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INTRODUCTION
Banks are increasingly using return on equity as the ultimate performance scorecard. The adoption of risk-adjusted capital adequacy guidelines, successive years of poor profitability and the conceptual and practical failings of previously used measures, such as asset growth, have led management to focus on return on equity (ROE). They are measuring the ROE's of each of the bank's component parts, such as sectors, lines of business and products. This shareholder value-oriented framework has spawned considerable changes not only in the way that performance is measured, but in the management processes used to plan, operate and control the bank (see Appendix).
However, bank executives arc finding that measuring risk-adjusted return on equity, while important, is not the entire story. Just as their counterparts in manufacturing and process industries discovered, the ROE report card provides a summary level picture of which parts of the bank are contributing to - or detracting from - shareholder value. It does not provide information as to the "how's" or "why's" of performance, much as a thermometer provides little in the way of diagnosis. Moreover, it does not indicate progress in terms of the bank's strategic agenda. While the product of sophisticated analytical, allocation and reporting mechanisms, it alone is inadequate.
Therefore, adoption of a broader set of performance measurement indicators is required. The indicators are needed to provide a better sense of performance along strategic lines, as well as to show how drivers of value are affecting the institution. Other industries have led the charge. Our experience with banks suggests that they, too, are establishing institutionwide and line-of-business metrics that go beyond ROE to provide more insight into performance.
THE PROBLEMATIC MEASUREMENT FRAMEWORK
As astute observers of management have noted, it it's not measured, it's not delivered. But what should banks measure? Bank executives wrestle with this problem continually. Many end up blaming the management information systems for producing the wrong stuff. However, bank MIS produces either what is asked of it or, lacking guidance from policy makers, what is easiest to retrieve. Unfortunately, shooting the messenger (i.e., MIS) is simpler than taking the time and effort to define what is truly relevant information.
In fairness, bank strategies and objectives evolve over time, which can cause "disconnect" between required...