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Chemical Banks - Allocation of Funds

In: Business and Management

Submitted By cioshyam
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Assignment: Chemical Banks – Allocation of Profits
Submitted By: G.K. Shyam Arya, PGXPM - 11 Date: 12-Mar-2015, Thursday Assignment Questions & Solutions: 1. Describe the due bill controversy and how do you resolve it? Proposed Solution:
a. Due Bills controversy: Introduction: Due Bills controversy is an example of intra department priorities that dilutes the focus away from organizational goals. Chemical Bank was the 6th largest U.S. commercial bank in 1983. Chemical Bank was organized into three main profit centres:  Personal and Banking Services  World Banking Group  Treasury Group The Due Bill was an acknowledgement (transactional evidence) that     The bank had sold securities to a customer His/her’s account has been charged If requested, securities would be delivered when they become available Upon maturity, Chemical bank would pay principal plus interest at a specified rate

Due Bills Lifecycle at Chemical Bank is described below:

Due Bill was  a product designed, marketed and sold by the Treasury group, which was responsible for generating continual funding of $25 Billion for Chemical Bank at the lowest possible costs highly profitable product for Chemical Bank sold in majority by the Metro division of Personal & Banking Group that processed Due Bill requests on demand from the customers Processed and administered by Trust & Investment division of Personal & Banking Group.

  

Events that lead to decline of profits earned due to Due Bills:  Introduction of goal system in Metro division, to evaluate performance of employees based on pre set goals that could be controlled. Metro division that sold majority of Due Bills decided to remove Due Bills from the Division objectives in 1983. Reasons for de-linking of Due Bills from the objectives Costs involved in processing of Due bills was allocated to Personal & Banking Group, while the revenue earned was allocated only to Treasury Group. The division was running at a loss to support Due Bills. It decides to push for a product called Super Saver Account that will improve the group’s earnings and incentivise the sale of the new product by linking it to the goals.  Low interest rates that reduced the spread or the NII and the profits earned through Trade.

The Controversy:  Treasury group claims to have done majority of the ground work in making Due Bills successful and Metro division was merely reacting upon the effects of the effort spent by Treasury Group. So, all the credit must go to the Treasury Group. Metro division claims to process majority of the Due Bills that the Treasury group boasts of, and seeks to receive a part of the revenue generated through Due Bills or drop it from their priorities. Metro division decides to push aggressively for Super Saver Account that seems to increase the profitability of the division and contributes to the Chemical Bank bonus pool. This results in removal of Due bills from Metro division objectives.







Financial division reviews the profit earned by Super Saver Account in comparison with Due bills. It declares that Due bills is more profitable to Chemical Bank in comparison with the Super Saver Account marketed by the Metro division.

b. Proposed Solution: As analyzed by the Finance group, the following measures can be taken to resolve the Due Bills Controversy:  Fee Sharing on all sales – all or part of $25  Fee sharing on new sales – all or part of $25  Include due bills in Metro goal system such that Branch managers are encouraged to sell more numbers to increase their share of profits through earnings created by the processing fee.  Treasury group to take up administration of due bills to reduce the variable costs by $ 0.4 million that otherwise was charged by the T&I division.  Metro division can focus to reduce the cost/effort involved for the sale of due bills.  By associating the above points, it was found that Chemical Bank profit can be maintained without increasing the Processing fee or causing loss to the Metro Division while providing the incentive to sell Due bills. As shown in the table below:

2. What is the transfer price from metro branches to the treasury and viceversa? Solution:
Transfer price is the cost of goods or services sold between two entities within an enterprise. Considering Metro division and Treasury as two entities involved in the sale of Due bills at Chemical Bank, the transfer price can be calculated as: a. Metro branches to Treasury: The cost involved in selling and processing of Due bills is the Transfer Price from Metro branches to Treasury. Transfer price of 1 due bill can be calculated as: Total effort spent in explaining about Due Bills to the customer and closing the sale.    A=Cost of 1 Man day at Metro branch handling Due bills B=Total Man day spent for the sale of one Due bill (Hours Spent/Total Working Hours) Transfer price for sale of 1 Due Bill = A*B Example: 1 MD = $ 100 Total Time Spent = 20 min. = 0.3 hours Transfer Price = 100 X (0.3/8) = $3.75

b. Treasury to Metro branches: The cost involved in creating, marketing, selling and trading of Due Bills is the Transfer Price from Treasury to Metro. Total effort and cost spent in Treasury activities

 A=Effort spent in creating, marketing and trading due bills.
  B=Cost involved in marketing and trading due bills. Transfer Price = A+B A = (Total MD Spent) X Cost of 1 MD B= Total cost for 1 Due bill

3. If you are the COE or consultant to the CEO how will you solve the internal friction to make you more competitive. Solution:
In a scenario as mentioned in Chemical Bank: Allocation of Profits, where it seems that profit from a particular vertical is disproportionately allocated, I would suggest deeper retrospection in the costs involved for both the verticals in sale of the product. In such a conflict, where each group claims the Lion’s share of effort spent in sale of Due bills, it is important to understand   the activities that triggered the sale of due bills, the activities that triggered earning opportunities through the sale of due bills.

The group associated with majority of the activities should get the larger benefit from the earnings. Let us view this by listing out the activities and corresponding player of the activities, as shown in the table below:

Also, costs incurred by the Metro group should be retrieved from the Treasury group that enjoys majority of the earnings through profit; some more should be spared as an incentive for having created the opportunity for higher earnings through the sale of Due bills.

4. Can you transport the lessons from this case to any of your group members’ company? Solution:
There are many takeaways that can be considered as a lesson and applied to the scenarios that my group members may face in their company: a. Testing Team @ Infosys: Testing Phase in the Software Development Lifecycle is most critical in ensuring that the product is developed to the satisfaction of the business requirement. Although the product is built and executed by the development team, the triggering point that defines the success or failure of a product, solely dependents upon the execution of test cases. In most scenarios, we notice development team getting credit for creation of a software product that provides a solution to the customer’s business problem. In reality, it is the Testing team that ensures the correct sync is created between business requirements and the final product. Failing to do which will render the efforts spent by the development team as mere waste. Hence, the testing team should be incentivised for the efforts spent on   creation of Accurate Test cases execution of Test cases to ensure software products are delivered with zero defects.

b. Scenario at vakilsearch.com: The Business Development team is responsible for the sale of various services offered by vakilsearch.com. A Business Development team member is incentivised for generation of threshold Professional fees target of Rs. 2,00,000 per month and also encouraged with other rewards for performing above the threshold. Though this creates a healthy competition within the department, it is seen as an eye soar for the execution team that is responsible for doing the actual ground work of executing these services for the customer. So far, there is no incentive scheme initiated for the execution team, due to which I can foresee few challenges:



 

Lack of motivation to execute more work at the same salary, while business development team is increasing the sales made every day to benefit from the new incentive structure. Decline in quality of the work due to increase in work load per person. Decline in services opted by existing customers due to declining quality of service which effects the revenue generated by the Business Development team and hence, for the whole organization.

Keeping in mind, the chain of events, it is necessary to create an incentive system for Execution team and modify the incentive structure of the Business Development team.  Incentive System for Execution Team: o A: Number of tickets/services successfully executed without refunds. Should be equal to the total number of tickets/services for which payment is received. o B: CSAT average equal to 4 or above out of 5, where 5 is the highest. o Incentive per month = (A+B) ~ Incentive Slab  Modifying incentive system for the Business Development Team: o Provide basic Incentive of Rs. X if Total Sales – Refund >= Rs. 2,00,000 per month. Where refund is caused due to incorrect information given to the client regarding the service provided. The introduction of Incentive system for execution team will motivate them to execute as many tickets as possible with their current band width and ensure quality requirements are met in order to satisfy the customer. The business development team will ensure lawful sales of the services to avoid refund due to wrong selling for which the execution team will not take the responsibility.

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