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Citibank Indonesia Case Solution
The bottom up budgeting approach of Citi Bank is efficient as it takes inputs from a number of parties. This bottom up approach can be termed as a true depiction of decentralized planning methodology. Mistri, the Country manager for Indonesia is unsure about the methodology that he should adopt in order to cater to the new profit goals. Mistri felt that with the prevalent macroeconomic conditions, the proposed budget was aggressive (risk bearing). In this scenario, Mistri took the additional precaution of lowering the sovereign risk limit for his country. Gibson should take into account the macroeconomic conditions, sovereign risk profile and the human resource capabilities of the country before allocating $4 million. Top management should take decentralized inputs, reform its human resource practices and compensation structure in order to allow country managers to stick to the long term goals.
Following questions are answered in this case study solution:
How does the Citibank budgeting process work?
Is this a participative budgeting process? Is participative budgeting consistent with decentralized planning?
What challenges does Mistri face?
How did Mistri feel about the budget he submitted?
What precautions did Mistri take concerning sovereign risk?
How should Gibson allocate the $4 million increase in profits that he has committed to?
How might Citibank discourage Mistri and other country managers from taking actions to meet their short-term goals at the expense of Citibank's long-term good?
Citibank Indonesia Case Analysis
1. How does the Citibank budgeting process work?
The prime budgeting methodology for the Citibank relies on the ‘bottom up’ approach. In this budgeting process, no explicit performance limits are imposed on the individual branches. However, recognized limits were obligated on the profitability of the overall organization. These profitability limits and other sovereign risk profiles were communicated by the headquarters to different regions by the mid-year. The responsibility of formulating a budget; therefore, lies at the shoulders of Country Managers. The managers start the budgeting process by computing key projections about the relevant factors (like the account growth). Subsequent discussions on these factors yield changes to the account relationship projections so that the desired profitability figures are attained. All levels of management are practically involved in the budgeting process. Subsequent reviews of the budget are carried out at regular intervals. After every quarter, the estimation of the rest of the annual budget is carried out. If the departmental budget contains some assumptions that headquarter modify or reject, then the whole budget is reformulated.
2. Is this a participative budgeting process? Is participative budgeting consistent with decentralized planning?
Participative budgeting is a process in which a wide range of employees and management is integrated into the budgeting procedure. In other words, it can also be defined as the process in which those parties are included in the budgeting processes which are impacted by it. The current budgeting approach, the bottom-up approach, maintains that all levels of management are actively involved in the budgeting process. Although the top management dictates the organization level performance measures, the department based flexible budgeting process allows operational managers to format the overall instructions as per their individual requirements. Hence, this bottom up approach can be termed as a true depiction of participation budget. Moreover, the budgeting approach also pictures a decentralized planning approach. One can argue that overall performance criteria are only set by top management; however, the remarks of the Mistri on the budget review process point out that low level management plays an active part in formulating the final piece of the budget. Additionally, the consultative and constructive nature of the budget reviews show that the budget does follow the decentralized planning where the overall decision making takes inputs from a number of related personals from different hierarchal levels.
3. What challenges does Mistri face?
Currently, Mistri is faced with a situation where he is unsure about the methodology that should be adopt in regards to the changed profit goals for his region. According to the revised goals, Mistri has to attain additional or incremental annual profit ranging from 0.5 to 1 million dollars. The attainment of this objective seems very remote as the previous budget formulated by him was already stuffed with aggressive assumptions about the growth in accounts and other macroeconomic factors. Mistri is also concerned about the ways in which he should attain the revised goals, as in all scenarios, the long term goals of the Citi bank might be endangered by adopting certain lending policies in the short run. Contrary to this, Mistrialso has the option of resisting the revised goals by convincing the top management that they might not be realistic in the short run.
4. How did Mistri feel about the budget he submitted?
The budget provided by Mistri maintains that in the coming year, the growth in revenues will be positive while the profits might decrease to a slight extent. According to him, the budget was aggressive in its nature as it contained some promising assumptions in regards to the regional perspectives. Firstly, Mistri knew that the overall macroeconomic conditions of Indonesia were not attractive in the short run. All crucial parameters (balance of payments, GDP forecasts, revenue sources of the country and economy) showed that no immediate boost can be provided to the economy. Moreover, these macroeconomic factors were out of the control of the bank. Secondly, the human resource practices of Citibank Indonesia were not rigid enough to retain the managerial talent. In this regards, the bank was faced with a dearth of experienced management and competent professionals. In the absence of an experienced workforce, it was very difficult to perform better in an economy that itself presents little opportunities and avenues of growth. In this scenario, the budgeted projection of an increase in revenues was considered to be aggressive in the eyes of Mistri. Also, the rationale thinking dictates that the budget is, in fact, a little aggressive (high level of risk associated with it) in its nature.
5. What precautions did Mistri take concerning sovereign risk?
The macroeconomic condition of Indonesia shows that the sovereign risk of the country might escalate in the short term. This proves that the overall or aggregate limit on the total amount of borrowers should be low for the time being. The top management at the New York may not possess the right picture of the local environment. For this reason, Mistri thought that the sovereign risk limit (limit on the number of borrowers, either public or private) was set at elevated levels. According to him, the risky situation demands that the overall lending should be cut short in the near future. For this purpose, he took the precaution of self-imposing a prescribed sovereign risk limit that was lower than the one provided by the top management. According to him, his limit was more representative of the overall conditions of the country. It can also be stated that the precaution took by Mistri was adequate in relation to the working of the banks.
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