The value of

operations
Using metrics
to measure
performance in
financial services
Contact

Chicago

Kelley Mavros
Principal, PwC US
+1-312-578-4715
kelley.mavros
@strategyand.us.pwc.com

This report was originally published by Booz & Company in 2008.

2 Strategy&
Introduction

“Could you remind me how this trade-weighted cost index is related to

our strategic goals?”

“Which of these 50 metrics tells the story about how well we are
managing our procured services?”

“How can we assure our clients that our service levels are improving?”

Executives who frequently make statements like these could be

wrestling with an issue that is becoming increasingly important in
financial services: how to measure and value performance in operations
across the organization. This challenge has come to the forefront as
complexity has increased in tandem with an emphasis on cost control.

These operations areas, encompassing the front, middle, and back

offices, are competitive differentiators for banks, yet the dialogue
between operations and revenue-producing businesses has historically
been focused on delivery cost. The most forward-thinking financial
services companies, however, are expressing greater interest in
developing metrics that capture the value of the services being
delivered by these areas.

These metrics clearly link operational and individual performance to

the corporate strategy and allow operations executives to accurately
describe their contribution to business objectives. Such clarity enables
operations executives to better articulate their value in the C-suite —
or, in the case of companies that provide operations services, to their
clients.

These stakeholders, in turn, gain insight into the performance of critical

operations. Established correctly, a comprehensive performance
measurement program will not just improve performance, but also
allow operations managers to better articulate their value (see Exhibit 1,
next page).

Strategy& 3
Exhibit 1
Increasing levels of performance of operations

Low High

Level of
sophistication

Stage 1 Stage 2 Stage 3

Cost center Insight

metrics
capabilities
Knowledge

Information

Key goals – Communication – Continuous – Metrics-based

with business improvement by business planning
partners founded setting goals based and resource
on transparency on benchmarks allocation Source: Strategy&

4 Strategy&
Historical context

Traditionally, financial services companies have thought of operations

simply as the cost allocations necessary to support their revenue-
producing businesses. Organizations typically buried operations and
IT within profit centers and viewed cost as their primary measure of
performance. Indeed, such cost allocations were limited to single-line
entries on the revenue-producing businesses’ scorecards or P&Ls.
Consequently, operations were not managed with the same discipline
and rigor as front-office functions. In our experience, the reasons for
this phenomenon are simple:

• Links to strategy. Strategy was tied to front-office functions, with

operations simply providing the requisite services. Any linkage
between operations’ performance and strategic objectives were
ad hoc at best or considered unimportant at worst.

• Availability of data. Performance metrics came from accounting

departments, which sourced the information from the profit centers
and operations in their general ledger. Individual operations areas,
on the other hand, made limited efforts to develop strategic
performance measures.

• Familiarity with data. Senior managers focusing on financial results

were typically interested in metrics they could easily relate to the
bottom line. Managers were unwilling to step outside their comfort
zone and work with data related to operational drivers, such as FTP
rates, transaction costs, percentage of transactions processed
manually versus electronically, and error rates.

Strategy& 5
Driving change

While some financial services companies continue to “manage by

gut” when it comes to operations, industry changes demand a more
comprehensive way of understanding and reporting performance. Over
the past several years, it has become increasingly important for financial
services companies to use a balanced set of measures focusing on both
value and cost to understand the performance of operations. Two
important levers contribute to this change:

• Shared services and outsourcing. Shared services and outsourcing

arrangements have moved operations away from the direct
management of individual business lines. Because these new
arrangements require operations to meet the needs of multiple
business partners, it is increasingly important that operations
managers understand and demonstrate the value of the services
their functions provide. On the other side of the equation, business
line managers now have less direct control over these support
functions and consequently require new ways to ensure that their
needs are being met.

• Performance measurement as a differentiator. As top-line growth

becomes more difficult, effective operations management through
performance measurement is emerging as a competitive
differentiator. For example, The Bank of America Corporation1
underwent an effort in 2001 to implement a performance
measurement system that linked key metrics with high-level strategy.
By 2003, the effort resulted in a 9 percent increase in customer
“delight,” a 100 percent increase in the number of checking accounts,
640,000 net new savings accounts, and growth of 16 percent in
earnings per share.

A performance measurement program that is comprehensive and

metrics-driven can help financial services companies meet these
challenges (see Exhibit 2, next page). Such a program features scorecards
for each operations division and includes key financial and non-
financial performance metrics, targets, and a driver map that links

6 Strategy&
Exhibit 2
Metrics-based approach to performance measurement

Key questions to answer Process steps Description

– Develop relevant performance

1. Develop organization-wide metric categories measurement categories to capture
organization-wide cost center performance
– Define and develop objectives, outcomes,
2. Define objectives, outcomes, and metrics
“What to measure” and metrics for each performance
measurement category iteratively with
each cost center’s area
– Develop metrics details (calculation,
3. Develop metric details
variables, business owner, etc.) for the
metrics defined within each performance
measurement category
– Develop required tools, link strategic and
“How to measure” 4. Operationalize the program
operational metrics, and integrate the
metrics within the planning and budgeting
process
– Institutionalize the program as part of a
“How to use what is measured” 5. Institutionalize the program
regular performance review communication
program

Source: Strategy&

each metric to an overall strategic business objective. This program

gives operations managers actionable measures at their disposal not
only to get a seat at the table but also to brag about their performance
to business managers.

Strategy& 7
The benefits of a metrics-
driven program

By requiring managers to develop specific measures that are linked

to strategy, a metrics-driven performance measurement program
builds awareness and understanding of what’s most important for
the business. Previously, operations managers could only balance the
qualitative or “value” demands of the executives in the business lines
they serve with quantitative cost targets. Now, however, they have
actionable measures and quantifiable targets that recognize both the
cost and value of services provided. Such metrics quantify the value of
operations services such as efficiency, innovation, client service, and
control/risk (see Exhibit 3, next page).

A performance measurement program can also improve the dialogue

between operations managers and the business or revenue producers.
With metrics tied to strategic objectives, discussions on performance
become focused on the critical issues that drive business performance.
For example, for a global bulge-bracket bank, we developed
performance scorecards to allow operations managers to provide
an easily understandable performance report. The net impact was
dramatic; operations managers not only improved their performance,
but also were better able to articulate their progress and demonstrate
success; as a result, business managers are now able to better appreciate
the efforts of their service providers. The operations managers now
have a seat at the table with the revenue producers. By delivering
against quantitative metrics as opposed to providing anecdotal
evidence, they have bolstered their credibility.

8 Strategy&
Exhibit 3
Performance measurement metrics for a global investment bank

Cost center objectives

Regulatory/ People
Efficiency Innovation Control/risk Client service
compliance development

1. Cost of functions 1. New business 1. Unresolved audit 1. False positive 1. Z/Yen benchmark 1. Diversity ratio of
(percent of initiatives points (#) surveillance survey (scale) employees (%)
revenues, percent developed
2. Regulatory
exceptions (%)
2. Internal client 2. Top 100 roles with
of costs) (# and $)
inquiries 2. Internal audit satisfaction clear internal
2. Trades per FTE (#) 2. Resources addressed within assessments surveys (scale) successor (%)
allocated to deadlines (%) (# open,
3. Data center 3. Purchase spend 3. Offer acceptance
innovation (#, %) # satisfactory
capacity horizon 3. Regulatory awarded to rates (%)
(time) 3. Loan portfolio inquiries handled, 3. Participation in diversity suppliers 4. Voluntary attrition
4. Share of high hedged (%) routine versus preventive drills (%) rates (%)
touch versus low 4. Difficult-to-fund non-routine (#, %) (%) 4. Time to fill open 5. Hours of training
touch (%) assets ($ funded) 4. Achievable capital 4. Moody’s risk positions (time) per headcount (#)
charge savings ($) assessment
5. Use of hybrid 5. Headcount off- 5. Participation in
(scale)
capital ($ shored to low- 5. Compliance costs new/complex
outstanding) cost region (#) allocated to 5. Transaction transactions (%)
enterprise ($) breaks/fails/
outstanding
confirms (#, $)

Source: Strategy&

Strategy& 9
Deceptively simple

Even though a performance measurement program seems conceptually

straightforward, financial services companies find it challenging to
implement and maintain these programs. A common mistake is the
absence of a clear linkage between performance measurement metrics
and the overall business strategy. Typically, this problem arises for two
primary reasons. First, some performance measurement programs were
developed with minimal business involvement and therefore focus only
on operational efficiency measures. Second, programs that were
initially developed with clear linkages between strategy and
performance metrics lost that connection over time. Without strong
links to strategy, operations and business goals become misaligned and
performance suffers.

Another common pitfall relates to the type of measures used to manage

performance. Typically, organizations fumble when choosing what to
measure and end up with metrics that gauge processes instead of
performance. Too often we have heard the phrase “It’s easy to measure
what we do, but not how well we do it.” If an organization is judged by
process metrics that are not tied to performance, it can easily find itself
meeting targets with no beneficial end result.

Finally, many organizations make the mistake of equating an IT solution

with a performance measurement program. These organizations focus
on picking the ideal performance measurement software or tools while
neglecting to thoroughly understand how operations performance is
linked with the organization’s strategic goals. These companies waste
time and resources on system implementation efforts, only to find their
systems rarely used years later.

10 Strategy&
Developing a successful program

Despite these difficulties, it is possible for many financial services

companies to develop a successful metrics-driven performance
measurement program for their operations. We’ve found three critical
questions that together foster a successful performance measurement
program:

1) What to measure? In principle, the answer to this question is simple.

Choose metrics that provide an understanding of performance vis-à-vis
strategic objectives and outcomes. For instance, we developed the
operations performance metrics for a global investment bank by first
identifying six relevant performance categories. The strategic objectives
were then mapped to each performance category. The principles
guiding the development of these performance metrics were that they
should be based on key themes worthy of senior management attention;
they should be based on facts, rather than conjecture; they should be
practical and actionable; they should provide insight into how well
the operations function is performing, not just what it is doing; and
they should initially be simple to allow room for evolution over time
(see Exhibit 4, next page).

We’ve identified several best practices that can set the foundation for
determining what to measure within operations:

• Develop the performance metrics iteratively, gaining buy-in along

the way from stakeholders in operations and the business units.

• Ensure that the metrics strike a good balance between breadth and
depth of visibility into current and future performance. They should
have leading indicators, such as outstanding trade confirmations,
from both a numerical and cost perspective, and lagging indicators,
such as the number of open and satisfactory audit assessments.

• Develop measures that allow performance targets to be

benchmarked across products, divisions, and companies —
for instance, against information in Z/Yen and Moody’s Risk
Management reports.

Strategy& 11
Exhibit 4
Performance measurement development approach

Performance Regulatory/ Control/ Client People Guiding

Efficiency Innovation
categories compliance risk service development principles

Process Ability to External Internal Ability to Ability to 1. Key themes

efficiency innovate oversight and controls and meet client develop staff worthy of senior
and cost and support regulations operating risk needs professionally management
drivers innovation attention
2. Fact-based,
not conjecture
Strategic 3. Premium on
objectives
1–2 objectives for each category practicality —
measures that
we can collect,
report, and act on
4. Focus on metrics
Desired providing insight
1–2 outcomes for each objective into “how well” as
outcomes
opposed to just
describing “what”
an area does
5. Room for evolution —
start simple and build
Metrics 1–2 key metrics to measure each outcome
over time

Source: Strategy&

12 Strategy&
• Target a limited number of strategic metrics as opposed to a laundry
list of operational metrics. For instance, in its first year of
implementing a performance measurement program, Bank of
America2 began with 20 to 30 metrics. This number was
subsequently reduced to the 12 metrics that best indicated
operations’ contribution to the company’s overall strategic objectives.
Companies can use a driver tree analysis to determine the relevant
lower-level drivers of these metrics.

• Use simple measures to report performance; make processes easy for

senior management to understand and act on. For example, use
exception-based reporting as opposed to creating indices or
aggregated metrics.

• Evolve metrics over time to match changes in strategy and desired

operational outcomes. Establishing periodic reviews can help ensure
that these tight links are maintained.

2) How to measure? Answering this question requires first answering a

number of others: What technology and tools should be used, and how
granular should the capabilities be? How should the relationship
between strategic and operational metrics evolve? What is the linkage
to the planning and budgeting cycle? Addressing these questions will
enable operations to implement their performance measurement
program. A phased approach that starts small and evolves through time
is most appropriate (see Exhibit 5, next page).

Best practices for determining how to measure:

• Ensure that the metrics developed can be easily collected through

existing processes and systems. If they can’t, develop a plan for
collecting and using the metrics. For example, when we developed
the performance measurement program for a global investment
bank, we categorized the metrics’ “go-live” time lines into three
buckets: less than one month, one to six months, and more than six
months. We then created detailed plans to operationalize the metrics
for the first two buckets; based on results in the initial phases, we
later did the same for the third.

• Rather than determining metrics based on the tools that are

available or the suggestions that vendors offer, first determine which
metrics would be most useful and then find the tools to capture
them.

• Develop the capability to measure the quality of a process when

failure is not an option. For example, effectively measuring the
security of corporate systems may require measuring not only

Strategy& 13
Exhibit 5
Putting the performance measurement program into operation

Near term Medium term Long term

Process steps
– Calculation done manually – Calculation done using macros, – Calculation fully automated
using built-in Excel functions SQL queries and integrated with the
Develop tools reporting tool
– Strategic metrics reported
evolve with data availability – Further evolution of strategic
and experience metrics

– Finalized initial strategic – Strategic and all operational – Linkages between strategic
Link strategic
metrics metrics defined and developed and operational metrics created
and operational
metrics

– Targets not set; performance – Informational targets for – Targets drive planning and
Integrate metrics measurement metrics are managing divisions and budgeting process; metrics
into planning and used as “state of the union” metrics linked to planning linked to planning and
budgeting cycle and for marketing and budgeting cycle budgeting cycle and enforced

Source: Strategy&

14 Strategy&
 security breaches but also attempted security breaches. As one
senior executive at a global investment bank pointed out, “We
should have the capability to measure not only goals allowed but
also shots on goal.”

3) How to use what is measured? The final area of best practices

concerns how a metrics program is used within an organization. How
should information be reported and organized? How is it distributed?
Who is accountable for performance, and what are the incentives? Clear
accountabilities should be established both for adhering to processes
(e.g., timely collection of data) and for performance results (e.g.,
reaching a target). Once clear accountability is established, an
organization should proceed cautiously with efforts to formally tie
performance metrics to incentives. Although a clear connection with
incentives can focus behavior on achieving targets, it can also cause
undesirable distortions as managers feel more pressure to achieve
their goals. Formally institutionalizing metrics as part of a regular
communication program tied to performance reviews is an important
step in ensuring senior management accountability (see Exhibit 6,
next page).

Adopting best practices in these areas can help guard against a

performance measurement program being rejected:

• Ensure that the metrics can be rolled out across the enterprise, and
that comparisons among divisions Company can help in the strategic
planning and performance review process for overall operations and
for each element in particular.

• Avoid perfection; begin the process by using the metrics to guide

decision making as soon as sufficient data is available. For a global
investment bank, we divided metrics into levels of operational
readiness for reporting (easy, medium, and hard). Metrics defined as
“easy” were immediately reported to gauge operations performance,
while the “medium” and “hard” elements were set aside to be
revisited as technology improved.

• Have a clear process improvement methodology to drive positive

change throughout the operation. At the Royal Bank of Scotland,3
even the HR function has been transformed into a quantitative
discipline. Employee HR HR data is linked with reward preferences,
business productivity, and turnover to provide a rich source of feed-
back pointing to trends that require action.

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Exhibit 6
Institutionalizing the performance measurement program

Communication purpose Format Audience Frequency Number of pages

Periodic review Division-level reports Shared service organization Quarterly One page per cost
of division-level management committee center division
performance

Periodic review Organization-level report Management committee; Quarterly 1-2 (“Top 25” metrics)
of shared service business-side executive
organization performance management

Management “Story” presentation is Management committee Ad hoc Presentation supported

committee supported by metrics by relevant metrics
talking points

Source: Strategy&

16 Strategy&
Achieving buy-in

In our experience, the challenge is not actually in determining

the performance measurement metrics, but rather in getting the
organization and stakeholders to embrace them. Senior team alignment
is critical, but senior executives usually have their own perspective
on which strategic objectives, outcomes, metrics, and goals are most
important. Internal customers — i.e., the senior executives in the
business lines — often have an unbalanced view of performance
priorities, with too much focus on cost. Very often, operations managers
tend to migrate toward metrics that indicate only positive results,
especially when compensation and other rewards are tied to meeting a
performance goal. Finally, people do not like to be measured on metrics
that have been developed without their input.

However, all is not lost. In our collective experience, there are five
key success factors for instituting such a performance management
program:

• Set a compelling vision. Senior leaders need to set a clear and

compelling vision of where the organization needs to be in terms of
the program with clearly defined measures of success in the short
term, medium term, and long term. This vision and measure of
success must be shared across all levels in the organization.

• Make sure leaders are committed and accountable. There needs

to be visible and proactive involvement of senior leaders in the
transformation to the performance measurement program. In
addition, there must be clear accountability and adherence to the
performance measurement metrics (e.g., links to compensation or
to the planning and budgeting cycle).

• Achieve early wins. The organization should plan key milestones

of operationalizing and institutionalizing the metrics program and
drive toward celebration of early wins. For example, the validation
and buy-in of metrics at the corporate level and within each
operations group is a quick win that should be celebrated as it
paves the way for achieving longer-term milestones.

Strategy& 17
• Enroll people in the change. There needs to be a concerted
communication and change management effort that maximizes
near-term opportunities to engage and mobilize stakeholders. Senior
leaders should be committed to overcoming organization-wide
skepticism and moving stakeholder perceptions from awareness
to acceptance of the performance measurement program.

• Organize for sustainability. Change champions should be

identified within each line of business. These change champions
understand the content and will lead and promote the performance
measurement program in their areas in close cooperation with
corporate champions. There also needs to be a periodic review of
the performance measurement framework to verify and adjust
the links to the overall corporate strategy.

Developing a performance measurement program for operations

is no simple task. As top-line growth becomes more challenging,
performance measurement of operations is increasingly seen as a
differentiator. Winners will extract superior margins by focusing on
“how well” they do, as opposed to “what” they do. Financial services
companies face an inevitable choice: challenge the status quo or risk
being left behind the pack.

18 Strategy&
Endnotes

1
Carl Thor and Mark G. Brown, “Effectively Managing Performance
Measurement Systems,” APQC, 2004.

2
Carl Thor and Mark G. Brown, “Effectively Managing Performance
Measurement Systems,” APQC, 2004.

3
Richard Donkin, “Human-capital measuring at the Royal Bank of Scotland,”
Human Resource Management International Digest, 2005.

Strategy& 19
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