The Balanced Scorecard at NatWest Roger Bosworth, Senion Manager, Business Planning and Performance, NatWest

(Slide 1)

Hello everybody. I think that what I'm going to talk about probably complements Nick in that fundamentally, my presentation is going to be very much hands-on, what we did in NatWest. I'm not actually going to argue the case of whether what we did was right, wrong or whatever.

(Slide 2)

We've been involved with a scorecard for about five years. We have a good chief executive, Derek Wanless, who latched onto the scorecard when it first came out of Harvard and we had David Norton over for a week right in the very early days. I think this is a key thing and probably number one on your list if you're going to do this. Derek believes in the scorecard and loves it. When lesser executives have got very flaky about it, Derek has said: in NatWest Bank, we are going to use the scorecard. He's never deviated from that view and his sponsorship has been tremendous.

I'm happy to take questions as I go along. I'm going to try to make the scorecard come alive for you and talk about the model that we use. I'm going to try to demonstrate to you the scorecard on our network.

I'll just tell you a little bit about NatWest Group. We've reorganised quite a lot recently. At the top is our vision: first choice in our chosen markets. This is what everybody wants. I'll tell you for real how we developed that with the executive, got their buy-in and got to understand what it means.

This is our current structure. We recently sold our operation in America so we've got NatWest UK (where I come from) which is fundamentally split into six separate businesses. We changed that model at the beginning of 1995 and the reason was quite a lot scorecard-related in that we had a model before which was a circle where everybody did everything. We had segmentation within that circle but we had a great problem with accountability. Everybody was accountable for everything but nobody was really accountable for anything. Now we have a model with a very small, central head office, soon to be 150 but likely to be 75 eventually. The six separate businesses all have managing directors.

Another reason we did this was to move the business decision-making closer to the customer. An interesting thing we did a couple of months ago involved our IT sector which was massive but separate from the businesses. We've moved it not only into NatWest UK but now into Retail Banking, right at the front end. So it can be responsive to the needs of the customer. We are in a phenomenal period of change and I come from an industry that ten years ago, was a sleeping dog.

We've got NatWest Markets, our investment bank, and then the Lombard Group which is all about point-of-sale car finance. We have Ulster Group which runs our operations in Ireland (both parts) and Coutts and Co.

Our global strategy centres around NatWest Markets and also around Coutts and Co where we are really aiming to be bankers to the high net worth individuals around the world. In fact, we're opening Coutts offices around the world. The rest is very much centred upon the UK and Europe to a certain extent.

There are lots of politics in NatWest Bank. I had to implement the scorecard in the branch network. Today, I'm not so much going to talk about the cultural things. I'm happy to if you want me to, but I was going to talk more about the methodology and how we actually made it work. Hopefully, I'll address some of those questions that Nick raised.

Let's first of all look at the high level things. This is not rocket science but is very important.

(Slide 3)

We have a five year strategic plan - doesn't everybody? When we took scorecard on, one of the first things we did was to brainstorm what our five year scorecard would be. This may look quite naive but it's not. When implementing anything on the performance front, it's crucial that you link it back to your strategy - what I call turning strategy into action. I'll try to show you how we did that. We have a five year vision of scorecard - where we want to be in five years' time.

We have a two year operational plan. This is a lot of scorecards around the business as the scorecard is cascaded throughout the whole of NatWest UK and there are milestones. That is what comes out of the operational plan. There's something there about cross-functional deliverables as well because of the model we have and how people share things.

We have milestones because they are actions that we're taking to link with our scorecard. You often find (and I've seen other peoples' scorecards) that sometimes milestones are put in scorecards. We keep them separate. So we have actual action programmes that we update through the year. We want to see that if we put resource into that action programme, it is improving one of the measures on the scorecard.

We then come through to performance management. This is very important. It was only about two or three years ago that we really concentrated on it. This was because like most companies, we have an operational plan with very clever people working on it but we then put it in the drawer. We say we've done the operational plan - great! We've gone through the whole process, everybody has bought in but then we shove it in the drawer. As I said earlier, change in our industry is so phenomenal and radical sometimes, and we can see it continuing over the next five or ten years. We have to keep that operational plan alive and we actually change it through the year, rewriting big chunks of it.

The performance management process keeps that alive. It takes the output from the operational plan. Which are the scorecards? Which are the milestones? It keeps playing them back to the business units. It has events around it such as performance meetings etc. It keeps moving that operational plan forward and changing it. Sometimes, what we say we're going to do at the beginning of the year, we find we can't do as the year progresses. We then feed those learnings back into the strategic plan.

(Slide 4)

Just to remind you of what we see the scorecard is about, there are four quadrants: financial, customer, organisation (about staff and the organisation itself) and internal (about quality and processes).

To prove that we use the scorecard throughout the business, this appeared in our 1996 report and accounts. We've split it into two sections now. One section is all the financials and the other we call "The Year's Review".

It's very important when you're talking to people about scorecard that you understand the audience you're talking to. We're trying to educate our shareholders into how we take a balanced approach with the business. We did improve this year in words but I don't think any of our shareholders would have noticed we were talking about the scorecard. Last year, we started to get the quadrants in and there were some pages after that with pictures of things we were doing in those quadrants to try to move them away from the bottom line tradition - which is important, but there are other things that are just as important as well.

(Slide 5)

Just to run over the time period, I said we've been at it about five years. We started in 1991/1992 and did a big study called Vision 2000. We had a look at our business, where we were going to be by the year 2000 and we were not far short of terrified. We had a franchise and because we had a branch network, we could be a bank. We are now seeing that we want to get rid of our branch network - this is a fundamental change in our business. We could see that we wouldn't need half as many employees because technology was just going to take us to pieces. You've seen telephone banking, Internet banking - there's massive change in our business.

The problem was that we didn't know how fast that would happen. We could articulate what the change would be but we couldn't say how quickly it would happen because we are a customer driven organisation.

As I mentioned, Derek said we needed a scorecard and so we started a learning process. Ours was quite typical. We didn't understand it but we started the learning process and moved onto a pilot. We did it in our mortgage company and it was reasonably successful.

In 1993/1994, we rolled it down through to the branch network. As I said, in 1995 we restructured and that was a good thing as far as I was concerned because we could take all those learnings and re-educate the business. In 1996, we moved into performance benchmarking which I'll talk a little more about later.

(Slide 6)

Let's now look at the vision. When Derek took the business over, it was quite fragmented. We had 200 branches in Spain despite the fact that nobody could speak the language. The fact that we had slight cultural problems was by-the-by. So Derek took the executive away to our lovely palace in Oxfordshire where they all sat down. They came back with "first choice of our chosen markets". This was tremendous. I'm not being cynical but what does that mean?

So we took it to pieces and we started with the question of our chosen markets. We said to the executive: okay, if you're coming back to us with this vision, then it has to mean something to us. We're not going to ponse around with something that looks nice for the staff because they are not fools. We asked what are our chosen markets were and did a market test all the way through the business. This was early in the nineties. The proof of the pudding is in the eating because since then, we've sold our retail network in Australia, in Italy and in France. We've sold our registrars business and our global securities business. We've recently sold 80% of our retail branch network in Spain and we sold our bank in America. This was because without a massive amount of investment, we couldn't be first choice down the eastern coast of America. So we got rid of it.

So we now know what our chosen markets are. We have a clear understanding throughout the business and that strategy has been articulated externally by Derek. The thing that impressed me about this was that they meant it. They went away to decide the vision and they meant it.

We then come onto first choice. Everybody wants to be first choice. How do we know when we're first choice? Is it how much money we make? Is it whether the customers are happy? Is it when the staff think we're great? What does first choice mean?

We tackled this and ended up with a model which didn't appear to us in 1992. It developed particularly in 1995 during the restructure. We had a situation where we had to tell the business units what we wanted. It's very interesting talking about how to measure and what to measure, and that was a question we had to address.

(Slide 7)

I'll go through the model in more detail but just very briefly, we start with a strategic, core capability. We then build a family of scorecards, mainly because I don't believe in one scorecard for NatWest UK as it ends up with a lot of indices that nobody understands. Even at board level, they are going to touch what's going on. We then use benchmarking to identify where first choice is. We've come to the conclusion that simply getting better year on year is not good enough. We need step change in what we're doing and stretch in what we need to achieve. We need to understand who the first choice customers are and then have the cascade.

Let's talk about the core capability model. Here, I think you can get a lot of the hassle about what you measure out of the way. If you had a banking textbook 20 years ago, you'd see that a definition of a bank is a person who takes deposits and lends money to other people. We said to the executive: now tell us what we are; tell us what those core capabilities are that we have to be really good at. An example is the Ritz Carlton Hotels. Their core capability, number one, is service (it's also one of ours, by the way).

So the executive sat down with McKinseys and spent a lot of time designing this core capability model. I won't reveal all of it but there's sales - you've got to be good at sales. We've got masses of data in our business so we had to be good at information management to understand what it meant. Leadership also came out. We had to have phenomenal implementation skills because there was - and still is - so much change going on in our business. You've probably seen our adverts in The Times. One of the skills we're short of is implementation skill. Risk management - that's not only about credit risk but about non-credit risk as well, like the NatWest Tower two or three years ago or matters to do with the environment.

(Slide 8)

These are the core capabilities where we have to be first choice to win. We translated those into a high level scorecard framework. We got headings such as return on capital employed, cost income ratio, recruitment and internal productivity. We said to the business unit that they must measure them. But we didn't tell them how to measure them because our business units are at different levels, different speeds. When we told them they had to do it because their boss was on the executive committee, there wasn't an argument. But one problem was distribution, mainly because we are not very good at it in certain areas.

I'll now talk about the Retail Bank. Having designed their scorecard, they then cascaded it throughout our 200 branch network. Before I move into the demonstration of what that looks like for real for the people on the ground floor, between the core capability model and the actual scorecard, we put a thing called role profiling, competencies. This is about if you understand what core capabilities you want, have you got the people that can do it? It's as simple as that. Our HR department have spent a lot of time working out if we've got the right people in the organisation in order to help us to excel at those core capabilities. When we did that testing, we found that people were very honest.

(Slide 9)

As Lord Butterworth said, I ran the project and called it "Harpo" because I thought we must be mad to take it on! It's something about alignment and if you look at the model, you end up with the people in the branches doing the improving in the areas that the executive agreed amongst themselves were where our core capabilities were and where we ought to be.

Question: Can I ask you something before we get into detail? Did you find that when you went through this first choice thing, there turned out to be tremendous ignorance at executive level? In our bank, when we put in the IT function the cost of being what everyone said they were going to be, it was just completely out of any possibility.

Roger Bosworth: I'll be absolutely honest. We're first choice in certain respects - if I went down to the small business scorecard, I'd say we were first choice. Yes, there was a lot of ignorance. That's why the early work was a real struggle. We played it back to them and said: tell us what this means. Derek actually took the top team away and they thrashed it out.

What really sold it for me was when we went through the market testing. They shifted some businesses around but fundamentally it's interesting because you've probably read in the paper, NatWest hasn't got a strategy. We have had a strategy since 1991/1992 (since we've been doing all this) and that is focussed. You might think it's a bit UK-focussed, as I do, because I would rather see our market as European, but we pulled out of Europe on the retail banking front. We will do things in Europe but that strategy is well focussed and has always been there.

The executives are people. Some of them understood it more than others. We had one or two who clasped it with both hands and pushed it forwards. We did a lot of work on the vision scorecard. That taxed the mind. But what really counted was that Derek wouldn't let them off. We report to him quarterly and six-monthly and so we all understand it. We talk around the quadrants. You've got to explain what you're doing. It's helped us enormously through all this change.

(Slide 10)

Let me show you what it looks like. This is a developers' model, hence you'll find there's a guy in here who thinks he's a branch so I'll pick on him. Interestingly, with the developers we had a team made of three types of people. One was the project team at the centre which was myself and a couple of project managers. One was three or four techies and the other was the front end of the business. We got those three together and we got them to build this by the techies showing the front end, or the front end saying they didn't like this and wanted that.

You've got two sides, left and right, which are both interactive. So I can look at the hierarchy. (Incidentally, the data in here has been running by an algorithm so it looks a bit silly but makes the programme work.) You'll notice the right hand side is colour coded and that it actually shows you branches and relationship managers. This is a London region: City and West End retail bank which is personal and small business, and shows how that hierarchy is put together. For instance, Charing Cross has got a branch underneath it and has three relationship managers. We happen to be looking at income.

If we look at it as a league table, I can see all those who are and are not performing. By the way, I'm an area manager in charge of this area. I can look at my relationship managers as well, separately.

On the left hand side, we've got the scorecard: income cost. This is a scorecard at area manager level, branch level. We don't actually run a scorecard at individual level, we run action programmes that feed onto your unit's scorecard. At the moment, we are putting in the technology in our branch network and into individuals so they can have their action programmes up on the PC.

There's a hell of a lot of data to manage when you do this. We had two problems when we implemented it. One was managing the data - you can't do this on paper. Two was the fact that we didn't have any information architecture. So we had the sales peoples' model over there and the finance people had theirs but they didn't speak to each other. We used a data warehouse to pull this information together into a dictionary so we could combine it. Once you do that, you can start to look at it by income, by cost and also credit risk measurement.

These measures are all specific to a branch. At the higher level, you'll see other scorecards coming in from centres and regions because on a scorecard, you see what you manage. It's about empowerment. This one has business development and customer satisfaction so let's select that.

This is customer satisfaction for Berners Street but let's change it to Blackfriars. I can look at the figures and get a feel, for instance, for what's growing in customer satisfaction. I see all the sorts of things from all the surveys that have been done about where my area is good and where it's bad. If I'm not doing well, I can go into Kingsway and see what they are doing. We've got this on a sort of network down to our regions but we are putting a better one in at the moment. When this network is in, you will be able to put notes on and people can start to share data.

Mystery shopper is interesting in that it's in the internal quality quadrant. A mystery shopper is of course looking at our own processes to see if they work. It doesn't necessarily mean that the customer will like them because that's where the customer satisfaction measure comes in. The mystery shopper tells us if our branches and individuals are undertaking the processes as we designed them. There's a lot more hierarchy down there, and you actually get the information and measurement that you need. So you can see how interactive it is.

The other thing of course is that we've got scorecard so you can look at data going back through the years. As well as all that, you can do pie charts, you can print it off - you've actually got the information that you need to run your part of the business.

We can see the scorecard for each branch and can now see financial customer range, internal quality etc. You can then press a button and see your results against the year - and your area manager can see it. There's a lot of data sharing which we try to encourage across the business. You can make your own league tables in here and set them up across areas and regions. That's the quick drift of how we've made the scorecard come alive in the network. I have to emphasise that we did a hell of a lot of work in the early years about communication.

Question: Would you cascade that down to branches so they can all look at each other's information?

Roger Bosworth: We had a problem with "information is power". Yes, that's what we're encouraging people to do but we had a problem with the executive on that front as well. As Lord Butterworth said, I'm involved with the central EIS too. When I was demonstrating the latest version the day before yesterday to our chief executive, you can see how it's written on his face when you start to open up some of these information sources - you've still got that fear. Information is power. They don't like it but once you can get over that hurdle, there are also problems about 50 year old men using technology. They are not happy with that - they like pieces of paper. But once we get over that, they find what a great advantage it is.

Question: With the Internet development, they are saying that problems are arising because there's too much data.

Roger Bosworth: When we put this system in, our chief executive said: what I want on my screen is the worst ten performing branches. It's all about roles and responsibilities, fit and focus. I'll talk about the Internet in a moment but we are also developing an Intranet within NatWest to open up information about the organisation.

(Slide 11)

Going back to the model, we use benchmarking to identify first choice because first choice in our chosen markets has got to mean something. This is where we are doing quite a lot of work. It's the usual thing - internal benchmarking, benchmarking against competitors, industry and best in class.

We found two things - there are really two sides to it. One is about best in class performance targeting, setting your targets to where the stretch is. The other is about sharing best practices. We've rather split our approach to benchmarking along those lines. Regarding where best practice is, the American banks are better than the UK banks in a lot of respects. They've got targets such as 99% of their customers being satisfied, compared with 85% of ours. So that helps us to set stretch targets. You can then work out how fast you can get there. It's not a question of just: well, we've done better than last year so that's okay. It's where we've got to be.

Funnily enough, we've had success particularly in the organisation and development box. It was the worst box when we started but we've got it shaken out. We understand what we're trying to measure in there and we've got it benchmarked against other financial services companies and against UK companies such as British Airways. By sending questionnaires etc, we now understand that for example last year, morale dropped like a rocket. It's likely to in our industry though because there's a lot of change.

Suddenly, we had all the benchmarking data and we realised that morale was going down in the country's largest companies overall anyway and it was falling in the financial services industry actually faster than it was falling in NatWest. So don't panic - it's happening across the country and it's something that we can expect.

As I said, the second thing is sharing best practice. That's where we are trying to develop the Intranet idea across NatWest. We also have used the Internet for that and there's some good stuff on there.

(Slide 12)

I'll talk a little bit about culture because I think that's important. You remember Captain Mainwearing - we've coming from that culture: command and control. When I joined the bank, I called people "sir" but we're moving to coaching because we reckon this is the only way we can do it. I'll give you an example. We have area managers who are very important people, sitting in offices with nice desks, a mobile phone and a PC etc. We now say: you're an area manager, go round and coach your branches. A lot of them are good at doing it.

We're moving from individual to team as we find that teamworking works better. I see myself as part of a team supporting the people, empowering them to do things. We're moving from training to learning and development. We've done a lot of work at our training centre with a lot of the learning and development going into the business. Our relationship with our staff is now not "job for life" but a "contract" about how you can improve the organisation and how you can prove yourself within the organisation to make yourself saleable if you want to leave. Part of the contract, to get away from the money thing, is: come to NatWest because we have fabulous training and we can gear you up for moving yourself on. Some people will take that into consideration.

We are measuring ourselves on moving into a performance culture and putting more money on results. We'll pay for activity on doing certain things and pay for results. We've moved quite significantly.

Question: Can you tell me how you align your paying for results with the balanced scorecard and in particular, teamwork? I guess our culture is much the same as yours but is still based on paying for results. If you achieve the target, you'll get your bonus etc.

Roger Bosworth:As I mentioned right at the beginning, we have performance contracts. NatWest UK has a performance contract with Group. At the end of the year, we'll look to Derek and what we've done can be measured. He has a performance contract with each of the six managing directors, a high level scorecard and milestones and he will say: that's your pot of money. This goes all the way down through the levels. If you haven't arrived there, then you haven't got the money available because it's coming from the top based on that performance contract. About 90% of this is quite black and white. It's about deliverables. This filters down through the organisation to, say, me in Finance. The individual will have an action programme. Scorecard is part of the culture in NatWest now. People will look at problems and say: let's look at the scorecard implications of all this.

Regarding performance culture, 40% of my reward is based on my bonus. That's a real shift from: keep your nose clean and get on with it. You can see that that investment has improved the business although it's not perfect.

People locked into a branch would be a team. They'd have their own scorecard. People will take out bits of this into their action programmes.

Regarding the mystery shopper, we started about six or nine months ago naming the individual that was mystery shopped. That was a big cultural difference. Before, we would feed the results down to the branch but now we're naming the individual who isn't getting crucified or feeling threatened by it because it's a learning experience. It's changing the attitude.

Question: Are you saying that on his action plan, each individual in the team gets a share of the pot that the team is going to get?

Roger Bosworth: I'll tell you how it works at the top level. A managing director will have a bonus for his business which will be split something like 60% on the business and 40% on NatWest UK because the latter is a team. As it goes further down, you'll have the same sort of result. Some things you do as a team, other things you do as an individual. We had a massive service improvement programme two years ago because we wanted to get continuous improvement in the business. People were encouraged to form small teams to work at improving certain aspects of the business. I haven't centred my presentation around this but that continuous improvement loop works through the action programmes which also contain what you're going to do to improve those actions.

(Slide 13)

Finally, away from the financials to the scorecard, I have one last slide. It's a summary of how we did it. We created a core capability model. We created a family of scorecards from this model (that was the NatWest UK six business unit scorecards). Some things are measured at high level and others you'll measure at business unit level such as sales. So you need to get that right. Ensure that all measures have sponsors and owners. I haven't talked about this very much but make sure you have people championing - our HR director champions the organisational development box. He's got people in there who are experts on those measures and can analyse them. You need those experts and you need to work as a team with those people.

Question: Can the sponsors of different things be the same person?

Roger Bosworth: This is interesting because at Group level, the quadrants are sponsored by different people. At NatWest UK level, we have Paul Biddle who is the finance director and will sponsor the finance quadrant. Sales will come from our sales and marketing director. HR is sponsored by Chris Bottomley, the director of HR. In the processes quadrant, most of that measurement is in the business. So make sure you've got people sponsoring each of the measures and you've got people who can translate what the data means. We benchmarked for measures against best in class companies and for where we were first choice. This may not fit your company.

Implement the underlying cultural changes that are necessary to drive strategic business goals. I had an MBA student come and see me a couple of months ago who said he was doing scorecard as his dissertation. He went to a company, went round and asked everybody what they did and measured it. That's not a scorecard. You've got to understand what you want to change in the company and the implications of it. We've had a big cultural change in NatWest and that's something we've managed with this scorecard approach.

Use company profiling to ensure the business is developing the required skills to support its core capabilities. This is key. Make sure you've got the people to do it. A lot of those skills will change over the next five or ten years.

Question: I've got one in terms of percentages. If you took the balanced scorecard and let's say reward and recognition, what percentages are allocated to the quadrants? Are they equal or are they given more or less weight? Does it include 360° feedback for example where a manager's appraisal is done as much by his peers and subordinates as by his boss?

Roger Bosworth: That's two separate questions. First of all, we do not allocate percentages to the quadrants. We say that we want a balanced performance. In the old days, you allocated everything to the financial quadrant. What did that engender in our business? Bullies - basically the business was managed by bullies who would go round, would beat up the staff and would get financial performance. The processes were fairly straightforward. We want a balanced performance. If you fall short in one of those quadrants, then you won't get much of a reward.

Secondly, you talked about the 360° appraisal. We are moving that way. Certainly, our appraisal system is very much approaching that type of situation. We've got more now about being in a relationship, fraternisation with the soldiers, bosses who work as teams and all that sort of thing. Again, that's about cultural things which are linked to the scorecard and not necessarily about the scorecard itself. But that's the way we will be ending up.

Talking as a middle manager of a bank, it's actually quite difficult to manage. It's much easier to work in a command and control situation where you're told what to do and you go off and do it. Working in an open environment and trying to manage the company like that is more difficult but much more rewarding and much more fun, in my view.

Foundation for Performance Measurement

UK Meeting - 19th September 1996