Chemical Bank: Implementing the Balanced Scorecard

In early 1995, Michael Hegarty, head of the Retail Bank Division of Chemical Banking Corporation, was overseeing a transformation in his organization. The process had begun with the merger of Chemical Bank and the Manufacturers Hanover Corporation at year-end 1991. The new, larger banking company was better-positioned to compete in a marketplace characterized by intense pricing competition, an outflow of deposits to mutual funds, rapidly evolving technology, and increased customer demand for value. Hegarty commented on just one indicator of the future competitive environment for retail banking:

At the time of the merger, the old Chemical Banking Corporation with assets of $75 billion, had a market capitalization of $2 billion. Less than four years later, Microsoft has offered to buy Intuit, a personal financial software company with $223 million in sales for $1.5 billion. What do you think Bill Gates is buying for all that money?

Historically retail banking had emphasized efficient collection and processing of deposits. Hegarty wanted to transform the bank into a market-focused organization that would be the financial service provider of choice to targeted customer groups. To implement this strategy, Hegarty knew that the bank had to make major investments to understand customer needs and to identify attractive customer segments. The bank also had to develop and tailor new products such as annuities, investment products, and technology-based payment services to meet customer needs in the targeted segments. With a broader product and service line, and excellent knowledge of its customer base, the bank would then be able to find ways to develop new relationships with its most desirable customers and expand the bank’s business with them—increasing its share of its customers’ financial transactions (or “share of wallet” as it was described in the bank). When asked how he expected to implement such dramatic and extensive strategic change, Hegarty said:

My biggest problem is communicating and reinforcing strategy. The Balanced Scorecard is one of a set of tools we are using—along with Mission and Vision Statements, Gap Analysis, Strategy Consensus, and Brand Positioning—for strategy formulation and communication. The Balanced Scorecard can’t win without a good mission statement and vision, an excellent strategy, and good execution. But it is certainly part of the architecture of success. It is an element in a major communications program to 15,000 individuals.

Norman Klein and Professor Robert S. Kaplan prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 1995 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 1

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Chemical Bank: Implementing the Balanced Scorecard

No one owns a process end-to-end (most do just a small snippet). But every individual should understand how they fit in—what their role is for helping the company achieve its strategy. The scorecard gives us the measures we need to stay focused on performance, while at the same time enabling us to clarify and communicate our vision, and focus our energies for change. The measurement allows learning, and the learning renews the vision and refuels our energy for change.

Retail Banking in the 1990s
Experts predicted that the 1990s would prove to be an intensely competitive decade in retail banking. In the past 10 years, the approximately 14,000 banks in the United States had shrunk to 10,000, and there were predictions of as few as 4,000 to 5,000 banks by early in the next century. Customers were demanding new investment and insurance products and far more convenient ways to do their banking. They were asking banks for new telephone options and for improved access to ATMs with enhanced functionality. These changes meant that branch personnel would be doing fewer deposit, withdrawal, and check-cashing transactions and would have to become more involved with higher-value interactions with customers, including sales of new products. But even with the move to higher-value services, banks anticipated operating fewer branches at the turn of the decade.

Research indicated that 61% of retail banking customers between the ages of 18 and 24 actively used ATMs, while only 27% of customers 55 to 64 did so. The trend lines were clear. The banks that would survive and prosper would be deploying superior technology, offering new products, and delivering service through new channels. Further, technology would be the key to new partnerships, especially with insurance companies and brokerage firms, and new strategies to identify, attract, and retain more profitable customers.

Ted Francavilla, managing director of Strategic Planning and Finance, noted that the traditional retail deposit business had become very tough. Revenue growth was slow due to lower interest rates and outflows of deposits to nonbanking service providers, such as mutual funds. Growth in core operating expenses and the need to invest in new delivery systems added to the challenge.

Francavilla noted:
Currently we have over $800 million in operating expenses and 8,000 employees in our New York Markets division. Landlords expect rental increases on their properties, and employees expect raises. These factors, coupled with low revenue growth, produce a real profitability squeeze for retail banking. We need to demonstrate to our corporate parent that we can earn good returns on the $800 million we spend each year and free up funds for investment in the future.

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Chemical Bank: Implementing the Balanced Scorecard

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In 1994, New York Markets was responsible for managing $27 billion in consumer and small business deposits, as well as over 300 branches, over 800 proprietary ATMs, a state-of-the-art telephone service center, and other related distribution channels. The division also acted as a distributor and referral source for Chemical’s mortgages, credit cards, home equity loans, and other consumer credit products, which were managed by Hegarty as national business lines. Mutual funds were also sold through a branch-based brokerage operation.

The New York Markets division had the number one market share among small commercial companies (under $1 million in sales) with a total of roughly 150,000 accounts. This represented a 24% market share in the metropolitan area. New York Markets also claimed a 16%-17% share of the consumer market, with 1.5 million customers holding approximately 3 million accounts. Net income of $15 million in 1993 was scheduled to double to about $30 million in 1994. Actual results for 1994 turned out much stronger, with pre-tax profits of nearly $200 million, due to a major product redesign based on a market segmentation approach, reductions in operating expenses after the merger, and effective deposit spread management in an improving interest rate environment. Exhibit 1 shows summary financial information for New York Markets division in 1993 and 1994. Exhibit 2 shows the organization chart of the Retail Bank.

Developing the Balanced Scorecard
Francavilla had been introduced to the BSC concept in mid-1992 while attending a one-week business school executive program. He had immediately sensed that the BSC insistence on clear specification of strategic objectives and appropriate measures in four areas—financial, customer, internal business, and learning and growth—would be a useful way to create change at Chemical Bank.

Francavilla asked Tony LoFrumento, vice president of Retail Bank Strategic Planning and Finance, to chair a middle-management task force to build a Balanced Scorecard for the New York Markets division. LoFrumento recalled the task force experience: The group worked hard and generated good ideas and analysis. But we soon realized that a mid-level group would find it difficult to push performance measures up to senior management. If the BSC was going to have an impact, Mike Hegarty had to be committed to the concept.

In May 1993, Hegarty attended a presentation about the BSC and was convinced that this approach could help create the cultural change he desired at the Retail Bank. Other senior managers at the bank, however, remained skeptical. David Norton, one of the co-authors of the initial BSC article, was brought in for a presentation to the senior management group. After the presentation, the group became committed to moving ahead with a Scorecard project.

Francavilla, as head of Strategic Planning and Finance, functioned as the internal champion for the BSC. LoFrumento led the day-to-day functioning of BSC activities, and Norton was retained for consulting support. They divided the senior management group into four sub-groups, each one responsible for developing objectives for one of the BSC perspectives. By October 1993, strategic objectives had been identified for each of the four BSC perspectives (see Exhibits 3A-3D). The subgroups, with assistance from lower-level managers, then developed measures for the objectives in their assigned BSC perspective. By the end of 1993, the entire group had reached consensus on a complete scorecard for the New York Markets division (see Exhibit 4). Francavilla noted that an immediate impact of the BSC project was to simplify the bank’s strategy statements:

Formerly, we communicated our strategy to the 8,000 people in the organization using the five dimensions on the left [see below]. We found we could boil it down to three core strategic themes which aligned well with three of the perspectives of the BSC. The scorecard focused our thinking in this way, and Mike [Hegarty] now communicates these three themes continually to all 8,000 people. It’s been branded into their minds so that they know that if they’re doing something that doesn’t fit into one of these three themes, they probably shouldn’t be doing it. And as we were building the scorecard, we found that we could relate each measure to one of those three themes.

Original Statements

Core Strategic Themes

Balanced Scorecard Perspective

Focus on Attractive Markets

Shift the Customer/Profit Mix

Customer

Improve Productivity

Internal

Create an Enabled Organization

Learning and Growth

Increase Fee Revenue
Improve Service Quality
Improve Operating Efficiency
Promote Continuous Learning
and Improvement

In addition to aligning the scorecard measures to the three strategic themes, the team developed causal links across the objectives and measures. For example, two of the financial objectives—Revenue Growth and Reduce Risk—were expected to be outcomes from the theme, Shift the Customer/Profit Mix. The BSC group linked the Revenue Growth and Reduce Risk outcome objectives back to objectives in, respectively, the Customer, Internal, and Learning and Growth perspectives that were the performance drivers of these outcomes (see Exhibit 5). This chain of cause and effect relationships illustrated that if the bank was to broaden and increase the set of financial products that retail customers transacted with the bank, then it must shift its image from a provider of a narrow set of banking services to becoming a financial advisor and service provider for targeted customer groups—an objective to increase customer confidence in our financial advice. This objective emerged from extensive consumer research that the bank had recently conducted.

This research had split Chemical’s customer base into five large segments based on their attitudes, behaviors, and other characteristics. The Chemical executives focused their scorecard objectives and measures, especially in the customer perspective, on meeting the expectations of customers in the top three segments. The scorecard objectives and measures provided focus on implementing effectively the new customer segmentation strategy. Having specified the link from financial objectives to customer objectives for the Broaden Revenue Mix objectives, the BSC team then linked to three of the internal objectives that its people must excel at if the bank were to create its new image as a broad provider of financial services:

Understand Customer Segments

Develop New Products

Cross-Sell the Product Line

These internal processes were now identified as vital to implementing the bank’s Broaden Revenue Mix strategy. Previously, performance measurement had focused on continuous improvement of existing processes like check processing and teller transactions. Thus the BSC process, starting from identifying financial and customer objectives, had highlighted several new internal processes for the organization to develop best-in-class delivery capabilities. The three internal perspective objectives led naturally to objectives in the Learning and Growth perspective. The bank’s customer representatives would have to expand their skills, so that they could serve as a customer’s financial counselor and communicate credibly and knowledgeably about an expanded set of financial products. The customer representatives also would need ready access to information on all the bank’s relationships with each customer.

The incentive system for the bank’s employees would also have to be changed to encourage the new behavior and skill acquisition. These three enablers—new skills, access to strategic information, and aligned incentives—would contribute to more capable and skilled employees who, in turn, would drive the internal process objectives. Each objective in the Retail Bank’s BSC was similarly linked in a series of cause-and-effect relationships that told the story of how the bank’s strategy would be accomplished. Francavilla commented on the benefits from establishing the linkages in BSC objectives and measures:

In the past, we found it hard to get and maintain focus on our infrastructure—things like MIS and employee training and skills. We talked about their importance, but when financial pressure was applied, these were among the first spending programs to go. Now with measures of Strategic Information Availability and Strategic Job Coverage on the BSC, people can see the linkages between improving these capabilities and achieving our long-term financial goals.

The BSC kept these issues front and center for the senior management group, so that a focus on these infrastructure investments could be sustained even in a highly constrained environment for corporate spending.

Lee Wilson, chief of staff for the Retail Bank, concurred with this view: The process has increased learning in the organization. Everybody agrees on the overall objectives, but it takes time to align 8,000 people and make appropriate infrastructure investments and commitments. If we stay the course, the BSC’s learning perspective will enable Chemical Bank to really deliver superior service sooner than other banks.

By the end of 1993, measures for each of the objectives had been selected and a senior manager had been designated for collecting the information and reporting on each measure. For example, the owner of the three measures under “Market & Sell” was Dave Mooney, manager of the Manhattan branch network, who reported to Jack Stack, the managing director of Sales & Service (see Exhibit 2). Mooney met frequently with branch marketing and selling managers and with Jack Stack to discuss progress along these three measures.

Impact of the Balanced Scorecard
Lee Wilson had not come to the bank until April 1994. While he had missed the 1993 process that led to the BSC, he could offer observations from his somewhat independent perspective: I see the BSC as a very valuable tool for the management team, but one that needs to keep evolving. To begin to appreciate the value of BSC at Chemical, you have to understand that its primary benefit was to pull together the two management teams. At Manufacturers Hanover, companywide policies had been handed down by a strong central staff. Chemical, on the other hand, relied on a more decentralized approach. Given the two cultures, there were inevitable tugs-of-war between them after the merger.

In early and mid-1993, the BSC meetings provided a mechanism for the senior people to focus on a common objective: devise a new strategy for the Retail Bank. Those meetings allowed people to come together and overcome their differences in assumptions and styles. A powerful shared sense emerged in these meetings about how the combined bank could capitalize on the potential from its new scale of operation. The BSC gave the senior executive group a positive perspective, focused on serving customers in a learning environment. Francavilla concurred, recalling the frustration of attempting to develop a consensus on strategy in 1992, shortly after the merger:

Everyone had agreed to the strategy: ”Provide superior service to targeted customers.” But we couldn’t agree on how to implement this strategy since everyone had a different opinion about what superior service really meant and who our targeted customers should be. The BSC process gave us specific and operational definitions of superior service and targeted customers.

But the glow of consensus-building gave way to frustration in late 1993 as work teams began to struggle with implementation. Several of the measures were difficult to obtain. People debated whether to use substitute measures or leave the measures blank until improved data systems could be developed.

Senior managers also noted that the BSC was quite visible only in the lives of 27 top-level managers in the Retail Bank. It was not yet being used to drive change throughout the organization. Some of the BSC themes had been communicated to employees through the monthly newsletter, News & Views (see Exhibit 6), and at the annual Branch Managers meeting. But the BSC had not been communicated to rank and file employees as a new management tool. LoFrumento explained: We got delayed by gaps in our measurement system.

We had most of the information on customer satisfaction and customer profitability, but we didn’t have the requisite data on customer share and retention by segment. The data for some of the new measures, like Strategic Job Coverage and Strategic Resource Alignment, did not exist at all and had to be created and developed by the responsible department. Even when we had some data, such as the mix of transactions in different channels, we had problems bringing together the information from diverse systems. As a result, we haven’t built a credible base yet. The measures are just now on board. The tracking has just begun.

Wilson felt that some of the BSC measures were not critical for customer satisfaction goals, nor actionable. He explained: We have an internal measure called “Trailway to Trolls” [Trolls are unhappy customers]. This index aggregates over a hundred different measures of customer complaints and degrees of dissatisfaction, but it isn’t actionable. If the Trailway to Troll Index starts to deteriorate, I don’t know if it’s been caused by performance that valued customers consider critical, or whether it’s a minor matter. When it was first developed, it was quite valuable in focusing management’s attention on service quality. But we can’t do quality for quality’s sake. We need to focus on those dimensions most critical for meeting or exceeding customer expectations of service quality. And to do that we need measures that are actionable.

Measuring Customer Profitability
William Jordan, managing director, had market management responsibility for the consumer and small business activities in New York Markets. When asked for his perspective on the BSC, he immediately voiced his support and expressed, in strategic terms, the fundamental importance of BSC :

We tend to focus on the short term and the month-by-month financials. This makes us excellent at tactics, but sometimes we find it difficult to think strategically about where we should be three to five years out. The Balanced Scorecard provided a forum for senior management to have active discussions about both the present performance and future targets we must achieve. I like the way it forced us to think about revenue opportunity and potential, and how we should measure our progress down the path that will insure our future.

The BSC reinforces the need for a new focus on the customer, especially the need to get to a more profitable mix of customers, and to retain and deepen our relationship with our best customers.
Jordan for years had believed that most of the Retail Bank’s small business accounts were profitable. Recently an activity-based cost study had matched “costs to serve” with “revenues earned” down to individual customers. The study showed that only 55% of small-business accounts were profitable on a fully loaded basis. This information prompted Jordan to launch several new initiatives to enhance small-business customer profitability. He wanted to know the defining characteristics of profitable and unprofitable customers so that he could begin thinking about how unprofitable accounts could be made profitable by changing earnings credit, or minimum balance, or perhaps introducing fees and better control over fee waivers. Jordan, however, emphasized:

Although we have raised our consciousness about strategic measures, the measures are not yet integrated. For 1995, I would like the BSC teams to identify a number of top-of-mind measures, perhaps as few as two or three, that reflect our strategic themes and priorities. I want to see a graphical presentation of the BSC that gives us a five-year view of the journey, and to be able to view short-term performance in terms of progress towards our five-year targets.

Taking Sales Measures to the Branches
Dave Mooney was implementing one of the first BSC measures—”Selling Contacts per Salesperson”—in the Manhattan branches. He recalled his first impressions of the BSC: I remember thinking, as we were going through it, how valuable the process was. It forced us to specify and understand the simple causal linkages from highlevel financial objectives to operational measures. The BSC was well accepted because it was very consistent with our management philosophy to focus on activities, process, and components that, according to our theory of linkages, must be accomplished to produce the outcomes we desire.

But as simple as that sounds, we weren’t working the fundamental processes. Like most other banks, we had been managing by hammering on outcomes. We kept telling people, “Get more deposits”!
In the summer of 1993, we started to focus on a measure at the beginning of the causal chain—how to make more sales contacts with customers. We now realized that a necessary condition to produce new sales was for our salespeople to have more customer contacts. So my first step was to ask for 10 completed contacts per sales person every week. The sales people responded, ‘We can’t do that. We’re too busy.’ But we dug in and told them that we were serious about this objective. Selling was no longer to be an optional or discretionary activity, to be done if time allowed. Selling must become something that you find time to do.

Mooney emphasized the importance of taking hold and managing the problem at that point. “There is an important lesson here,” he said. “Measures don’t manage. The BSC gave us an engine, but it was management that had to put the vehicle in motion.” Mooney was asked why the Balanced Scorecard was required to encourage sales people to do more selling. He replied: A lot of ideas were converging at the same time. We were just putting into place a more formal, highly structured customer-calling process that produced the customer-contact measure. But then this measure had to survive a highly competitive debate that the senior management team put all prospective measures through to create the BSC. My confidence increased about the importance of that measure and of the selling activity. The great value of the BSC was that it articulated the key levers of performance and reduced these to a few important drivers.

He recalled that implementation became easier when the first results of increasing sales contacts with customers were known: 1/2

We started to see phenomenal results, 2 to 3 product sales for every 10 contacts. That helped. But there was something else going on as well. People learned that the senior executives at the bank were not going to stop caring about this measure. The four or five people who ran the branch districts knew I was going to have to report out on the measure to Jack Stack and Mike Hegarty. That’s one of the powerful features of the BSC: it’s both motivating and obligating. The BSC forced us to stay on track and to follow up.

Looking Ahead
When asked to assess the current status of BSC, Francavilla stressed that the work was well under way but nowhere near complete.
The Scorecard has been very useful in helping us better understand the key drivers of our business. Our monthly financial review meetings have now become strategic review sessions with some excellent learning and idea generation. But the BSC is still a senior- and middle-management tool, a work in progress that we are not yet ready to introduce to the entire organization. If you were to walk into any branch in Manhattan today and ask how things are going with the BSC, they wouldn’t know what you’re talking about.

He and LoFrumento were intent on refining the BSC for 1995, hoping to identify fewer and better measures. They continued to live with the frustration of finding that certain measures were harder to get than they had anticipated. In 1994, they had contracted with an outside vendor to track customer retention data. After months of reported “progress,” the vendor finally admitted that it could not deliver the data. The implementation team had therefore assigned this task to an in-house expert.

At the same time, LoFrumento felt that they had come a long way: There’s a lot we know we have to do, things like being able to track customer acquisition and retention. But we’re probably ahead of the competition. Most banks are working with aggregate bottom-line information. They may know that 20% of their customers are generating most of their profits, but they don’t know who those customers are. They are still living in a world where a marketing program would be hailed as a success for bringing 10,000 checking accounts into a bank—and the bank would never know that 9,000 of those accounts were going to lose money. We are well beyond that point. We now have three million accounts in our data base, and we can do any number of cross cuts on those accounts. We can look at deposits, credit cards, and very soon loans, and know just how profitable each account and each customer is.

Francavilla added that knowledge of customer segments and customer profitability was already driving the pricing of some products, and was allowing the bank to be far more sophisticated in designing new products and marketing programs.

In summing up, Francavilla said that there was more to be done on the infrastructure. “We’ve just scratched the surface on the power of Lotus Notes, for instance. Not just for E-mail but the database side,” he said. “And, of course, BSC itself is a tool that we will apply increasingly more rigorously as it improves.” Then he went on to describe a future that would find performance goals, and performance reviews, aligned to the BSC. And once that happened he and LoFrumento expected that results would follow.

Lee Wilson concurred that for the BSC to truly drive behavior, it would be necessary to link both senior executive compensation as well as other major compensation programs to scorecard measures.

In 1994, the size of the compensation pool for New York Markets was tied to financial measures and BSC measures, such as customer satisfaction and customer retention. In 1995, we are making linkages much more explicit between BSC measures and the compensation to Top-20 executives.

The senior executives also wanted to align branch sales and service personnel with the BSC customer objectives. Starting in 1995, they modified the compensation program for these managers to include specific, tangible measures of satisfaction and retention for valued customers in the three targeted segments.

Lee Wilson commented on the early success from the segmentation strategy. The key to our financial success was retaining a very high percentage of our most profitable customers despite closing more than 100 bank branches in the New York metropolitan area.

Mike Hegarty summarized his views on the BSC:
I like the BSC because it is both a forward-thinking tool and one that will supply the measures that will drive improved performance in our branches. And while BSC is not promoted in the branches under the name “BSC,” it is visible in the branches. For example, if an ATM at a given branch isn’t serviced, a computerized monitoring system will make a phone call to a branch manager and tell her that ATM #3 will go down in 10 minutes. And if a branch manager should, say, decide to let three ATMs go down, the computer will call Dave Mooney and give him a status report.

The team that made that kind of monitoring possible understands how that all fits with BSC, but the branch manager probably doesn’t think of it that way. The 2,000 tellers in our branches will be able to tell you the dozens of things we are tracking—from customer satisfaction data to cleanliness in the ATM areas—but they won’t know it by the name BSC.

By the end of the year, branch managers will not only tell you what we are tracking but also tell you how they are performing on key measures. They will know, because they will be evaluated on how they perform on designated measures. We will even have bonuses determined by multiple measures that are weighted by revenue contribution to the bank.

I’m not saying we have done it all. One major problem right now is that I have no idea how good my sales force is. That evaluation is not happening. We’re also just beginning to rethink training, and we will have to find new measures to evaluate that training. But again, that’s the virtue of the BSC. It is a tool that can get us to new goals and measures, and then to a process that will take us beyond those measures.

We always had communication. That part isn’t new. But the communication was by anecdotes, and not a basis for setting priorities for programs or for resource allocation. The BSC came along in the resource-constrained environment of the 1990s, where excellence in revenue, expense, and investment management would be decisive. The BSC will help us to take the “noise” out of the anecdotes, it will tell us whether we have the right priorities for our activities and whether our activities are in synch with our strategy.

And finally, it provides us with feedback on our strategies, whether they are working and whether we have set our targets high enough. The scorecard is helping us all to learn and to enable change.

Exhibit 1

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New York Markets

INCOME STATEMENT ITEMS ($ millions)

Actual
1993

Actual
1994

Net interest income
Total noninterest income
Total revenue

$691.3
205.7
$897.0

$801.9
239.7
$1,041.6

Noninterest Expense:
Total salaries and benefits
Occupancy and equipment
FDIC
Other
Total direct expense
Total indirect expense
Total noninterest expense
Operating margin
Provision for loan loss
INCOME BEFORE TAXES
Income taxes
Net income

$345.7
173.1
73.0
103.2
$695.0
172.9
$867.9
$29.1
2.9
$26.2
11.5
$ 14.7

$339.4
176.4
61.8
115.6
$693.2
150.9
$ 844.1
$ 197.5
2.1
$ 195.4
86.0
$ 109.4

Average Gross Deposits ($ billions)
Consumer
Commercial
Total NY Markets

$ 24.1
4.3
$ 28.4

$22.8
4.3
$ 27.1

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This document is authorized for use only in Understanding Financial Information for Decision Making by Dr. Bala V Balachandran from March 2012 to September 2012.

Retail
RetailCard
CardServices
Services
C.C.Walsh
Walsh

National
NationalConsumer
Consumer
Business
BusinessGroup
Group
T.T.Jacob
Jacob

Exhibit 2 xxx Retail Bank, August 1994

• Retirement Investment
& Currency Service

• Branch Operations
• Quality Assurance
• Commercial/Consumer
Credit

• Marketing Services
• Distribution Planning
• Deposit Product
Management
• Electronic Banking

• Operations

• Programming

• Telephone Center
• Sales Management

• Systems

Systems
Systems&&
Operations
Operations
C.C.Morales
Morales

• Branches

Sales
Sales&&Service
Service
J.J.Stack
Stack

• Commercial Market
Management

• Consumer Market
Management

Market
Market
Development
Development
W.
W.Jordan
Jordan

New York Markets

Retail
RetailBanking
Banking
M.
M.Hegarty
Hegarty

RB
RBStaff
StaffSupport
Support
L.L.Wilson
Wilson

Community
Community
Development
Development
C.C.Parry
Parry

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-12-

Exhibit 3A

Strategic Financial Objectives for BSC

FINANCIAL (SHAREHOLDER)
A. Improve Return on Spending:

Return on spending reflects our ability to create wealth with the Corporation’s funds. ROS is the appropriate objective because the business is assigned a low level of capital by the Corporation due to its low credit risk. ROS will align our expense outlays with the revenue generated. By aligning our spending with high value and high return activities, we will increase the return we achieve on dollars spent.

B. Reduce Costs:
By becoming more streamlined and efficient, we will focus resources and help to achieve acceptable profitability over the 3-5 year span. We will accomplish this by eliminating expenses that do not lead to revenue generation, by improving productivity, and by streamlining and redesigning key business processes

C. Increase Revenues:
To achieve our financial vision, we need to grow our revenue streams. We need to redefine our core businesses and increase the number of valuable customers. We will achieve this by retaining and acquiring valuable customers, and broadening valuable customer relationships through the cross-sell of existing products and the sale of new products. D. Reduce Risk:

We plan to move away from a dependence on net interest income by broadening and selling our portfolio of fee-based products to cover a greater portion of our expense base. Changing our mix toward more fee-based business will cushion Chemical from the risks of the interest rate cycle.

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Chemical Bank: Implementing the Balanced Scorecard

Exhibit 3B

Strategic Customer Objectives for BSC

II. CUSTOMER
Differentiators
Offer customized value propositions to targeted customer segments: i.

Define propositions that different customers value

ii. Understand the economics of fulfilling various propositions iii. Target those customers whose value propositions can be fulfilled profitably Differentiate ourselves through employees capable of recognizing customer needs and possessing the knowledge to proactively satisfy them:

A greater knowledge of Chemical’s product and service offerings will help our customers better fulfill their banking needs. This knowledge, along with crossselling, consultative skills, and a supporting operating structure will satisfy a greater proportion of our customer’s financial needs.

Give customers access to banking services or information 24 hours a day, consistent with the appropriate value proposition for the segment they represent. Essentials
Perform consistently and seamlessly in the eyes of the customer Service customers expediently: the timeliness of the response should meet or exceed the customer’s perceived sense of urgency
Eliminate mistakes in all customer service encounters

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Chemical Bank: Implementing the Balanced Scorecard

Exhibit 3C

III.

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Strategic Internal Objectives for BSC

INTERNAL
A. Innovation
1.

Make the Market
Identify the needs of customer segments who represent high current profitability and their underlying economic potential. Understand the risk of each and how Chemical Bank can sustain differentiation with these target customers in the market by exploiting its key competencies.

Create the Product
Create profitable, innovative financial service products which are among the first to market, easy to use, and convenient to our targeted customers, yielding perceived superior value by the customer, and cost effective for Chemical Bank.

B. Delivery
1.

Market and Sell
Cross-sell our products and services through organized, knowledgeable, consultative and proactive employees. We must listen to our customers, proactively educate them about our products and communicate to them how our products can meet their financial needs. To perform these activities, our salespeople must have a high level of systematic and regular contact with our customers and employ professional sales management practices.

Distribute and Service
Achieve service excellence based on our people and systems providing customers with the best reliability/availability, responsiveness, and no defects/errors. Quality delivery of our products and services is not an area of differentiation, but it is critical to our survival. Service excellence is the key to maintaining existing relationships and prerequisite to entering the battle for new customers. Without excellent performance on the “hygiene factors,” we cannot move off square one.

15
This document is authorized for use only in Understanding Financial Information for Decision Making by Dr. Bala V Balachandran from March 2012 to September 2012.

IV. LEARNING AND GROWTH
Strategic Information Assets
The ability to extract, manipulate, and use information holds the key to competitive advantage in our industry. First, we must recognize, harvest, and disseminate the considerable amount of information we have today. Second, business units and decision makers need to understand what and how much data are required to make a decision with a reasonably high degree of confidence. Third, we must improve the utility, access, ease of use and timeliness of information.

Reskilling: Strategic Jobs and Competencies
Build our marketing, sales, and customer service competencies to accomplish our aggressive revenue generation targets. First, our people need the competency to cross-sell our products and services. This demands a customer-focused orientation, the ability to recognize customer needs, the initiative to proactively solicit business, and superior consultative selling skills. Second, our people need a broader knowledge of our product portfolio and financial markets to support their crossselling activities. Accountability and Reward Linkage

Performance management systems are the pivotal points used to communicate, motivate, and reward employees for behavior that supports the Balanced Scorecard business objectives. We will align incentive plans to BSC business objectives to encourage behavior toward our business vision.

Focus Our Resources
We will focus our resources to align our capital, expense, and personnel decisions with strategic priorities. Allocating resources where the return is the highest, setting priorities on competing expenditures based on that criterion, and remaining focused will enable us to operate more predictably and profitably.

This document is authorized for use only in Understanding Financial Information for Decision Making by Dr. Bala V Balachandran from March 2012 to September 2012.

This document is authorized for use only in Understanding Financial Information for Decision Making by Dr. Bala V Balachandran from March 2012 to September 2012.

Exhibit 5 xxx Strategic Objectives for Revenue Growth Strategy

195-210

This document is authorized for use only in Understanding Financial Information for Decision Making by Dr. Bala V Balachandran from March 2012 to September 2012.

Retail Bank News and Views (Fall 1994)

Customer Focus (page 3, excerpts)
Segmentation: A Way To Get To Know Our Customers Better
Consumer Market Management recently completed analysis of the files of all 1.2 million deposit households of the Retail Bank and has assigned each household two scores: one indicating current relationship profitability and the second indicating the customer’s Financial Personality segment—a strong indicator of potential profitability. The availability of this information is critical progress towards putting segmentation data into action.

Shifting the Customer/Profit Mix in New York Markets
One of our strategic goals is to increase the number of profitable customers. There are two related ways to develop and maintain a more profitable customer base. One is to provide exceptional service with targeted offerings to those customers who are currently highly profitable in order to strengthen the relationship and retain them longer. The other is to encourage customers who are most likely to become profitable to do more business with Chemical. The profit scores and segment codes can help us achieve these ends by helping us identify those customers. The Segment Coding Process

The data gathering process began with a comprehensive study involving 2,000 customers and non-customers who were asked over 200 questions about how they handled money, their attitudes toward banks, and many other subjects. This initial study resulted in the identification of five financial segments. After establishing the Financial Segmentation framework, Consumer Market Management administered a much shorter questionnaire to more than 25,000 customers. Measuring Customer Profitability

In addition to the segment codes which have been assigned to all retail deposit customers, actual profitability scores were assigned to customers of record as of December 1993. The profit score incorporates both the revenues and expenses associated with deposits, consumer and shelter loans, and revolving products for each individual household. There are four profitability levels: Premier: the most profitable customers.

High: profitable because the revenues from fees and spreads more than cover the costs of the products and services we provide them.

Medium the bulk of our customers yield a small profit on the products and services we provide them.

Low:

generate little or no profit for the Retail Bank. In many cases, the revenues generated by their accounts do not cover the
costs of providing the services.

How We Will Utilize This Information
During the first quarter of 1995, profitability and segment information will be available online. With information provided in a workbook, a video, and an interactive training disk, branch staff will be able to improve their sales efforts by customer segment and profit score. The ability to identify the most profitable customers for superior service will be made possible with this information. This should ultimately result in more business from our most profitable customers and more profitability for the Bank.