Commercial Bank of Dubai: Performance Management

Introduction

Performance management systems are central to the operations of any modern organization. Competition is very high in almost all sectors. This means that often, the only way to create and sustain competitive advantage is by increasing the efficiency of operations. This is where a performance management system comes in. The Commercial Bank of Dubai implemented a performance management system in 2009 to give it greater capacity to monitor the efficiency of its workers and its banking processes. This notwithstanding, Moody’s Investors Service downgraded the bank in 2012, alongside three other banks in Dubai (Sambidge, 2012). The reason given for this was that the ratio of non-performing loans (NPL) was too high in these banks (Sambidge, 2012). One estimate puts the loan portfolio of the three banks at about 15-17% (Sambidge, 2012). This is higher than the average NPL rate of 6% for banks in the Gulf Cooperation Council (GCC). The objective of this paper was to review the performance management system of the bank about the downgrade of the bank by Moody’s Investors Service.

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Methodology

The methodology for achieving the objectives of this project was as follows. The first activity was conducting a literature review to ascertain the essential elements and the general applications of a performance management system. The literature review sought to identify key challenges that organizations face when using performance management systems. The literature review formed the basis for an analysis of the usage of the performance management system at the Commercial Bank of Dubai. The second activity was the analysis of the performance management system in use at the Commercial Bank of Dubai. This activity sought to compare the implementation processes of the performance management system in the bank with the ideas uncovered from literature.

Literature Review

Performance management is a process. It includes performance planning, performance monitoring, and performance measurement (Sahu, 2009). Performance planning is the goal-setting phase of performance management. A company usually analyzes its strategic needs and sets overall goals concerning what it must do to achieve results. Some organizations have a top-down model where the management sets the overall goals, and then line managers distribute the goals to the lower cadre employees (Davies & Davies, 2011). Others have a bottom-up approach where line managers develop departmental goals based on the individual goals of each employee. The total of all these goals makes up the organizational goals (Davies & Davies, 2011). A more complex system involves ideas flowing back and forth until everyone in the organization understands the strategic goals of the organization and the level of individual commitment required to make those goals a reality.

Performance monitoring involves measuring the intended performance against the actual performance. Performance monitoring is an on-going activity to ensure the results each employee posts daily are consistent with the goals set out earlier (Neely, 1999). Performance measurement takes place at predefined points. In organizations, performance measurement activities include internal and external audits, staff appraisals, and feedback meetings (Neely, 1999). A performance management system includes all activities and infrastructure that an organization uses to carry out performance management (Colquitt, LePine, & Wesson, 2009).

The key challenges associated with the implementation of performance management systems are as follows. First, performance management systems tend to lack alignment with the overall goals of the organization (Neely, 1999). No effort goes into ensuring that all the goals developed at any level in the organization are based on the overall strategy. The second challenge is the lack of measurement. An organization can do well to establish and monitor performance goals. However, many organizations underestimate the need to measure performance at the end of a cycle (Colquitt, LePine, & Wesson, 2009). The third challenge organizations face when implementing performance measurement systems is the use of poor indicators to measure performance (Sahu, 2009). Many organizations tend to focus only on the financial measures forgetting that an organization has other assets. These assets, such as good relations with key stakeholders, may not have a financial value. Therefore, an organization may fail to define the measures it needs to use to measure its performance in aspects with no financial measures.

Background

The Commercial Bank of Dubai had 1200 employees in 2009 when it implemented a new performance management system. The new system was paperless. The software-based system made it possible for the bank to obtain the ISO 9001-2000 certification. This certification indicated that the bank had very good quality management systems. These efforts did not stop Moody’s Investors Service from downgrading the bank’s rating.

The performance management system of the Commercial Bank of Dubai was the focus of this study. The choice of this institution arose from the fact that the bank implemented a performance management system in 2009, and in 2012 Moody’s Investors Services downgraded the bank. This is important because of the stature of the bank within Dubai. If a bank of its stature could not maintain its ratings, does that mean that the bank did not implement an appropriate performance management system?

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Secondly, this situation provided a unique opportunity to explore the issues that surround the implementation of a performance management system. A performance management system that is functioning well should help an organization wade through difficult times. How is it that the bank did not manage to retain its rating? Is the problem related to performance, or is it related to other areas of business management?

Overview of Previous Performance Management Systems of the Bank

The performance systems reviewed in this paper was not the first one implemented by the bank. Rather it was the first time that the bank moved to a paperless system. The significance of this shift is that when a performance measurement system moves from a paper-based model to a paperless one, the capacity of the organization to utilize data analytics improves.

The performance measurement system in use at the institution before the new system was manual. The bank started using this system in 2004. At the time, its main interest was the automation of the balanced scorecard for the bank. The bank’s management felt that this would ease administrative work and goal setting at the business level. However, critical performance measurement components were manual. Appraisals were paper-based, and computers were used for data storage, not data analysis. While the bank deserved commendation for the existence of the performance management system at the time, a manual system meant that the bank had no quick way of measuring performance. The problem with this was that it could limit the capacity of the bank to respond to strategic issues.

The shift to a paperless performance management system enabled the bank to take advantage of the data processing capacity of paperless performance management systems. Despite this change, the banks still lost its Moody’s Investors service rating.

The New Performance Management System of the Bank

The performance management system had the following elements. First, the system had a three-tier performance management structure. The structure of the performance management system included performance management at the individual level, the departmental level and at the corporate level (IYCON, 2009). The individual performance related to the work of individual employees. Each employee developed performance targets in conjunction with their immediate supervisor. These goals also depended on the roles and responsibilities of each employee. The performance targets at the departmental level summed up all the performance targets of the individual employees. At this level, the departmental managers harmonized all the expectations of the senior management and departmental employees. The harmonization of the goals was very critical in ensuring that the employees owned their goals and that the departmental goals were aligned with the overall strategy of the organization. The third level was at the corporate level. All the heads of department forwarded their departmental goals to the corporate heads to ensure that the departments fulfilled their strategic roles in the bank. This three-tier model is common across many organizations that use performance management systems (Davies & Davies, 2011).

The second feature of the performance management system implemented in the bank in 2009 was that it was paperless. The decision to move from a system that relied on manual processes to one that used an electronic process gave the bank the capacity to analyze the data collected through its performance management system. This shift was significant for the bank because the bank acquired the capacity to respond with speed to performance bottlenecks. This capacity was very important at the time because the global financial crisis was at its peak. Banks such as the Commercial Bank of Dubai were vulnerable to the effects of a volatile money market. The meeting of performance goals was necessary for survival.

Another important feature of the performance management system that the bank implemented in 2012 was that it interlinked corporate and individual scorecards to give an overall feel of the balanced scorecard for the bank (IYCON, 2009). The balanced scorecard is a strategic management tool. It provides four perspectives that an organization can use to measure the processes it uses for strategic management. These perspectives include learning and growth, business processes, customer perspective and a financial perspective (Sahu, 2009). The application of the balanced scorecard at the individual level across an organization is an innovative way of tracking how the entire organization is working towards achieving a balanced strategic outlook.

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The final element of the system in place at the bank was competency tracking. Competency is a factor of performance. The nature of competency is that it changes over time. As people become more skilled at their job because of their working experiences, they tend to become more competent in certain aspects of their job. Competency also increases when someone attends training to learn new approaches to work or to learn about new disciplines. The system that the bank implemented could measure changes incompetency. This was a very innovative way of determining which employees were becoming better with time.

ISO 9001-2000 Certification and its Relationship to Performance

One of the important elements of the performance management system of the bank was that the system earned the bank an ISO 9001-2000 certification. This certification usually results from a successful audit of the quality management systems of an organization. It seeks to reassure all suppliers, customers and other business stakeholders that the organization can reproduce their goods and services with consistency and efficiency. The reason for raising this issue in this project is that the bank received ISO 9001-2000 certification, which is a quality management certification. This took place in 2006 based on the paperless system that the bank currently operates. The banks quality management systems managed to satisfy the standards set by ISO 9001-2000.

The fact that the bank developed a quality management system that earned it an ISO 9001-2000 certification did not assure the bank of success. The efficiency of processes is not the same as sound business practices. It is desirable for an organization to develop quality management systems because the quality is one of how companies differentiate themselves in the marketplace. However, this is not a substitute for a performance management system. Quality is a single attribute of performance (Davies & Davies, 2011). An organization should be careful not to commit too many resources to quality control at the expense of the overall performance of the organization. Each organization needs to set its quality expectations and then find the most efficient way of delivering its products at that quality level.

Moody’s Investors Service Rating and its Relationship to Performance

The downgrading of the bank by Moody’s Investors Service was an important event. This event formed the basis for the analysis of the success of the performance management system in the bank. Moody’s Investors Service downgraded the bank from a rating of A3 to a rating of Baa1 (Sambidge, 2012). This downgrade affected the banks’ attractiveness to investors, and it affected the banks to appeal to customers. The basis for the downgrade was that the NPL ratio was too high, at over 15%. This means that the bank lent money to people or institutions that became incapable of repaying. This statistic is crucial because NPL can wipe out a bank’s profit in any given year.

The relationship between this downgrade and the bank’s performance is that there seemed to be a mismatch between the bank’s performance management system and its strategic goals. The point in having a performance management system is to ensure that an organization is capable of reaching its strategic goals. The bank’s failure to reach these goals showed that the performance management system had a flaw. It may also have meant that there were changes in the operating environment that altered the effect of the assumptions made when implementing the performance management system. This demonstrates that if there is a mismatch between the performance management system and the strategic goals of an organization, the performance management system is not an asset to the organization.

Strengths and Weakness of the Performance Management System

The strengths of the bank’s performance management system were as follows. First, the bank used recommended approaches in the design of the performance management system. In particular, the performance management system had three levels that gave it the capacity to harmonize all goals of the organization. The second strength was the deployment of a paperless performance management system that made it possible for the bank to take advantage of computer-based analysis of performance measurement data. This approach is increasing in popularity because of advantages like real-time performance monitoring, and better response to performance deviations (Davies & Davies, 2011).

The weaknesses in the system were as follows. First, the system was misaligned to the bank’s strategy. The intended results and the results that the system produced were different. The issue of NPL was a concern for many banks at the time. The global economic climate was very depressed. This led to many banks crashing especially in America and later on in Europe. Dubai, as a regional financial hub, also felt the impact of the global financial crisis. These facts show that any bank in the world at the time needed to become stricter in the management of its loan portfolio. The Commercial Bank of Dubai should have taken greater care in the management of its loan products to ensure that it did not end up with a huge amount of NPL.

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The second weakness in the system employed by the bank was that the bank used weak indicators to measure performance. This assertion does not invalidate the measures themselves but comes from the assumption that the goal of having a performance measure is to remain competitive. The measures chosen could have been useful for other purposes, such as employee evaluation. However, the measures did not give the bank the capacity to prevent the downgrading by Moody’s Investors Service. The process of identifying performance measures needs to take into account objectives that retain or increase an organization’s competitive advantage. The recognition of the significance of Moody’s rating to organizations in the financial sector should have made retaining high ratings a core part of the performance criteria for the institution.

The third weakness in the performance management system in the institution was that it failed to adapt to environmental changes. In 2009, the financial services sector suffered from depression globally. It was incumbent upon the management of all institutions in the financial sector to adapt their business practices for this period. The indictment on the management of the Commercial Bank of Dubai arises from the fact that other banks in the region managed to keep their NPL ratio at below 6%. The Commercial Bank of Dubai was only one of three banks that could not sustain their Moody’s Investors Service rating.

Recommendations

To benefit from the performance management system already in use in the institution, the bank needs to take into account the following recommendations. First, the bank needs to reevaluate the current performance measures in light of its business and financial goals. The current situation suggests that the implementation of the balanced scorecard did not include indicators that should have ensured that the financial perspective of the bank was healthy. There is a need to reconsider the indicators in use now.

The second recommendation to the bank is to reexamine its strategy in regards to adapting to environmental changes. How is it that other banks in the region kept their NPL rates at around 6%? This shows that the Commercial Bank of Dubai failed to adapt when its operating environment changed. The result is a huge portfolio of NPL.

The third recommendation is to reexamine the current usage of the performance management system concerning the overall organizational strategy. If the problem is the performance management system, then the strategy team at the bank needs to realign it. If the problem is the strategy, then the bank needs to develop a strategy that will ensure that it retains a competitive advantage.

References

Colquitt, J., LePine, J., & Wesson, M. (2009). Organizational Behavior: Essentials for Improving Performance and Commitment. New York: McGraw-Hill.

Davies, R. H., & Davies, A. J. (2011). Value Management: Translating Aspirations Into Performance. Surrey: Gower Publishing.

IYCON. (2009). Commercial Bank of Dubai Achieves ‘Best Practice’ in Integrated Performance Management System using QPR Software. Web.

Neely, A. (1999). The Performance Measurement Revolution: Why Now and What Next? International Journal of Operations & Production Management , 205-228.

Sahu, R. K. (2009). Performance Management System. New Delhi: Excel Books.

Sambidge, A. (2012). Moody’s Downgrades Three Dubai Banks. Web.

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