Implementation of Balanced Scorecard by Citibank - Essay Example

? Case study: Implementation of Balanced Scorecard by Citibank Citibank’s division in California has introduced a performance scorecard to underscore the significance of a range of measures set with the objective of achieving the strategic goal of the division. This paper examines the varied theoretical lenses provided by economics, psychology and sociology that are effective in the understanding the issues I expect the bank to observe during the implementation of the balanced scorecard. Next, it examines how effective the balanced scorecard is in helping Citibank achieve its organizational culture change after which it offers some objective recommendations. It further evaluates the degree in which an individual scorecard is aligned with Citibank’s strategic objective (Holmstrom 1979). Part I Implementation of Balanced Scorecard by Citibank The effective implementation of balanced scorecard calls for an effective control system that incorporates values, measures as well as other valuable measures that contribute to an organization’s overall wellbeing (Meyer 2003). By drawing upon sociological, psychological and economics studies on the selection and implementation of a balanced scorecard by Citibank, several exploratory hypotheses on the weights placed on the different types of performance measures offer a guide into how the scorecard can be effectively implemented in the company (Grant 2008). Economics Economics-based agency models underscore the significance of performance measure in align the goals of the agent with those of the principal. Economic-based models harness the use of traditional financial measures to evaluate whether the company’s strategy contributes to the bottom-line progress of the company. These models therefore attempt to examine the outcome from the strategy, and to translate the success of the strategy in financial terms. Citibank should select performance measures while reflecting on their real purposes and overall effect (Grant 2008). In addition, they should indicate that the selection of the performance metric in incentive contracts should be a feature of the incremental information content for each measure with regard to an employee’s action choices (Christensen & Demski 2003). Citibank should exploit the full potential of the balancing score card in tracking the short-term financial results while at the same time tracking its progress in developing capacities and acquisition of the intangible assets that promote the growth of future financial performance (Kaplan & Norton, 1996). At this stage, Citibank should consider the three possible stages in which to consider the financial measures to evaluate, namely rapid growth phase, sustain phase and harvest phase(Kaplan & Norton 1996). In the growth stage, I expect Citibank to evaluate increase in customer base, revenue surge or increase in sales. At the sustain stage, the bank should come up with measures that can effectively evaluate its overall performance, in which case it should consider financial measures like return on capital employed or return on investments (ROI). In the harvest phase, Citibank should probably come up with effective cash flow analysis to appraise its success in harvesting profits from established services or products(Christensen & Demski 2003). In brief, economics-based agency models concentrate on the significance placed on encouraging congruence between the agent and the principal’s goal (Pfeffer 1998). Psychology Psychology-based models study how the type of information applied in assessing performance is influenced by decision strategies and human-information processing capacities. Usually, they tend to deviate from the balanced choice models in economics and inquire much into how limitations of human-information processing and decision-making strategy affect the use of performance measures. Citibank should examine how its employee’s information processing abilities and their strategies for making decision affect the types of information each individual employee uses in assessment of performance (Meyer 2003). This is because issues of cognitive biases or cases of information overload can be substantially instrumental in determining the relative weights or significance on the varied forms of balanced scorecard measures. Kaplan and Norton (1996) posit that a balanced scorecard should deliver a subjective reward system (Kerr 1995). In which case, the bank should consult the views and opinions of the branch managers and other employees on the sensitive areas of individual concern to make sure that the objectivism and the subjectivism in the scorecard is balanced (Gibbs 2004). Overall, the employees’ information processing capabilities and the strategies they employ in making decision affect the types of information each individual employee uses in assessment of performance. Such capabilities and strategies have to be examined and aligned with the objectives of the balanced scorecard (Christensen & Demski 2003). Sociology Sociological perspectives, also called institutional, examine nature of performance measurement as well as how its features inform the manner in which it should be effectively applied into use. This dialectical perspective hypothesizes that for the change to become effectively institutionalized in the organization, it has to overcome the problems already entrenched in the agency. In the case of Citibank, the implementation of the balanced scorecard should be motivated by the organizational contradictions such as efficiency gaps, technical efficiencies, non-adaptability. In fact, Seo and Creed (2002) postulate that for the balanced scorecard to be effective, it has to be motivated by the institutional contradictions but not by legitimacy reasons. The concept of contradiction explains how the embedded agents might emerge to challenge, or subsequently attempt to overhaul or counter the changes introduced by the balanced scorecard. Citibank should create conditions for institutional change by identifying potential conflicting areas such as misaligned areas, non-adaptability, institutional incapacities or technical inefficiency, which should be dealt with before the balanced scorecard is introduced. For instance, the employees need to recognise the need to change, and consequently, apply the ideas into practice by human praxis. This would make the balanced scorecard much adaptable (Seo and Creed 2002). To summarise, the sociological approach helps to detect possible discrepancies that may be the source of institutional contradictions once the balanced scorecard is implemented. Even if Citibank implements the balanced scorecard to improve efficiency, the scorecard may become suboptimal if solutions to the institutional contradictions are not solved. Part II Effectiveness of Balanced Scorecard in helping Citibank Achieve Culture Change Balanced scorecard is a performance measurement system that integrates the application of financial and non-financial indicators. Citibank executives have introduced new performance scorecard mainly to align the organization’s strategy towards customer satisfaction. The exclusive focus is to build a long-term performance, sustainable growth and customer satisfaction. Organizational performance Reward system: The performance measures should embody a balance between external performance measures with regard to the customers, and the internal measures of the critical success of the business, employees and growth. In the case of Citibank, it is impossible to conclude that the new performance scorecard was effective. Citibank’s new performance scorecard served as an innovative reward system to trigger a shift from an organization that was financial-result-focused to one that was customer-relationship focused. Prior to its implementation, Citibank executives postulated that a high level of customer service would ensure high financial performance. However, the performance scorecard faced some challenges in this objective as the established culture was deeply embedded in the organization. In addition, as a reward system, it became highly controversial as it compromised some organizational goals thus raising a number of conflicts, such as the potential of the workers losing motivation and possible spiraling on how they handled customers. Motivation: Consequently, Citibank’s new performance scorcard instead demoralised the workforce, an area of concern Citibank California president Frits Seeger seems to have lately reflected on. For instance, James McGaran, who was the manager of the most influential division of Citibank and who had reliably delivered impressive results failed to score to his expectations as he scored “below par” on customer satisfaction. In fact, it elicited a dilemmatic situation where the supervisors such as Frits Seeger and Lisa Johnson wondered what total performance rating to offer him. Ittner and Larcker (2003) advise that companies that implement boilerplate variants of the nonfinancial measurement structures like Kaplan and Norton's Balanced Scorecard should identify the cause and effect relationship between the desired outcomes and measurements. From this perspective, the balanced scorecard failed to help Citibank achieve its goal of organizational culture change from the basis that the bank made a mistake of failing to link measures to strategy. Indeed, it can be criticized for having had the potential to demoralize workers. Punishment: According to Kaplan and Norton (1998), a balanced scorecard should be applied as communication, informing, and learning system, and not as a controlling system. Citibank seems to have instead used it as a controlling system to ensure that the company improved the overall customer experience. For instance, since customer satisfaction comprised items including ATM and online banking experiences that may be out of the manager’s control, it could not be appropriate to measure individuals’ performance. With this regard, James discussed these concerns with his supervisor, from where he complained that customers rated services from their branch as well as that of other branches. It can be argued that James viewed the new performance scorecard as a controlling measure bent on punishing misperformance (Ittner and Larcker 2003). In summary, the the individual performance scorecards will be effective in causing organizational culture change when it exemplifies a balance between external performance measures and the internal measures. Planned Targets From the outset, Citibank’s Performance Scorecard was intended to build a more customer-oriented organisational culture. However, the bank appears to have failed to validate the linkages of the cause and effect relationship after developing the causal model, which contributed to the failure of the balanced scorecard to effectively effect the culture change. This triggered off institutional discrepancies, such as misaligned areas, non-adaptability, institutional incapacities or technical inefficiency, that were the source of institutional contradictions (Seo and Creed 2002). For instance, though James did not view customer satisfaction as a primary element that should prefigure his performance rating, Frits, who was the president of Citibank in California, was convinced that the indicator was vital if the company had to meet the high expectations of the clients as to achieve strategic goals of the decision such as sustained competitiveness (McLean 2005). Exceptional nonfinancial performances such as customer satisfaction do not always translate into exceptional financial performance (Ittner & Larcker 2003). While implementing the balanced scorecard, Citibank failed to set the proper performance targets, which faulted its capability to execute culture change. Recommendations Citibank’s case study presents an opportunity of analysis to come up with an effective balanced scorecard. Some specific recommendations include: To overcome the aforementioned inadequacies, Citibank should have formulated a causal model that is based on the hypothesis in its strategic plan, which should serve as a roadmap and not a vision or mission statement of the company. Citibank should in addition constantly review the model to give the company a thorough understanding of what really causes economic performance, as under each proven drivers of the performance drivers of those drivers exist (Kaplan & Norton 1996). Citibank should also base its actions on its findings if the balance scorecard has to be effective. For instance, it should allocate attention and capital based on the relative importance of different drivers after it establishes the cause and effect linkages in its causal model. In conclusion, Citibank’s case study shows that the nonfinancial performance system had almost become an alternative for financial performance. To be more assertive in helping the bank to achieve its culture change objectives, these systems should be based more on refined qualitative and quantitative methods and less on generic performance measurement frameworks. Part III The extent the individual scorecard is aligned with Citibank’s strategic objective Failures To a considerable extent, the implementation of the performance card in Citibank California was a case of unsuccessful change as it was not aligned with the strategic objective of building a profitable franchise by offering relationship banking along with “a high level of service to its customers.”The assumption is supported by some dialectical concepts of institutional contradictions. First, it was decoupled from the company’s other objectives such as having a fully motivated team, meaning it was not fully institutionalised in the organisation. Proponents of a balanced score card postulate that the implementation of an individual scorecard should strengthen the company’s sum total strategies as well as align resources, including human and capital with the strategic objectives (Crabtree and DeBusk, 2008). In addition, though Citibank developed the performance scorecard in response to the deficiencies in customer service, the exclusive focus on the custom satisfaction indicator put the company’s long-term performance at risk. Sundin et al. (2010) argue that since balanced scorecard was developed to counter deficiencies of relying solely on financial measures, the exclusive focus on either nonfinancial measures of financial measures have the potential to lead managers to make short-term decisions which have the capacity to threaten long-term performances, satisfaction of employees or shareholders, and the sustainable growth of the company. The individual scorecard seemed to have been ill prepared and inconsistent with the overall strategies of the business. For instance, it seemed biased towards the dimension that directly supported the company’s strategic direction and not that of its internal organs such as the motivation or the feelings of the individual workers (Kim, T & Leung 2007). For example, the company failed to perceive how the individual scorecard would have on its employees and the conditions that each branch faced. James was an exemplary worker who seemed dedicated to the strategic objective of the company, however, he was the manager of the most difficult branch that had customers with ever-increasing expectations (Sanchez-Runde & Steers 2003) (Deter et al. 2000). It can also be argued that the individual scorecard failed to align with Citibank’s strategic objective as it seemed to have been bent on decomposing the company’s key objectives -- particularly the financial perspective -- into the internal process and growth objectives in a manner that was suggestive of the way in which the return on capital applied the performance measurements in the leading operational measures (Deter et al. 2000). Triumphs The implementation of the performance card in Citibank California could be argued to have been successful aligning with this strategic objective of building a profitable franchise by offering relationship banking along with “a high level of service to its customers.” First, it was effective in evaluating the social, financial and psychological health of the branch and how it is congruent with Citibank’s objectives for California. James’ performance evaluations have exceeded expectation each year. In addition, he had delivered impressive financial statistics in his annual reviews. However, when Citibank implemented the performance scorecard for measuring nonfinancial statistics for each of its countrywide branches, his performance was sub-par. Consequentially, this prompted the need to improve the customer service department. The individual scorecard was helpful in adequately addressing numerous aspects expected to directly affect the success of Citibank’s goals, even as the measures did not directly reflect some aspects within the control of the branch manager. For instance, it is through the nonfinancial sections that the bank found that some sections have deficiencies that needed to be addressed. In the areas of individual performance, the balance scorecard was effective in informing individual employees of areas of weakness, which they had to work on to improve the overall objectives of the organisation. It is after the introduction of the performance card that reflected Citibank’s widening of assessment scope to customer’s satisfaction score, that it became obvious to James that this was basically the area where his performance was deficient. This implies the individual scorecard was effective in meeting the goals of the company (Gerhart 2009). In conclusion, though the individual scorecard made some, a major reason for its failure in Citibank was the fact that it was not motivated by the accumulation of institutional contradictions, meaning human praxis was not conferred with to introduce the performance scorecard in the organization (Merchant & Van der Stede 2007). References Christensen, J. & Demski, J 2003, Accounting Theory: An Information Content Perspective, New York, McGraw Hill-Irwin. Crabtree, A & DeBusk, G 2008, The effects of adopting the Balanced Scorecard on shareholder returns, Advances in Accounting, 24 (1):8-15. Deter, J, Scroeder, R. & Mauriel, J 2000, A framework for linking culture and improvement initiatives in organizations. Academy of Management Review, 25(4) 850-863. Gerhart, B, Rynes, S, & Smithey Fulmer, I 2009, Pay and performance: Individuals, groups, and executives. Academy of Management Annals, 3(1), 251-315. 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