EXECUTIVES AT Keycorp are staking their future on a new software system that helps them better understand and analyze profitability.
The idea is to better manage Keycorp's mix of businesses so the most profitable lines can be promoted more rigorously and those that are not profitable can be made profitable or, if necessary, axed, said William H. Dougherty, chief financial officer.
Profitability analysis places a banking organization like Keycorp on an equal footing with successful companies in other industries that already measure profitability by products and services, Mr. Dougherty said.
"Somehow, banking has gotten away without doing that for a long time," he noted. "But today you have to manage that information in order to attract capital."
Nancy A. Bush, deputy manager of Brown Brothers, Harriman & Co., New York, concurred that bankers have been slow to accept the need to track profitability.
"Banks really have not traditionally had accounting systems that have allowed them to measure profitability in refined ways," said Ms. Bush.
Nothing in banking's financial reporting tool chest has come close to matching the cost accounting systems that most other industries use, she said. "The banks that are developing [this capability] and reporting, particularly profitability by lines of business, are certainly ahead of the curve."
To help keep tabs on profitability, Keycorp is installing a software system developed by Hogan Systems Inc., Dallas. Called the Earnings Analysis System, it allows Keycorp to track profitability by individual bank, branch, line of business, product or service, and even by customer.
Keycorp is part of an emerging army of banks that have come to understand the importance of managing the individual components of profitability. A survey of 134 leading banks, conducted a few years ago by Price Waterhouse and Hogan, found that most banks (97%) routinely analyze profitability on an organizational basis and that more than 80% perform at least some sort of profitability analysis on some products.
Keycorp began implementing its system in January 1992. By the end of this year, four of the holding company's subsidiary banks will be fully utilizing the system. All 10 of Keycorp's banks will be up and running on the system by the end of 1994, said Susan Smith, the Keycorp vice president who has been spearheading implementation of EAS.
Once the profitability system is fully operational, executives at Keycorp's individual banks will be expected to use the system to help meet performance objectives and to dispatch staff and resources to those products and services that offer the best returns. The system will also help executives at headquarters to analyze and compare the performance of individual banks.
"It encourages the individual bank presidents to be entrepreneurs," said Mr. Dougherty.
Keycorp, which uses the slogan "America's neighborhood bank," consists of 10 individual banks with 850 branches in nine northern states, the nation's frigid zone. Areas of operation include upstate New York, Maine, Alaska, Colorado, and Idaho, and other Snowbelt states.
The holding company relies on a combination of centralized and decentralized management, with activities that directly affect customers (like loan approval and product pricing) managed at the individual bank level and functions that are invisible to customers (like data processing and audit) managed out of Albany, N.Y.
The profitability system is ideally suited to this organizational structure, said Mr. Dougherty, because it provides access to the kind of information the executives at individual Keycorp banks need to price products and services realistically and to meet the holding company's performance objectives.
"Today this business is becoming very scientific," Mr. Dougherty said. "In the past it has been more of an art. And you can go broke being an artist."
Clearly, Keycorp runs little risk of going broke. The company reported a return on average assets of 1.27% for the six months ended June 30 and a return on average equity of 18.16%. Those figures are up from an ROA of 1.13% and an ROE of 16.27% for the first six months of 1992, and compare with an ROA of 1.21% and an ROE of 15.64% for all commercial banks for the first six months of this year, according to figures compiled by the Federal Deposit Insurance Corp.
Ms. Bush places Keycorp's performance on a par with that of its peers, though she noted that its ROA is below that of Society Corp., the Cleveland-based holding company with which it entered into a merger agreement in early October. (Society maintains an ROA of about 1.55%.) On the other hand, Keycorp's efficiency ratio, at 60.45% for the nine months ended Sept. 30 places it in a better position than its peers, which as a group have an average efficiency ratio of 62.5%.
But Mr. Dougherty is not content to rest on his laurels. He and his colleagues are intent on improving Keycorp's financial performance over time, and they believe the profitability system will help them do that. Mr. Dougherty said the company has set a long-term goal of achieving a 1.50% ROA; in 1994 he hopes to achieve an ROA of 1.3% and an ROE of 18.5%.
The role that EAS will play in meeting these financial objectives arises out of its ability to provide a single source of comprehensive information on products and services and the use of those products and services by Keycorp customers.
"When you know profitability by product, it's much easier to expend the resources necessary to sell that product," said Robert Windelspecht, senior vice president and controller of Keycorp. "The more you know about profitability, the better focused you can be."
"A system like this helps bankers determine where they can and cannot make money, and why," said Joseph Roosevelt, a principal at Price Waterhouse.
After feeding into EAS detailed information on the costs associated with products and services, a banker can produce detailed profitability information based on rules and parameters established by the bank.
Take the example of a deposit account. Using EAS, Mr. Roosevelt said, Keycorp can compare the cost of providing the account (with all its various components, such as deposit and check processing) with customer demand for a particular type of account in a particular region, and then determine how to price the account so that it produces the desired profit.
Similarly, on the lending side of the business, the president of a local Keycorp bank can use EAS to help price loans to local customers so as to meet the bank holding company's ROA and ROE objectives, said Mr. Dougherty.
The usefulness of EAS is likely to be enhanced after the merger of Keycorp and Society, since both banking organizations use the system. EAS is one of the common threads that has made the Keycorp-Society union so attractive from a systems point of view, Mr. Windelspecht said.
EAS is designed to run on mainframe computers, but users access the system via PC workstations. A key selling point of the system, according to Hogan vice president Bill Miller, is that it is designed for use by a bank's nontechnical financial staff, so there is no need to be beholden to the data processing staff when performing profitability analysis.
For their part, executives at Keycorp like the fact that EAS allows them to put together more detailed analyses of the company's financial performance. And that, by extension, means they can better serve shareholders.