Confronted with a tough economic and regulatory environment, community banks are seeking ways to improve profitability and efficiency. With limited prospects for growth, there is a heighted focus on expense management and an acute desire to maximize the return on investments.
Performance management reporting is fundamental to supporting these objectives. This reporting can be broadly described as concerned with providing information to managers – that is, to those who are inside an organization and who direct and control its operations. More specifically, good performance management reporting is founded on a reliable set of financial information that provides clear accountabilities for profit and cost centers. Reporting should cover financial targets, customers, business processes, technology, human capital, and the relationship of these variables to return on capital. Examples of business performance reports include budgeting and forecasting, trends in sales, scorecards and dashboards, and profitability and analysis.
Effective performance management reporting should help to answer important questions. For example, profitability and analysis reporting at the line-of-business level should address such questions as:
- What risk-adjusted return do the businesses generate? How do the businesses compare to each other on a risk-adjusted capital basis?
- How profitable are the businesses when interest rate risk is eliminated?
- Which branch offices are profitable?
- How much does the back office cost per loan or deposit account?
- Are loans priced appropriately given operating costs and funding costs?
Many community banks lack the requisite performance management reporting capabilities to answer these fundamental questions. While banks recognize the utility of performance analytics, these analyses are often perceived as too expensive and time consuming to implement, or are assigned a lower priority then other needs in the development pipeline. This attitude is short-sighted in light of the current operating environment and the strategic imperative of operating efficiency. Furthermore, the expense and implementation complexity can be managed if objectives are fully defined and capabilities are built or acquired in stages. Perhaps the most important question is this: can community banks succeed without robust performance management reporting capabilities?