is an important component which differentiates the organisation from other competitors (Lloyds TSB Group plc, 2012). Strategies of Lloyds TSB Bank The strategies of Lloyds are to construct customer franchisee and to enhance the business strength. In order to fulfil the objectives, the company focuses on business portfolios to balance with organisational properties, abilities and risk appetite. Lloyds focuses on cost saving mechanisms. It also attempts to update the global presence in order to enhance the brand name. Lloyds continues to enrich the performance in balance sheet, by strengthening the funding and liquidity status. It can certify healthy capital ratio and steady capital base (Lloyds TSB Group plc, 2011). Organisational Values Lloyds offers more services to the customers and delivers strong, constant and sustainable yields to the shareholders. The strategies of Lloyds are built around the notion to become the best bank and it produces value by spending in those fields which make the brand different from other competitors. These approaches of Lloyds deliver strong value to the organisation. With almost 30 million customers worldwide, Lloyds is highly committed to deliver good services and to create simpler, responsive, effectual and approachable organisation with actual focus on performing sustainably and sensibly. By focusing on core markets that provide strong returns and striking growth opportunities, Lloyds maintains a cautious method to risk management and it enables to further boost the performance of the company (Lloyds TSB Group plc, 2011). Balanced Scorecard Application in Lloyds TSB Bank The Customer Perspective Strategy: The strategy is to make Lloyds as one of the most preferred banks in the UK through supporting customers, providing new products, managing complaints, streamlining banking services and treating customers impartially (Lloyds TSB Group plc, 2011). Measurement: The key performance indicators (KPIs) from customer perspective are ‘customer complaint rate’ and ‘customer satisfaction rate’ (Lloyds TSB Group plc, 2011). It is worth mentioning in this context that the reasons behind using these two indicators over the other KPIs such as ‘customer loyalty’ and ‘customer churn’ can be identified in terms that customer complaints and customer satisfaction can help to determine any pitfalls in service delivery of Lloyds independently, thereby embarking the efficiency of the bank. Therefore, Lloyds can effectively develop plan for improving its performance from a customer-centric viewpoint further offering the opportunity to influence the other KPIs. Target: The target for Lloyds is to develop the performance and to lessen the number of grievances to ‘1.3 per 1000 accounts’ by 2012 (Lloyds TSB Group plc, 2011). With respect to customer relationship, the target for Lloyds is to enhance the customer relationship rating so that the company can engage more effectively with the customers and become more reactive to the requirements of customers (Lloyds TSB Group plc, 2011). Financial Perspective Strategy: The strategy for Lloyds from financial perspective is to balance the amount of non-core assets. Non-core assets are those resources which are not crucial or not utilised in the business. Non-core assets usually provide low returns which have uncertain value proposition. In order to balance the amount of non-core assets, Lloyds manages the commercial loan on a regular basis by committed workout unit. Lloyds also modernises the global presence in order to concentrate on the skills and the investment which enable the company to recognise the business prospects (Lloyds TSB Group plc, 2011). Measurement: The key performance indicators from financial perspectives are non-core assets and return on equity (Lloyds TSB Group plc, 2011). The other KPIs of financial perspective include, sales growth, Return on Capital Employed (ROCE) and cost reduction which are certainly quite complex and time consuming to be implemented on a continuous basis. Comparatively, the measurement of non-core assets can be termed as simple and important as it can help to identify the amount of idle assets and determine the resource efficiency of the bank thereby facilitating its ROCE and cost reduction attributes. Target: The target for Lloyds is to maintain return on equity in between 12.5% to 14.5% (Lloyds TSB Group plc, 2011). Internal Business Process Perspective Strategy: The strategy of internal business process is to simplify the business processes. Lloyds aims for reducing the expenses and saving the maximum amount of money on business operations by simplifying the processes. It undertakes end-to-end reforms of operational procedures comprising significant process of computerisation and a number of IT applications. It will help to enhance the customer satisfaction by acceleration of requests and decline of faults, complexities and expenses (Lloyds TSB Group plc, 2011). Measurement: The major KPIs from internal business process of Lloyds are ‘integration cost synergies’ and ‘cost income ratio’ (Lloyds TSB Group plc, 2011). In comparison to other KPIs, such as staff retention, stock turnover and product quality, cost synergy can be identified as a vital indicator for Lloyds as it can help to measure the internal efficiency of the bank in relation to saving the operational expenses of business. Target: The target for Lloyds is to save cost of almost 1.7 billion Pounds by 2014. Lloyds also targets to make cost income ratio in between 42 to 44% (Lloyds TSB Group plc, 2011). Organisational Learning Perspective Strategy: The strategy of Lloyds is to increase the involvement of employees in organisational decisions. Higher involvement leads to enhanced motivation and performance of employees. Highly motivated employees will simply provide great services to the customers and make Lloyds a better place for banking. The other strategy for organisational learning is recruitment and talent development. The objective of recruitment and developing talent is to reinforce succession planning which is vital for supporting strategic advantages (Lloyds TSB Group plc, 2011). Furthermore, as a part of learning strategy, Lloyds has launched career development program targeted at employees who attempt to accomplish senior management position. The program provides learning about barriers to progression, methods for overcoming them and ways to accomplish full potential in job (Lloyds TSB Group plc, 2011). Measurement: The key performance indicators from organisational learning perspectives are score of ‘Employee Engagement Index’ (EEI) and score of employee training (Lloyds TSB Group plc, 2011). EEI is vital for measuring performance from organisational learning as it can help to measure the involvement of employees which can further assist to drive the overall performance to betterment. Similarly, employee training score also acts as a significant indicator of performance as it also denotes the training duration of employees, hence their learning on organisational processes accumulating a percentage of the function performed by other KPIs such as ‘quality circles’ and ‘research and development pipeline’. Target: The target for the company is to make the employees more capable to satisfy the customers (Lloyds TSB Group plc, 2011). Analysis and Discussion The key performance indicators which can determine the BSC of Lloyds are described below: Financial Perspective Non-Core Assets: As the above figure denotes that performance of Lloyds has been increasing over the past two years in terms of non-core assets, it can be identified that the organisation has been able to attain greater profitability by appropriate allocation of resources. This further implies that the strategy considered by the organisation should be continued in order to preserve its efficiency in proper resource allocation which in turn can further enhance its performance on the whole. Return on Equity: As a consequence of repositioning strategy, the ROE of Lloyds has improved considerably from 2010 to 2011 (see appendix 2). The following figure will describe the performance on ROE of Lloyds: The above graph depicts profitability in term of ROE which has upward trend (Lloyds TSB Group plc, 2011). The implication of this approach on the organisational growth is quite profitable as it has been able to generate greater return from the investment made by the shareholders, which in turn facilitates the organisation to attain greater shareholders’ confidence. It ensures sustainability of the organisation. Internal Business Process Perspective Cost Saving: From the above graph, it can be observed that cost synergies has upward trend which states that the internal business process of Lloyds is quite effective as in recent years it is able to save considerable amount of money on its operations which has resulted in efficient operational process which is one of the key objectives of Lloyds (Lloyds TSB Group plc, 2011). The KPIs calculated above, in relation to financial perspective, depicts that Lloyds is aiming to improve its financial strengths with the simplification of its business procedures. The interim vision is thereby to compete effectively in the global market. Hence, Lloyds bank has maintained efficient financial performances, identifiable as its improved return on equity along with cost synergies. Cost Income Ratio: From a realistic perspective, Lloyds owns adequate cash savings. However, the company is targeting an additional cost saving of ?1.7 billion by leveraging its financial performance. For example, the stock price of the bank on 9th August 2012 was ?31.56 in ‘London Stock Exchange’ and US$1.95 in ‘New York Stock Exchange’ (Lloyds Banking Group, 2012). The other significant key performance indicator of Lloyds for measuring performance from internal business process perspective is cost income ratio (see appendix 4). It depicts the expenses in relation to the revenue of bank. The following figure will depict the finding of cost income ratio of Lloyds from 2009-2011: In terms of internal business, Lloyds bank is trying to increase the income over cost. From the above graph, it can be stated that cost income ratio of Lloyds had increased which denotes that the income of the company was low in comparison with cost. It can be said that the internal business performance in terms of controlling of costs is quite poor which consequently can affect on the objective of Lloyds (Lloyds TSB Group plc, 2011). The reason for such poor performance in cost income ratio is simplification and low risk taking behaviour. Organisational Learning Perspective Employee Engagement Index (EEI): Employee Engagement Index (EEI) is a vital performance indicator for measuring the organisational learning of Lloyds (see appendix 5). The following figure will show the EEI score of Lloyds from 2009 to 2011: From the above figure, it can be stated that the organisational learning perspective in terms of employee engagement has become weak in Lloyds. However, the company is taking measures to enhance the learning of employees in order to achieve its objective of higher employee engagement. Employee Training Rate: Employee training rate indicates the average learning experience of employees in Lloyds. The following figure shows employee training days in Lloyds in 2010 and 2011: The above graph depicts that number of employee training days has increased in Lloyds which can consequently have a positive effect on the efficiency of the employees while performing their assigned workplace objectives. Thus, it can positively effect on accomplishment of organisational objectives of Lloyds i.e. to gain high growth (Lloyds TSB Group plc, 2011). Customer Perspective Customer Complaints Rate: Customer complaints ratio is considered as a vital measurement of performance of Lloyds from the perspective of customers (see appendix 6). The following figure will show the customer complaints ratio of Lloyds from 2010 to 2011: From the above graph, it can be observed that organisational performance related to improving the banking services has improved which can effectively ensure customer satisfaction and retention which is one of the major objectives of Lloyds to become best bank in the UK. Customer Satisfaction Ratio: Customer satisfaction is the other key performance indicator for Lloyds which denotes the performance of the bank from customers’ perspective. The following figure will depict the customer satisfaction ratio of Lloyds from 2010 to 2011: The above figure denotes that Lloyds had achieved considerable success in satisfying the customers. The above finding indicates that the strategies of Lloyds had enhanced customers experience in banking. It can ensure loyalty of the customers towards the bank which can increase the probability of gaining better image as well as sustainable growth. Overall, the KPIs depicted in above diagrams denote that the performance of Lloyds has increased in terms of customer, financial, internal business and operational perspectives. With respect to the vision and objectives of Lloyds to become a great bank, preferred by people in the UK, the measurement of BSC depicts that the company has achieved good performance towards accomplishment of its goals. However, the BSC has highlighted the aspect that two KPIs i.e. Cost Income Ratio, and EEI demonstrated poor performance. Benefits of Introducing BSC into Lloyds Bank TSB Balanced Scorecard (BSC) is a procedural tool which is intended for assisting business to achieve the future progress, objectives and plans. The aim of BSC is to provide a medium for calculating performance which helps to determine whether an organisation has met or surpassed the goals. BSC provides a comprehensive assessment of the performance in an organisation (Balanced Scorecard Institute, 2012). BSC can provide significant benefits to Lloyds not only acting as an indicator of its performance efficiency, but also as a strategic administration system. BSC can help Lloyds to recognise the requirements of customers and its performance gaps to a considerable extent. For example, from customer satisfaction ratio of Lloyds, it can be stated that the bank has been quite successful in gratifying the requirements of customers by a considerable extent. BSC can also enable employees of Lloyds to understand the implemented approach and link the determined strategic goals with the regular business operations thereby augmenting their performances and commitment. For example, the measurement of EEI score of Lloyds bank depicts that employee commitment towards organisation has increased considerably. Furthermore, BSC can also simplify performance appraisal and feedback on a continuous basis, therefore recognising any pitfall in the performance. For example, the cost income ratio is a simple indicator which denotes that Lloyds bank needs to reduce the operational expenses in order to gain higher profit. Thus, in summary, it can be stated that BSC can help to meet the goals of Lloyds (i.e. to become one of the best banks in the UK and to compete effectively in certain relevant international markets) by delivering an insight on the critical drivers of performance which result in the overall achievement of the targeted objectives. Drawbacks of Introducing BSC into Lloyds Bank TSB Although BSC can provide significant advantages, it should be considered that the framework is not a method for fixing the gap pertaining in performances; rather, it can only assist in identifying the gaps. BSC method can also at times get biased in nature as it does not consider all drivers of performances. Besides, BSC cannot measure the performance of corporate social responsibility. The measurements metrics are also limitedly acknowledged in this technique. Hence, it can be attributed that BSC is easy to formulate but it is quite challenging to calculate the actual performance. For example, the increasing number of training days in organisational learning perspective cannot essentially mean that every training course will be effective for all employees owing to the fact that each employee have distinct strengths as well as weaknesses it their respective jobs (Zhang & Li, 2009). Similar drawbacks can also be identified in the case of Lloyds. For instance, in case of Lloyds, BSC can impose several drawbacks it terms of actual performance measurement. The BSC method is unable to consider the risk while analysing the financial performance. Furthermore, although BSC provides four perspectives, it might not demonstrate the entire picture of business performance for Lloyds. For instance, environmental issues might be important for the customers of Lloyds, but BSC cannot objectively measure the performance on environmental issues. Software Implementation of BSC BSC remained as one of the most stable and extensively used models for measuring performance over the past few years. Hence, there have been several applications developed for the implementation of the framework. It is in this context that the software application has assisted in understanding, sharing and revising the performance of Lloyds by a certain extent. Several software providers have been thereby offering numerous solutions to BSC which differ in terms of their efficiency and applicability such as ‘Oracle Balanced Scorecard’, ‘QPR Scorecard’, and ‘SEM Balanced Scorecard’ among others applications. Moreover, there are a number of BSC software providers such as IBM Cognos, Spider Strategies, Oracle Enterprise Manager and Nexus Open Software Ltd. among others (API BWMC Ltd, 2012). It has been observed that Lloyds had been in business relationship with IBM since the year 2004 when they formed an IT outsource related deal (Haley, 2004). Therefore, as IT software in order to work out the BSC, Lloyds can make use of IBM Cognos. It has been recognised that there are a number of versions of IBM Cognos which are quite affordable for Lloyds to implement in its business operations (IBM, 2012). There is more than 1000 corporate, retail as well as investment banks that are making use of IBM Cognos software as a solution for measuring the KPIs and improving the business performance. Moreover, a media & entertainment industry player such as Omnicom Group Inc. in the United States has also used IBM Cognos solution successfully. It is observed that these institutions trust the IBM Cognos software as a solution for their business operations (IBM, 2012). Thus, while selecting software for BSC, Lloyds should consider aspects such as scalability, flexibility, customisation, utility, mechanical specifications, information demonstrations, and assessment functionalities among other attributes. In this context, it can be stated that Oracle Balanced Scorecard is best suited for Lloyds as it can deliver an effective framework which systematises strategic thinking and performance assessment with minimum complexity (CIMA, 2005). Conclusion BSC is a pertinent method for evaluating the entire picture of a company in terms of performance. In order to enlarge the business, a company must be capable of understanding the different measures before making investment decisions. BSC helps in developing strategies and motivating employees to accomplish organisational objectives. In Lloyds, BSC has helped to reveal significant performance initiatives. It can be observed that the performance of Lloyds from the perspectives of BSC and the relative KPIs is moderate. From the findings it can be observed that Lloyds has efficiently performed its business operations in recent times which has considerably increased customer satisfaction and also raised its overall growth ratio. However, it needs to further improve upon certain performance related aspects for accomplishing its organisational objectives in a superior way. BSC of Lloyds has followed the comprehensive principles personalised to satisfy the certain business context. The BSC proves to be a crucial tool for Lloyds in order to recognise and drive value generation for the shareholders and customers. The BSC helps to understand that how Lloyds should transform the present business practices in order to enhance the productivity. Recommendations The success of any organisation relies on employees and its relationship with the customers. From the analysis, it can be observed that the EEI score of Lloyds had decreased from industry average which requires the company to take measures in order to enhance the commitment of the employees. In order to overcome this issue, Lloyds is already providing several professional development opportunities. It is recommended that Lloyds should enhance the talent base in the organisation and retain the best performers in order to drive the business towards success and ensure sustainable growth. It is evident that, Lloyds had experienced high cost income ratio which can impact on the performance. Thus, it is recommended that the company should invest more on innovation and reduce the amount of non-core assets. Lloyds should attempt to increase the market share of SME banking and corporate banking in order to gain higher income over expenses. Given the above advantages and drawbacks of BSC, it is vital to recognise that the tool can prove to be truly beneficial for Lloyds if it is completely incorporated into the business system. However, if Lloyds depends completely on the KPIs of BSC in order to measure the performance, it would probably result in dissatisfactory outcome as it is practically impossible to combine all the outcomes of KPIs. 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Appendices: KPI Formulas Appendix 1: Non-Core Assets of Lloyds TSB Bank Non-core Assets Year 2009 2010 2011 Amount (in billion Pounds) 236 194 141 Appendix 2: Formula of Return on Equity of Lloyds TSB Bank Year 2010 2011 Net Income 322.427 2847.04 Shareholder's Equity 46061 45920 Percentage 0.7 6.2 Appendix 3: Cost Synergies of Lloyds TSB Bank of Lloyds TSB Bank Cost Synergies Year 2009 2010 2011 Amount (in billion Pounds) 0.8 1.4 2.1 Appendix 4: Formula of Cost Income Ratio of Lloyds TSB Bank Year 2009 2010 2011 Operating Income 33024.79 28476.39 32306.16 Operating Expenses 15984 13270 16250 Cost Income Ratio 48.4 46.6 50.3 Appendix 5: Formula of Employee Engagement Index (EEI) Year 2009 2010 2011 Number of Satisfied Employees 74880 83200 54080 Total Employees 104000 Employee Engagement Index (EEI) (in Percentage) 72 80 52 Appendix 6: Formula of Customer Complaints Index of Lloyds TSB Bank Customer Complaints Year 2010 H1 2010 H2 2011 H1 2011 H2 Number of Complaints 2.4 2.1 1.7 1.5 Appendix 7: Customer Satisfaction Rate Year 2010 2011 Customer Satisfaction Rate (in Percentage) 38 44 Appendix 8: BSC and Key Performance Indicators (KPIs) of Lloyds TSB bank Perspectives Objectives Key Performance Indicators Customer Reduce the number of grievances and enhance customer relationship Customer Complaint Rate Customer Satisfaction Rate Financial Maintain better return on equity and reduce the amount of non-core assets Non-core Assets Return on Equity Internal Business Processes Save maximum amount of cost Integration Cost Synergies Cost Income Ratio Organisational Learning Enhance the capability of employees Employee Engagement Index Score of Employee Training Source: (Department of Defence, 2001) Read More