Saturday 11 June 2011

Strategic Management Case Study

AYB 321 STRATEGIC MANAGEMENT ACCOUNTING
Case Study on Svenska Handelsbanken: Budgeting, Beyond Budgeting and Organisational Architecture

1.     Introduction: SH’s Approach

In 1970s, Svenska Handelsbanken (SH) eliminated budgets and has also changed completely its organizational strategies since then. SH has adopted beyond budget system because the traditional budgeting process is seen to be an unproductive negotiation process, artificial and almost unresponsive with the market and business reality. Therefore, they would rather manage the business according to what really happens than rely on a fictitious budget. Besides that, SH has also changed product marketing concept to customer driven marketing concept, focusing on providing high quality service and maximising customer profitability. In order to achieve this approach, SH has decentralised decision rights to lower managers, thus local knowledge of branch offices can be used efficiently.

2.     How SH Achieves the Five Purposes of Budgeting

Although Svenska Handelsbanken has abandoned the traditional budgeting system, it still acquire the five purposes of this type of forecast system including planning,  facilitating communication and coordination, allocating resources, controlling profits and operations, and evaluating performance and providing incentives.

2.1. Planning

Svenska Handelsbanken has delegated planning to branch managers, and required these managers to set an operational plan. Customer targets, products offered, prices and individual responsibilities are considered in these plans during discussions between the branch manager and staff. Costs to implementing these plans cannot exceed 40 percent of income, which every employee must contribute to. As the branch managers have an advantage of their local knowledge, and closer relationship with their customers, they can effectively design products, and prices that their target customers are willing to consume.
Along with this implementation, the financial department prepares a rolling cash forecast quarterly which provides an early signal to the trend of cash flows (i.e. increasing or decreasing in value), thus supports investment plan, and liquidity requirements plan.

2.2. Facilitating Communication and Coordination

Minimisation of interference is considered crucial. A policy was established to eliminate head office directives or reports. In case of a poor decision was being made, the expectation was that senior managers would only send an e-mail or make a brief phone call to inquire about the issue. The final decision ultimately remained with the local manager.
Service agreements regarding price, type, amount and level of a particular service are created between a planning committee headed by the CFO and representatives of the sellers (support services) together.
Finally, the managing director spends some time with branches to hear about their views on the local markets, customers, or other issues. Assumptions in their operation plans might also be challenged during this time.

2.3. Allocating Resources

Using beyond budgeting, business unit managers are not restricted to their expenses as long as those expenses satisfy that unit operation’s relevancy. In relation, the bank does not allocate capital to unit managers, whereas unit managers are charged with capital costs. Then, SH measures revenues and expenses assigning to the unit manager’s operations by using cost-to-income ratio. In addition, being understanding the local situation best, the local branch managers are devolved to manage their own financial, and human resources. By doing so, SH can allocate resources effectively, and top-managements can monitor how accurate these managers allocate resources, thus possible actions will be taken place if necessary.

2.4. Controlling Profit and Operations

There are a number of measures the bank use to assess their competitive situation. These measures include return on equity, cost-to-income ratio, profit per employee, and total profitability. Managers are judged by these ratios. If a branch was underperforming, the regional controller would be made aware and have to address the enquiries about the situation with head office management.
At head office level, transaction volumes, productivity measures, customer acquisitions, defections, and the level of customer discounts being granted by branches are also monitored. Written reports from all parts of the organisation are provided to the management group regarding the previous month’s performance on a monthly basis 

2.5. Evaluating Performance and Providing Incentives

The bank uses the handicap system to evaluate performance and provide incentives.
At the regional level, regions are compared to each other using return on equity (ROE), cost to income, profit per employee and total profit metrics. Each year, the best region is awarded a trophy cup. Each branch manager is held accountable for KPIs and they share lessons learnt with other branches to improve regional standing
In regards to evaluating performance of employees, 85-90 percent of employees at SH are paid straight salaries based on market considerations and their individual performance. A few employees in investment banking are eligible for bonuses in order to be comparable to competitor firms.

3.     How SH’s Organisational Architecture Supports their Approach

3.1. Decision Rights

Assigning decision rights is one of an important element of organization architecture and a process of placing decision rights is implemented through a firm’s centralization or decentralization. In the case of SH’s organisation, the firm’s performance is improved by decentralising decision making. It provides the lower level manager more power in making decisions. In SH, all the marketing activities at the local branch are in charged by the local branch manager while the account managers are responsible for the business relationship with customers. Moreover, there are no sales targets imposed on the branch office network, thus branch managers can make decision over the products that meet customers’ needs.
By giving the branch manager more authority in making decision, it can reduce the cost of transferring information and promote quicker response to changing market conditions because local branch managers generally have more detailed and up-to-date information about their local conditions than top managers. Also, it will encourage employees buy-in as a result of being delegated greater responsibility. Consequently, it helps the firm to achieve its approach as to provide quality services for customers and customer profitability.

3.2. Performance Evaluation

Performance evaluation is a necessary and beneficial process, which provides annual feedback to staff members about job effectiveness and career guidance. The success of SH’s approach is also supported by the effective use of performance evaluation. In SH, they evaluate the performance of the profit centers in the bank in relative terms which is one of the best ways to reduce the risk of employee’s evaluation being affected by factors outside their control.
What's more, they employ internal and external benchmarking in their performance evaluation process to compare actual with actual without budget figures.  With internal benchmarking, the cost-to-income ratio is the key to measure the performance of the branch offices among themselves. The performance of the branch manager is also considered through the performance of the branch office. In the central part of the organization such as the staff department of legal services, external benchmarking is playing an important role in evaluating the performance. They compare with the external lawyers to see if units are able to cover their costs by internally charging at or lower than the equivalent market price for their services. As a result, SH’s management approach is achieved by this successful performance evaluation system.

3.3. Rewards

Compensation is one of the most important parts of reward systems within a business organisational structure. It benefits individuals, thus business’ owners are responsible to decide which compensation package can attract and retain their employees at the lowest cost possible.
Svenska Handelsbanken manages their rewards system by creating profit-sharing system in 1973. Within this system, when SH’s after-tax return on shareholders’ equity is higher than the average for the Nordic banks, one third of the shares will be allocated to their employees equally. The employees can receive disbursement at age sixty.
Individual performance achievements are also a vital aspect in the SH’s reward systems. If a manager outperforms the other managers, they will be successful in SH as they can be entrusted with the management of a larger branch office or expected to be a head of the region.    
By doing these strategies, SH can motivate their employees to work better, particularly local branch managers will exert themselves to perform well.

3.4. Balance of the three legs with each other and with Corp Culture

In a decentralised organisation, to enhance value of employees’ decisions, there should be a control system that provides incentives for employees. It is important to develop rewards and performance evaluation systems in which compensating employees according to their performance outcomes. 
Decentralised organisation is also a part of SH’s corporate culture. This is when account managers have control over the total business relationship with their customers, all marketing activities, and designing products. Svenska Handelsbanken decentralises decision rights to their employees by granting local branch managers these controls. Importantly, SH manages rewards and performance evaluation systems by profit-sharing systems, internal and external benchmarking. Profit-sharing systems can improve manager’s performance capacity while internal and external bench marking can evaluate manager’s performance and monitor their actions. As a result, SH has balanced the three elements of their organisational architecture and its corporate culture.

4.     Conclusion

Although Svenska Handelsbanken has abandoned the traditional budgeting and implemented the beyond budgeting, they can still successfully achieve the five purposes of the traditional budgeting such as Planning, facilitating communication and coordination, allocating resources, controlling profits and operation, and performance evaluation and providing incentives. Along with this achievement, SH has also managed their organisational architectures to support their management approach by decentralising decision rights to local branch managers, using external and internal benchmarking, and implementing reward systems (i.e. profit sharing systems). As a result, this approach has made the company outperform their peer banks throughout Europe.

Bibliography

Brickley, J. A., Smith, C. W., & Zimmerman, J. L. (2009). Managerial economics and organizational architecture. Boston: McGraw-Hill Irwin.
Francke, L. (2003, February 24). Interview with Lennart Francke: Managing without budgets at Svenska Handelsbanken. (J. Daum, Interviewer)
Handelsbanken. (2010). Annual Report 2010. Retrieved May 2, 2011, from http://www.handelsbanken.se/shb/inet/icentsv.nsf/vlookuppics/investor_relations_en_hb_10_eng_ar/$file/hb10eng_medfoto.pdf
Lindsay, R. M., & Libby, T. (2010). Svenska handelsbanken: Controlling a radically decentralized organization without budgets. American Accounting Association , 625-640.
Svenska handelsbanken's outlook revised to stable: [1] (1998). PR Newswire Association LLC. Retrieved from http://search.proquest.com/docview/447276229 ?accountid= 13380
Svenska Handelsbanken: Moody's affirms all ratings of svenska handelsbanken (2007). Normans Media Ltd. Retrieved from http://search.proquest.com/docview/444635098?accountid=13380
Svenska Handelsbanken AB earnings conference call - final (2008). Voxant, Inc. Retrieved from http://search.proquest.com/docview/466189894?accountid=13380




1 comment:

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