S&T BANCORP KNOWS the value of good profitability reporting.

Unsatisfied with measuring only overall corporate profitability, the Indiana, Pa.-based banking company has pushed its profitability reporting down through the organization, into lines of business and specific departments.

This issue has grown more important to S&T's management over the past few years, as the 33-branch bank moved above $1 billion of assets.

To this end, about one year ago the $1.2 billion-asset bank decided to install the Summit Organizational Profitability System, developed by Interactive Planning Systems Inc., Norcross, Ca.

"The IPS system has become a fundamental component in management's ability to communicate the profitability dynamics of the bank to the various departments and branch heads," said Robert Rout, senior vice president and chief financial officer of the 531- employee bank. "By using the system, we can see areas that are working well and what areas need to be addressed."

S&T is using the system primarily to establish a benchmark to identify profit growth areas and for future performance monitoring.

"We see the data as building the foundation for us to move into customer and product profitability," said Mr. Rout. "Our vision is to offer relationship pricing which will reward customers who use the most of the services and contribute the most to profitability."

Senior vice president Edward Hauck said the profitability system allows him to evaluate the contribution of each branch to the overall bank.

"It gives us a benchmark for continuous improvement, which allows the branch mangers to improve their own bottom line by managing staff and products, and they understand the dynamics" of branch profitability, he said.

In the midst of making these improvements, the bank has boosted its return on assets, from 1.33% in 1991 to 1.43% in 1993.

Michael P. Durante, vice president of research at McDonald & Co. Securities Inc. in Cleveland, said S&T is one of the best-run smaller banks in the country.

"It is a company with strong fundamentals and great numbers," he said. "S&T operates very efficiently, with an [efficiency] ratio of 54% while the industry average is at 62%."

Nevertheless, in the spring of 1993, management realized it needed a way to stay informed as the operation became more complex.

It decided that a system to analyze performance, pricing, and planning would provide the answers it was seeking.

"We wanted to find a quantitative support system to assist us in making sound decisions based on actual data," said Mr. Rout.

Management decided it wanted a system that was simple to use and could be installed quickly.

"We wanted a system that everyone could use, not one that only financial analysts would understand," said Mr. Rout.

The Interactive Planning Systems product fit the bill.

The system runs on 486-based personal computers in a DOS environment. The machines are connected through a local area network that is also connected to the bank's service bureau - M&I Data Services Inc.

The information is downloaded directly into S&T's servicing bureau and is crunched through the IPS system into standard reports for review.

S&T uses the system to get monthly profitability reports so it can see how the operation is doing by departments on a regular basis.

"The system sets the fundamental building blocks for product, customer, and lines of business profitability measure," said Mr. Rout. "It is promoting the dynamics around bank profitability, telling us where to allocate resources and what we can do to make our business operate more efficiently."

In the process of setting up the system, S&T's managers asked that only information that adds value to the reports be included.

"Entering every single item down to the paper clips and interdepartmental charges would have caused us to be overloaded," Mr. Rout said.

In order to determine what information should be included and what should not be included in the reporting, the bank performed cross-studies for every department.

S&T identified exactly what each department provided, including services, products, and the like, and then assigned a cost to the items to be charged out of the department.

"We wanted to make sure all of the information that came into the system from various areas was needed to determine profitability," said Mr. Rout. "The data we chose includes information from the general ledger, marketing customer information file, and cost studies."

By keeping it simple, the bank is able to get the information to its managers so they can make decisions that will increase the profitability at their level, instead of having all of the directives come from the top.

"Individual managers get a report and are able to see what they can do to increase profitability of their department," said Mr. Rout. "The system gives the managers information so they can see exactly what they can do to make a difference in the profitability of the operation without having to hear everything from senior management."

S&T's managers believe profitability systems can achieve maximum value only when the profitability dynamics of the bank can be communicated effectively to a broad group of decision makers within the organization.

Mr. Rout said each manager must have a clear understanding of how his or her decisions affect the net income.

He added that one of the most important factors of the successful implementation of the system is employee acceptance - due to ease of use.

"The reason there is so much resistance to some systems is because they require so much time and effort to use," said Mr. Rout.

The Interactive system, he said, is very simple to use.

He said the only way this system is going to be effective is for S&T to get its entire organization moving in the same direction at the same time to reach the same objectives.

"The key is to communicate clear objectives throughout the company," he said. "Using a profitability system provides us with the information we need to make the business work successfully." At a Glance S&T Bancorp Headquarters: Indiana, Pa. Assets: 1.2 billion Employees: 531 Branches: 33 Return on assets: 1993: 1.43% 1992: 1.36% 1991: 1.33%

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